Pension in Germany

How is the German pension system set up?

Germany operates a so-called three-pillar pension system designed to provide retirement security through multiple income sources. These pillars themselves are constituted of various options:

First pillar: Statutory pension ("gesetzliche Rentenversicherung")

This is the mandatory public pension system that forms the foundation of German retirement planning. As an employee, you automatically contribute 18.6% of your gross salary (split equally with your employer at 9.3% each) up to the contribution ceiling of 87,600 € in 2025. Your pension amount depends on your earnings points, which are calculated based on your income relative to the national average over your working years.

The system provides inflation protection and survivor benefits, but replacement rates have declined over decades. Current retirees typically receive about 48-50% of their pre-retirement income from statutory pensions alone, making additional retirement savings absolutely essential.

Second pillar: Occupational pensions ("betriebliche Altersvorsorge")

This employer-sponsored system offers several implementation methods, with the "direct insurance" being the most commonly used one. Essentially, your employer takes out an insurance on your name and the contributions are automatically deducted from your payslip.

Third pillar: Private pensions and investments

This includes both subsidized Riester pensions, "Basis-Rente" and unsubsidized private retirement accounts. Riester pensions receive government grants and tax deductions but come with strict regulations about withdrawal and investment options. Private accounts offer complete flexibility but without government incentives. Additionally, non-insurance based investments such as property, stocks, etc. are factored into pillar 3.

Why should I invest privately?

As seen above, if you pay into the statutory pension, you can calculate with around 48 % of your pre-retirement income as a pension. To give you specific numbers, the average pension in 2023 was 1.728 € for men and 1.316 € for women.
In addition to the amount being low, this is a gross pension. You still have to pay income taxes as well as health & nursing-care insurance on the pension, leaving you with a significantly lower net pension.

This leads to the so-called pension gap, the difference between your last income and the pension you will receive.
‍Example:

That means that in order to have the same level of income as a pensioner as they had before retirement, this person has to close a monthly gap of roughly 1.600 € through other forms of income.

Important: the pension gap is only a rough estimate, ideally you should take into account all future income (rental income, dividends, pension, etc.) as well as all expenses (rent, insurances, car, living costs, etc.) and that for you and your specific situation. This should be the starting point for all pension planning.

What optionsmake sense for me as an employee?

That depends on a variety of factors: your income, your age, your family status, whether you have other investments, etc. An individual analysis is key when it comes to retirement planning.
But we of course want to give you some guidelines, split into on whether you are an employee or self-employed:

What options make sense for me as an employee?

For Lower to Middle Incomes (up to 50,000 € annually)

Employment-based plans offer the most favourable terms. Up to 322 € /month are completely tax-free AND your employer has to add 15 % to your contribution. Even modest contributions can significantly boost your retirement income due to compound growth over decades.
Maximize your Riester pension benefits, as government subsidies provide substantial returns on your contributions. The basic subsidy is 175 € annually, plus 300 € per child born after 2007. If you contribute 4% of your qualifying income, you receive full subsidies, making this essentially free money.

For Higher Incomes (50,000 € - 87,600 €)

Focus heavily on employment-based pensions to maximize tax advantages. Since you're in higher tax brackets, the immediate tax savings from reducing your gross income are substantial.
The Basisrente starts to become attractive because it offers a more flexible type of investment and you can claim your income taxes back on the contributions made.
Riester pensions become less attractive at higher income levels since subsidies represent a smaller percentage of your income, but they still provide tax benefits worth considering.

For Top Earners (above 87,600 €)

Your statutory pension contributions are capped, but your income isn't creating a larger retirement income gap. Maximize employment-based pension contributions up to the tax-free amount.
The Basisrente should be the next product because it allows you to reduce your income tax and since you are most likely in the highest tax bracket, it offers a great money for value proposition.

What options make sense for me as a self-employed / freelancer?

Lower Income (up to 30,000 € annually)

Focus on building emergency funds first, as irregular income creates greater financial vulnerability. Consider voluntary statutory pension contributions at minimum levels to establish basic retirement security while maintaining cash flow flexibility.
Rürup pensions may provide limited tax benefits at lower income levels, so prioritize flexible private pension until your income and tax situation stabilizes, simply because they offer a higher degree of flexibility in access to the savings.

Middle Income (30,000 € - 70,000 €)

This is where Rürup pensions become highly attractive. The tax deductions can substantially reduce your tax burden while building retirement security. Consider contributing enough to optimize your tax situation while maintaining sufficient liquidity for business operations.
Combine Rürup contributions with flexible private investments to balance tax efficiency with accessibility. Aim to save 15-20% of your income across all retirement vehicles.

Higher Income (above 70,000 €)

Maximize Rürup pension contributions to take full advantage of tax deductions. At higher income levels, the tax savings from Rürup contributions can be substantial, effectively providing government subsidies for your retirement savings.
Consider international diversification and multiple retirement vehicles to spread risk and provide flexibility. This might include foreign pension plans if you have international business interests or expect to retire abroad.

