The Pension Insurance In Germany

Pension insurance in Germany can stand for two different things. There is the state-run National insurance, a mandatory scheme for almost all employees, which is the only old-age provision for most retirement plans. On the other side, different privately funded pension insurance schemes supplement the state pension and fill financial gaps. They are far less […]

Seamus Wolf
From Seamus Wolf

06. Oct 2022

Reading time: About. 7 minutes

The pension insurance in Germany

Pension insurance in Germany can stand for two different things. There is the state-run National insurance, a mandatory scheme for almost all employees, which is the only old-age provision for most retirement plans. On the other side, different privately funded pension insurance schemes supplement the state pension and fill financial gaps. They are far less unified and have huge differences. Being privately funded does not mean there are no ways to profit from government subsidies and tax breaks.

This article will inform you about both insurances, but since previously the statutory pension insurance was explained, it will primarily focus on private pension insurance. Not all pension schemes work for everyone. It requires careful planning and information to make the correct decision, and we want to help with this. Please get in touch with us and ask your questions, our consultations are free, and our experts have years of experience. 

What is a pension insurance scheme?

The Basic principle of a pension insurance scheme is to use contributions from your wages and other income to finance your retirement. How this works depends on the kind of pension scheme you use.


Pay-as-you-go is the method used by the state pension. Instead of investing the paid money, it finances the obligations of those already retired. . The benefit of this method is the reduced impact of economic developments and malinvestment. 

However, upon your retirement, you depend on future generations and their willingness and capability to pay into this scheme. This income line dries up, there are not enough payers with the money. The scheme can collapse.

Capital backed insurance

The money collected through your contributions is reinvested and used to generate profits. When you retire, this invested income will pay for a livelong pension; unless you demand a lump sum. 

Although not at the mercy of the new generations, you must invest wisely.  With too much risk, you could lose your pension. If played too safe, you may not get a large enough return. The priority of these schemes is getting the right balance.  

However, most providers will assist you with your investment and offer different products and options to tailor the pension scheme to your needs. Getting a guarantee for your contributions or to use a product that automatically limits your risk exposure is usually possible.


The national pension schemes

The statutory pension is important and directly influences others. As a Pay-as-you-go scheme, it depends on a steady flow of new payers. For every contribution made, you receive the right to draw a certain pension, as soon as you qualify for it.

As a result, the amount you get is directly proportional to the payments into the system. The more you pay, the higher your pension will later be, a notable benefit for employees with higher incomes.


Quitting The Scheme

Generally, there is no way to quit this mandatory insurance, with most employees being members with no way to leave However, there are exceptions. Workers in several professions, most notably medics and lawyers, use occupational pension insurance. Similar to the national pension, it works based on contributions to establish the payout amount.  But they are usually working as capital-backed insurance.

For freelancers, the situation is even less restricted. They do not have to be members of any kind of pension insurance. They can use their money as they choose. No one will stop them if they decide to put it into the national pension voluntarily, but they do not have to.

As they are entirely responsible for their retirement, a failure to plan will have dire consequences. So, the liberty to choose your own investments is connected to the duty to do this with diligence.


Private Pension insurance

Private pension insurance is divided into two groups. Private funded get their contribution from your taxed income and neither include subsidies nor tax relief. Building them up isn’t easy, but less tax is paid when you receive your pension. 

Alternatively, state-supported ones allow tax breaks and support while building an old age provision, making saving enough capital for your pension easier. In return, you have higher taxes when your pension is paid. However, more regulations must be met. For maximum flexibility, private pensions insurances work better. Yet, the outcome is different if your priority is about saving taxes and maximizing your pension payout. 


The Rürup-Rente

A popular among freelancers and high earners is the Rürup-Rente. It is possible to deduct your complete investment from your taxes up to 25.639 EUR per year! According to your wishes, this money will be invested and used to grow your retirement.  The Rürup-Rente will give you a lifelong personal pension, upon reaching the agreed age. 

However, it is strict regarding the use of accumulated capital. There is no alternative form of payout possible. Importantly, this pension cannot transfer the pension to someone else. Upon your death, the pension will stop, even when you paid more than you received.  

With possible big tax write-offs, which other pension insurances cannot match, the Rürup-Rente is popular with high income earners and freelancers. 


The Riester-Rente

The Riester-Rente was designed as a single pension insurance to support as many citizens as possible. From low incomes dependent on social services to high-income earners, small or large families. They all should be able to profit from a Riester-Rente. Unfortunately, this versatility came with a complex structure. .

Like the Rürup-Rente, the contributions to this pension insurance are tax-deductible. But only to the upper limit of €2100 per year. To help people with smaller means, every saver can access a personal state allowance to support the insurance. The saver can then get a personal allowance of €175, with the condition that their pension investment is greater than 4% of their yearly income and a minimum of €60 is invested.  If you have children, you will also get an additional sum for every one of them, up to €300 per year. 

However, this contract is strict regardingyour place of residence. If you leave the EU, you can not pay into or receive the pension. You may be forced to dissolve the complete contract, where you return the tax write-offs and allowances to the state and only keep your contributions and the gained profit.

Although, the ability to cancel the contract can also benefit you. If you are unhappy with the contract, you can quit it and at least get your own money back. Also, it is easy to use the capital for purposes other than a pension. Up to 30% can be paid out as a lump sum. Using a “Bauriester” you can use the contract to buy your real estate.



Only accessible for employees, but extremely popular with many advantages, is the “betriebliche Altersvorsorge.” Similar to a company pension, it is a provision provided by the employer to benefit their workers. Offering benefits on investment conditions and the amount that can be contributed. However, individual employee wishes are not considered. 

There are 5 different templates to create a BAV. Two focus on the firm itself and minimize the involvement of other institutions; the “Direktzusage” and “Unterstützungskasse.” The remaining 3 demand the uses of a bank or insurance company; the “Pensionsfond,” “Pensionskasse,” and “Direktversicherung.” How each of these invests their money depends on their given guidelines.

One reason for its popularity is the ability to save taxes and to reduce your contributions to mandatory social insurances. The underlying principle of the BAVis it assumes that the employer is paying into the pension. The contribution does not count as a wage and is not taxed or used for social security. “Entgeltumwandlung” is the proper name.

Up to €282 can be paid into the contract monthly. Higher payments are possible, but they no longer reduce the other insurances. “Pensionsfond,” “Pensionskasse,” and “Direktversicherung” are tax-free up to a limit of €564 per month. With “Direktzusage” and “Unterstützungskasse” not having a limit!


Pension Insurance in Germany for foreigners

Foreigners tend not to be considered, with expats needing to arrange their own pension insurance in Germany. Fortunately, all discussed pension insurances are available to them, including statutory pension insurance

The only pension insurance that requires special attention is the Riester-Rente. Since it demands a place of residence in Germany or the EU, it may be a problem for those planning to retire elsewhere.

The Best private Pension plan in Germany

As overviewed, all these pension insurances are different from each other. People have different situations, wishes and plans, so there is no definite best private pension plan for anyone. An optimal solution for one may be a disaster for the next one. The key is to find the right pension plan for you. Informing yourself about all the alternatives available to you is the first step to fulfill this endeavor.

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