Pensions in Germany Explained:
Some answers to frequently asked questions

A promise of a certain growth rate is not possible, but we can share with you what the longest time series in the world tells us in an unbiased way, what outlook is in line with insights from the economic profession, and what is “baloney.” 

Fundamentally, a representative mix of stocks will grow in line with the economy over the long haul. That means the return is on the order of 6-7 % (nominal GDP growth plus dividend yield or buybacks). You can outperform in a sustained way if the economy or business you focus on is more innovative. Our ETF mix historically beats the MSCI World benchmark by about 2 % as it focuses on small (and more innovative) companies and the more innovative economies in the world with a stable investment environment. 

In addition, there is always a certain volatility risk when investing in equities. However, over an investment period of about 10–15 years, well-selected stock indices have historically always delivered gains, making them a safer investment than annuities with guarantees, which unfortunately often only guarantee high costs and minimal returns. In periods without a world war, you can expect a superior index to avoid losses for any 10-year period.

The tax benefit of your pension plan with Pensionfriend is that:

• You pay capital gain tax only once, as the private pension functions as a tax shield, namely when you take out the money. If you would instead have an ETF portfolio with a broker, you pay tax every year on the gains beyond the threshold. The big drawback of that is that the tax you paid is no longer invested and no longer earns money for you.

• Only half of the return on your investments is subject to taxation if you pay it out at a lump sum from age 62 onwards and if you have held the pension contract for more than 12 years.

It can be attractive to take your payments in different tranches to reduce your tax liability, as your pension income is much lower. Most likely, you will not pay more than the normal capital gains tax of 26,375 %.

With the Pensionfriend Pension Plan, you can start with a one-time investment or with a monthly or quarterly savings plan. We are looking for a minimum commitment and your capability to save this much, given your income.  

Our webinars and software are free. We do have an expected minimum for a consultation. Currently, the minimum is 10.000 € or 100 € per month. This is necessary to keep our costs low. Our system is designed around self-service so that you can go really far and, if you want, all the way without any consultation.  

Discover your options with the Pensionfriend Pension Plan

We at Pensionfriend are fully transparent about our simple, low-cost structure: We only charge 0,69 % for the pension plan per year. For portfolios over 250.000 €, the overall fee declines to 0,49 %. And that's it: No hidden fees, no closing costs, not even a cancellation fee if you would rather not continue your contract.

This service fee is based on your average fund assets per year and is deducted from your capital on a monthly pro rata basis.

For smaller contracts, we charge a 7,5 EUR “fee” per month until the value of your contract reaches 10.000 EUR. But this is not a real fee: the 7,5 EUR are invested in a loyalty fund, and the whole sum will be transferred back to you at age 62 when the tax benefits of a private pension plan are available. This loyalty premium can be avoided if you start Pensionfriend with a 10k one-time investment.

For the ETF, we have pretty low running costs (0,15 % — 0,28 %), depending on which ETF portfolio you choose. These fees are going completely to the ETF provider.

Compared to ETFs that track the same stock index you buy through a broker, you have three major benefits:

1. A tax-efficient structure where you only pay taxes on half of your gains once at the end instead of every year. This saves the average user 0,6-1 % per year over a 30-year period.

2. We rebalance for you, so you don't have to be bothered. Moreover, our rebalancing algorithm can add about 0,1-0,2 % per year.

3. We pick ETFs that cost less and even earn some side fees that get reflected in an extra appreciation. This saves the typical user 0,2-0,4 % annually over the medium term. Compared to other pension plans, a huge benefit is that you have no large upfront fees. This means you are not locked in due to the cost you already made. It gives you flexibility. Moreover, we work with the lowest-cost insurance companies to bring you these offers. And don't be mistaken: higher cost does not mean better returns. Higher-cost insurance companies just have higher profits and advertising budgets. The underlying risk is exactly the same. With Pensionfriend, you can choose out of 500 ETFs, but we recommend our Pensionfriend ETF mix, which outperforms benchmarks like the MSCI World and S&P 500 in unbiased data trials and in line with fundamental economic logic.

