How do pensions work in Germany?

The three pillars of the German pension system

The German pension system can be divided into three pillars:

Pillar one is, for most people, the basic public pension (‘Gesetzliche Rentenversicherung’ or ‘GRV’). The second pillar consists of company pension schemes. The third pillar includes various forms of private pension insurance. The state partially subsidizes some of these.

So, what do these three pillars mean for you? And how can you use them to enjoy a relaxed, financially secure retirement? Let's take a closer look at the individual pillars:

The essence of Germany's public pension

The public pension you may get in Germany is higher than in many other countries, but you shouldn't rely on it exclusively. For one thing, the amount paid out in retirement depends heavily on how much and how long you have paid in during your working life. But if you have not paid into the system for several decades or were only employed part-time, the statutory pension will not be enough to live on and certainly not to maintain your lifestyle. For example, the average pension for men in Western Germany is 1.800 €, and for women, it is only 1.333 €.

Around half of the pensions paid are thus less than 1.000 € per month. Almost every fifth pensioner receives less than 500 € per month from the public pension!

Even if you paid in all your life, it is often not enough. The significant benefit of the public pension, though, is that it keeps up with inflation and is paid out for the rest of your life, no matter how long you will live. Thus, in planning your pension, you must understand how significant that base pension is, that you can always count on it, and what happens if you move abroad.

Do I have to pay contributions to the public pension?

If you are employed, you have little choice.

Virtually all employed people in Germany have to pay into the official pension system of the Gesetzliche Rentenversicherung. Those not subject to compulsory contributions can voluntarily insure themselves with a public pension. This applies, in particular, to the self-employed, freelancers, or non-working adults, such as stay-at-home moms or dads. This voluntary contribution can be made between 100,07 € and 1.497,30 € per month. 

We have calculated that it mostly makes sense to contribute voluntarily if you are older (around 50-55). This particularly applies if you are female or well-educated, as you are expected to live longer and benefit more from the public pension. Furthermore, if you are risk-averse or don't have many other savings, then it makes sense to contribute more to the public pension if you can, starting around middle age.

When will my public pension be paid out?

The standard retirement pension age is 65 plus ten to eleven months, and it will gradually increase to 67 by 2029. So when you’re born after 1964, you will have to work until the age of 67 to get the full pension.

With longevity increasing gradually, we expect that the normal retirement age will increase by about one year per decade. So, if you are 30 now, you can expect the public pension to be available at about the age of 70. 

Can I retire early?

Yes, but you will receive less pension unless you are at least 63 and have 45 years of minimum insurance (the so-called waiting period). All others who are 63 or older and have completed at least 35 years of waiting time can retire early but with deductions.

Every month you want to retire earlier costs a deduction of 0,3 % on your monthly pension. To avoid this, you can make special payments before the official start of your pension from the age of 50. This is a relatively attractive option and should definitely be considered if you want to retire early. If you do so, it makes sense to spread the special payments over several years to avoid exceeding your tax deduction limits.

How high will my public pension be?

Your pension is determined foremost by the number of pension points (so-called 'Entgeltpunkte', often also called ‘Rentenpunkte’) you have collected. For every year of average income contribution, you earn one point. The average income is recalculated yearly; currently, you receive one pension point for 50.293 € of income. If you earn less, you will receive proportionally fewer points, and if you earn more, you will get proportionally more pension points.

Accruing pension points does have a maximum limit, which in 2025 is 1,92 points for all incomes 96.600 € and above.

To calculate your pension, you must multiply these pension points with the pension value or 'aktueller Rentenwert,' currently 39,32 € in Western Germany.

Note: On this pension, you still have to pay taxes so that it will be reduced even further!

To assess the net value of your personal pension, it is critical to forecast the value of the pension points, how many points you will still accumulate, and understand the taxes.

Use our pension point calculator to find out how many pension points you have already accumulated and how high your public pension will be based on this.

Our forecast takes into account population dynamics and expected wage growth. You can also use the calculator to analyze the impact of various options to supplement your pension and choose the one with the highest net impact.

You can compare this to the forecast of the official forecast the ‘Deutsche Rentenversicherung’ DRV (the official insurance institution of the state pension) provides you every year (if you are older than 27 years and have already paid at least 5 years of contributions). But mind you, this is a static forecast that does not model how the value of the pension points or your income evolves. We think the DRV should use our model.

More information about your options with the public pension in Germany

Do I keep my public pension when I move abroad?

The simple answer is yes. You are entitled to a pension, regardless of where you live. Do be careful with double taxation. Fortunately, over 90 countries have a tax treaty with Germany, from Australia to Russia, that will prevent the pension from being taxed twice. Typically, the pension, as it was built up in Germany and is paid for by German contributions, will be taxed in Germany and at German tax rates. But it does vary by treaty, so you have to check it.

Asking for a refund rarely makes sense unless you have not reached the minimum 5-year threshold for a pension. We do have a special article on this topic.