Special case: you are the owner of your own company

Managing directors of German GmbHs (and UGs etc.) occupy a unique position in the pension landscape, facing distinct challenges and opportunities that differ significantly from both employees and traditional self-employed individuals. Your pension planning strategy depends heavily on your shareholding percentage, employment classification, and compensation structure.

Minority Shareholding Managing Directors (under 50% ownership)

If you own less than 50% of the GmbH shares, you're typically classified as an employee for social security purposes, making you subject to mandatory statutory pension contributions. You and the company each pay 9.3% of your salary up to the contribution ceiling of 87,600 € annually.

This classification provides access to the full employee pension system, including statutory pensions, occupational pension schemes, and Riester pensions. However, you're also subject to all employee social security contributions, which can be substantial at higher income levels.

Majority Shareholding Managing Directors (50% or more ownership)

With majority ownership, you're generally exempt from mandatory social security contributions, including statutory pensions. This exemption extends to unemployment insurance and statutory disability insurance, shifting responsibility for these protections entirely to your personal planning.

While this exemption reduces your current costs, it eliminates the safety net that employees enjoy and requires comprehensive private pension planning to replace the benefits you're forgoing.

Pension Strategies by Ownership Structure

Attention: there are so many more aspects to consider for managing director / owners and due to the special nature of their social status, we always need to look at each situation individually.

For Employee-Classified Managing Directors

Statutory Pension Optimization: Your mandatory contributions build standard pension entitlements, but high-earning managing directors often find statutory pensions provide inadequate replacement income. Focus on maximizing additional pension vehicles rather than increasing statutory contributions beyond the mandatory ceiling.
Occupational Pension Excellence: Employee-classified managing directors can access the full range of occupational pension options. Direct insurance policies funded by the company provide excellent tax benefits, as contributions reduce both corporate and personal tax burdens while building retirement assets.
Consider pension commitments where the company directly promises future pension payments. This can be particularly attractive if you control the company, as it allows flexible funding while providing strong tax benefits. The company can deduct pension provisions, reducing corporate taxes, while you defer personal taxation until retirement.
Deferred Compensation Arrangements: Structure part of your compensation as deferred compensation, allowing the company to invest funds for your retirement while providing immediate corporate tax deductions. This strategy works particularly well when you expect to be in lower tax brackets during retirement.

For Exempt Managing Directors

Rürup Pension Maximization: Rürup pensions should become one of the primary tax-advantaged retirement vehicle. The annual contribution limit of 27,566 € provides substantial tax relief for high-earning managing directors, effectively subsidizing your retirement savings through tax reductions.
Consider maximizing Rürup contributions early in your career when tax benefits are most valuable, then supplementing with private investments as your income grows beyond the contribution limits.
Company Pension Schemes: Even exempt managing directors can establish company pension arrangements, with the company paying up to 644 € / month tax free. These schemes require careful structuring to avoid creating taxable benefits, but they can provide valuable retirement funding mechanisms.
Private Investment Strategies: Without access to tax-advantaged employee pension systems, focus on building substantial private investment portfolios. Consider international diversification, as your business interests may already concentrate your wealth in German assets.

Attention: There are so many more aspects to consider to determine the best approach to your pension and future planning, we always need to look at each situation individually to determine the best course of action!

What aspects are important to consider?

Next to your individual pension gap and the amount of disposable income you have, there are a few general considerations to make:

Timing and Flexibility
‍German pensions generally lock your money until retirement age, typically 67 years of age for younger workers. This provides discipline but reduces flexibility for major life changes. Private accounts offer more flexibility but require greater self-discipline in the sense that money that is earmarked for retirement, should stay in the accounts.

‍Tax Implications
‍The German system generally follows "taxed at the point of consumption" principles, meaning contributions are tax-deductible, grow this tax-free, but withdrawals are fully taxable. This works well if you expect to be in a lower tax bracket during retirement.

‍Inflation Protection
‍Statutory pensions include inflation adjustments, but occupational and private pensions may not. Consider this when evaluating long-term retirement planning strategies, i.e. make sure that your contributions rise in time.

What should I do now?

There is a truth-ism about investing that holds very true here: the best time to invest is yesterday, the second-best time is today. Let us give you a few recommendations on the way:

Start Early
Compound growth makes early contributions dramatically more valuable than larger contributions later in life.

Diversify
Don't rely solely on statutory pensions. Aim for retirement income from all three pillars to provide security and flexibility.

Employer Matching
Always contribute enough to receive full employer matching in occupational pension schemes – this is essentially free money.

Regular Review:
German pension rules change periodically, and your personal situation evolves. Review your strategy every few years to ensure it remains optimal.
The German pension system rewards long-term thinking and consistent contributions across multiple vehicles. While it may seem complex initially, understanding and utilizing all available options can provide substantial retirement security and tax advantages throughout your working years

Contact our Pension expert!

Daniel Weiss

Email: daniel.weiss@versicherungsbuero-weiss.com
Telefon: +49 30 - 40 36 31 95 1
Mobil / WhatsApp : +49 178 - 140 584 0
Access to my calendar: https://calendly.com/vb-weiss_daniel/meeting

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