Pensionfriend is fully flexible and available even if you leave Germany to most of the other countries worldwide with very few limitations:

If you leave Germany but stay in the so-called EEA (European Economic Area), including the UK and Switzerland, absolutely nothing happens. You can and should keep Pensionfriend and continue to contribute to the pension plan.

If you unregister here and move to a country outside the EEA: In this case, Liechtenstein Life — our pension plan partner — reserves the right to terminate the contract and pay you the money out if you move to a country with greatly increased risks regarding compliance, taxation regularities or political system. It is very unlikely that this will happen. But even if: The full value of your pension plan contract will be paid out to you — without any additional fees.

So, regardless of where you plan to live in the future, with Pensionfriend, you accumulate money in the strongest ETF portfolios, and it is important to build a private, tax-beneficial pension next to the public one, which only covers a very basic pension income. 

You can cancel your pension plan at any time, free of charge. You can then choose if you either want to get paid out the capital that you have saved in your portfolio so far or prefer to transfer the assets in your portfolio to another provider. Furthermore, you can also adjust your plan at any time with additional contributions. Effectively, what we aim for is to give you the benefits of an ETF savings strategy with the tax advantages of private pension insurance at the lowest feasible cost.

Our pension team is passionate, dedicated, and world-class, focused on all aspects of the pension decision to help you plan for a safe and sound financial future. Our biggest advantage is that we understand investments. 

Dr. Chris Mulder was head of the public investment advisory at the World Bank and knows how to separate the chaff from the wheat. Our advice is based on unbiased data, unlike virtually every other investment advisory. 

Our team of economists, insurance, legal, and financial experts have dissected Germany's unprecedentedly complex pension and tax system, so we have developed formulas to calculate and forecast taxes and benefits as accurately as possible.

The Pensionfriend team is moreover supported by a brilliant team of software engineers and product managers. This allows us to bring you calculators that others can only dream of. This way, you can calculate for yourself how your future looks. Yes, we are proud of our team! In sum, you have finance, tax, pension, and calculation experts all at your service, so you can review your basic situation in minutes and then take your time to go over different scenarios to help you build a safe and sound financial future.

Pensionfriend works with a life insurance company to offer specific retirement products. This company is Liechtenstein Life Assurance AG. It is based in Liechtenstein and licensed to operate, among other places, in Germany and Switzerland. It is regulated for the German market by the so-called BaFin.

Your assets through Liechtenstein Life are so-called Sondervermögen or special assets, and they are not part of the insolvency mass of Liechtenstein Life or Hypofriend. Thus, your assets are yours even in the unlikely event of an insolvency.

In case Pensionfriend shuts down, it’s important to understand that your money never passes through our accounts. Your transfers are directly with our cooperation partner, Liechtenstein Life, which holds your assets.

Liechtenstein Life Assurance AG is based in Liechtenstein and is, therefore, subject to Liechtenstein national laws. 

This is a great advantage for you because this means your assets must be managed as special assets (Sondervermögen) according to Liechtenstein's bankruptcy code and are, in case of insolvency, transferred to you within 4 weeks after the necessary documents have been submitted.

Learn more about how your investments are protected as special assets.

The public pension you can get in Germany is higher than in many other countries. Nonetheless, while it is a solid basis for those who worked and contributed most of their life, it won’t be enough to maintain your standard of living in old age.  

The shortfall is especially large if you did not contribute for a longer period or if your income increased substantially, and your pension is hence in part based on the lower income you used to have and less so on your current high income. 

It is also very relevant to know that the public pension is a so-called pay-as-you-go system. This means that the contributions you pay into the pension fund today are used to pay the monthly pension of current pensioners. Your pension will, therefore, be paid by future generations. However, as many baby boomers will retire in the coming years, fewer young people will have to pay for more retirees.

Based on our funding and demographic analysis, we expect that public pensions will keep up with inflation, but no more than that. That is another reason why you will need supplementary components for a decent pension.

Learn more about how the public pension works in Germany and why it should only be the foundation of your retirement planning.

The term “pension gap” refers to the difference between your pension income and your needs to maintain your standard of living in old age. Traditionally, many people in Germany rely on the public pension. However, this is usually significantly lower than the last net income before retirement.

For example, if you retire as a salaried employee in Germany at the age of 67 after 45 years of employment and your last monthly gross income was 6.000 €, you will receive a public pension of around 2.130 €.

If there is no further income from a private pension, renting of real estate, or other, the difference to the last income as an employed person is 1.480 €. It is usually assumed that you will need a little less money in retirement because you save money from your income for your retirement, 

Therefore, let’s assume that 80 % of your last net income will be enough to maintain your accustomed standard of living. In our example calculation, the difference is then still 760 €. This amount is the pension gap. 

At Pensionfriend, we have made it our mission to build up a pension plan and close this gap, for example, with private pension insurance or real estate.

Calculate your gap now with our Retirement Calculator

You have two main options for your pension payout. The first is an annuity, which provides a steady monthly income for life, while the second is to withdraw your pension at your discretion, for example, every month or every year, or the entire pension at once.

The lump sum is only subject to taxation when you take your money out, and only on the capital gains you made. The lump sum approach has the advantage that you can keep investing your money during retirement. The longer you wait to take the money out, the longer your investment benefits from the tax shield and high returns. You can also decide to switch some of your investment to more conservative instruments like fixed-interest bonds.

If you choose the annuity, known as 'Leibrente' in German, then you pay income tax over the entire payment. However, the payment is reduced depending on your age. Generally, the older you are, the lower the tax rate. For example, if you are 70, your tax is reduced by a factor of 10.

You can also decide to combine the two approaches. For example, at age 70, you can take out half of your pension as an annuity. We strongly recommend not focusing on the annuity returns when you conclude your PPP but checking prices when you are in retirement. The annuity returns are very low now, and insurance companies don't offer very competitive prices when they need to make commitments that may last 40–50 years. You should check the prices when you are close to buying an annuity and then consider what strategy works best for you.

Yes, you can retire earlier, before reaching the statutory retirement age. The minimum retirement age for a public pension is 63.

Note that the standard statutory retirement age is gradually being raised to 67, depending on when you were born. For those born after 1964, the statutory retirement age is now 67.

For each month you retire before the official retirement age, your public pension is reduced by 0,3%. Therefore, if you retire 1 year earlier, your pension is reduced by 3,6%. If you retire 5 years earlier, your pension is reduced by 18%.

If you have a long insurance history:

• 45 years of contributions → you can retire at 63 (or slightly later, depending on your birth year) without deductions.

By answering a few questions here and signing up, you can access our comprehensive pension calculator to review your overall outlook and examine when you can retire and what a good savings target is.

Sign up here to get access to your dashboard.

The average gross public pension in Germany is about 1102 € per month. For men, it was 1431 €, and for women, just 930 €. These are figures for 2023 from the Deutsche Rentenversicherung. In the meantime, average pensions should have grown another 8,5% as the value of the pension points has increased that much.

According to the German Statistical Office, the average net overall pension in Germany is about 1990 € per month. One in five retirees receives an income of less than 1400 € net per month.

Germany’s target for the so-called replacement ratio, the ratio of public pension income to the last earned wage income, is about 48 %.

Sign up here to get access to your dashboard with detailed retirement income estimations.

There is no simple answer, alas, as it depends on how much you will need.

But if you know how much you need, this is a rule of thumb that you can use:

• For each 1000 Euros in extra gross monthly income, you need to save about 300.000 Euros. This is based on the 4 % rule. Our simulations show that with a well-invested portfolio, you can withdraw 4% of the initial amount and pay yourself an inflation increase each year. In addition, you are most likely to leave a sizable inheritance for your survivors.

• If you would instead choose an annuity--a fixed monthly payment till the end of your life-- from an insurance company, you would have to save about 454.000 €.

For a more comprehensive answer, we suggest that you sign up here and use the calculator in our dashboard. It should take you about 5-10 minutes to get a first free answer.

Following that we do advise you to make an appointment here to go over the results, as these in the end are not simple calculations.

Effective January 1, 2026, you will have a monthly tax-free allowance of 2.000 € if you are an employee and work past your statutory retirement age.

This is quite a generous break, and can save high-income pensioners up to 12.000 € in tax annually. You don't need to work full-time to get this break, so it makes it very attractive to work up to the 2.000 € threshold.

This tax break is called “Aktivrente” in German. It is designed to make working past retirement age more attractive. Keep in mind that the basic current statutory retirement age is 66 and 2 months, and it will increase to 67 by 2029.

Note: The "Aktivrente" makes employment income tax-free up to the threshold, but social security contributions (such as health and long-term care insurance) will still be deducted from the salary.

Who Benefits From the Tax Break?

Any employee working past the standard retirement age will be eligible for the tax exemption. The pension status is not relevant in this case—whether you are already drawing a pension, have deferred it, or have no pension entitlement.

Not eligible, however, are the self-employed, freelancers, and a few other independent occupations not subject to social insurance contributions.

Can You Work Past Retirement Age Independently of the Active Pension?

Yes, this is possible.

After reaching statutory retirement age:

• You can earn unlimited income. You automatically stop paying pension contributions, and your pension amount is unaffected.

You can inform your employer to continue paying insurance contributions (this cannot be backdated). If you opt in, your pension will increase annually based on both your and your employer's payments.

Do you own a property? Congratulations, you have already set the foundation for your retirement. In many cases, however, this is not enough to close the pension gap. If you live in your property yourself, you will save on rent, but that will probably not be enough, as you will still have other expenses that may not be covered by other pensions you are entitled to.

The same applies to a property you rent out: you have a steady income from the rental payments but still have to pay your rent and the running costs for the property. 

Discover your options for optimal retirement planning with Pensionfriend

There are indeed some attractive forms of company pension plans. These are the ones that only your employer contributes to or where the assets are invested through a company or industry pension fund.

However, these forms only exist in rare places; in the vast majority of cases, company pension plans are so-called direct insurance policies nowadays. And those are anything but suitable for closing your pension gap. 

The main disadvantages include 

1. high upfront and ongoing acquisition and administration costs

2. very low returns due to limits on how your contributions are invested

3. you pay the tax advantages in the savings phase back through taxation of the pensions you receive in retirement. 

When you change your job, the tax advantages also fall away: your upfront costs are lost if you stop the program, in the limited cases you can. If you continue, it is basically dead money with zero return at current interest rates. 

Our conclusion is quite clear: In most cases, by far, a company pension plan is not a beneficial investment and not suitable to provide for a financially secure retirement. You can read more about this in our article Why company pension plans don't make sense in Germany.

ETFs, or Exchange-Traded Funds in full, are a wonderful invention to buy in one basket of stocks that gives you the benefit of diversification at a low annual cost. 

You can, for example, use ETFs to track indices, such as the S&P 500, which contains shares of 500 of the largest US companies. So when you buy an S&P 500 ETF, you're investing in not only one company, but all 500 companies listed in the S&P 500. This way, you spread your risk.

ETFs are available for all kinds of stock indices, for example, the EURO STOXX 50, which contains the largest companies in the eurozone, or the MSCI Emerging Markets Index, which tracks the performance of nearly 1.400 companies from 24 emerging countries. 

ETFs are not free and do not track the underlying stock baskets or indices perfectly. This leads to a so-called tracking difference. You will be shocked to find out how costly some ETFs are, and pleased if you see the positive tracking difference some ETFs are able to generate. 

The most important decision you need to make is the index or basket of stocks that you want to track. Next comes the ETF that tracks this basket. 

In choosing among thousands of ETFs, you also have to watch out for all kinds of unsavory ETFs with high fees and odd baskets of stocks. 

At Pensionfriend, we focus on data and cost. We aim to find those ETFs that replicate our preferred stock indices with the best tracking difference and cost combination. For the STOXX 50 index, this can save you over 0,5 % per year. To select the preferred stock indices, we compare their performance using the longest unbiased data series available, which spans over 150 years and across many business cycles and crises. This way, we understand the relative performance and risk much better. 

For example, the high (over 10 %) reported performance of the well-known MSCI World index has a lot to do with the starting date that included a huge upswing in the Japanese stock market, which, however, in the future is underperforming due among others to aging and lower agility of the Japanese economy. Over the longest comparable period, the S&P 500 outperformed… Very long data analysis and basic economics also show that returns of 10 % are not sustainable and should not be expected.