Riester pension: State-subsidized but beneficial in one form only

There is an expectation that the public pension will not keep up with living standards as it is paid by current workers, and fewer and fewer of those will have to support more and more pensioners.

In response to this problem, in 2002, the government introduced the Riester pension (‘Riester-Rente’) to encourage private retirement insurance as a supplement, with support from subsidies and tax benefits.

Unfortunately, the Riester pension also has some crucial flaws, which we discuss later, that reduce the net return on your investment to about zero in the savings phase.
Considering inflation and taxes on your pension, you can even get a negative result.

In individual cases, it can still be worthwhile to take state subsidies, and we will show you when and how after discussing who and how much subsidy you can get.

Who can get a Riester contract?

All those who contribute to the public pension scheme can benefit from these subsidies. This applies to all employees, recipients of unemployment benefits, parents on parental leave, caregivers, early retirees, and artists. Self-employed or persons without their income can also be indirectly eligible as the spouse of an employee with a Riester contract.

Subsidies for Riester contracts

There are two types of subsidies: direct subsidies through an old-age provision allowance ('Altersvorsorgezulage' in German) and indirect subsidies through tax benefits.

The direct basic allowance amounts to 175 € per year for each person and 300 € for all children born after 01/01/2008. For older children, the allowance is 185 €. These allowances are linked to conditions: to receive the full allowance, you must pay at least 4 % of your annual gross salary, including the subsidy.

You can also benefit from tax advantages, as you can deduct your contributions up to 2.100 € per year from your taxes.

However, it is only the highest of the two ways of calculating the entitlement that counts. So if your tax deduction could save you 800 € and the subsidy is 775 €, you are entitled to a maximum of 800 €.

Disadvantages of the Riester pension

Despite the sometimes high subsidies, we cannot advise you to take out a Riester contract in many cases.

The Riester pension is mainly tied to the current low interest rate, as providers must guarantee you get at least your principal sum back.

This is why insurance companies, in essence, don't want to offer these contracts anymore, and rarely do they offer them with adequate upside. Even when interest increases, the money earned will first go to offset the relatively high cost.

To top things off, the pension you receive in the payout phase is taxable and subject to a so-called pension factor ('Rentenfaktor' in German). We will spare you the details here, but it means that insurance companies pay only about 65 % of what you have paid in when you have an average current life expectancy! This is a dismal outcome, as you don't get back your nominal savings, let alone be protected by inflation. Hence, only if the subsidies are huge (e.g., you have three children), it is worth it. Below, we show how homeowners can get around this and avoid this huge Rentenfaktor “tax” in retirement.

TIP: Don't use Riester if you plan to move to a country outside the EU or the European Economic Area (EEA) during your retirement, as you will also have to pay back all allowances and tax benefits that you received if you do so, even for part of your retirement. In addition to the EU states, the EEA includes Iceland, Liechtenstein, and Norway. 

The best way to make your Riester-Rente profitable

Your best (and usually only) option for using Riester sensibly is the so-called 'Wohn-Riester'. The Wohn-Riester is a specific use of the Riester pension. It just means you use the proceeds to pay your mortgage or invest in a home, more precisely in the purchase, construction, or age-appropriate renovation of a property. Some providers offer special Riester home savings contracts (known as 'Riester-Bausparvertrag' in German) that you can only use for this purchase, but we would not usually recommend this.

We recommend using your Wohn-Riester right before retirement to pay off (part of) your mortgage. This way, you save on interest payments and avoid the vast “Rentenfaktor” tax (see above) implied by having the Riester paid out gradually and partially in retirement. With interest rates higher, you can also use any Riester savings to lower your mortgage immediately or when your interest rate reset is coming up – i.e., at the end of your fixed interest period.

The further good news is that:

1. You can use it for any home in the EU.

2. You can sell your home and transfer your investment to a new home.

3. You can avoid any regular tax by owning your home until the age of 85. If you sell your home before that, without buying a new one, you will have to pay the standard tax and don't need to repay your subsidy.

We also recommend investing your Riester assets in stock ETFs until you pay off (part of) your mortgage. That way, you benefit from high expected returns.

Note that when you pay off your mortgage earlier than in retirement, you will implicitly pay 2 % interest on the Wohn-Riester amount you put in your home. In other words, your Riester balance that you would have to pay tax on in retirement will grow by 2 %. If the return on your Riester plus 2 % is less than your mortgage rate, it makes sense to use Riester's assets to pay off your mortgage immediately. If you plan to own your home until at least the age of 85, you don’t pay any tax anyhow, and then it pays already if the return on your Riester is less than your mortgage rate (which it virtually always is).

You can also use your Riester as a down payment for your home purchase. We can calculate if that makes sense for you.

Rürup pension: A poor choice despite tax advantages

Rürup-Rente (or officially: 'Basisrente') is a pension designed for those not sufficiently covered by the public pension. Mainly, it should ensure a basic provision for the self-employed in old age. It is, therefore, often referred to as a basic pension. But like the Riester pension, this originally good approach is now a losing proposition due to high costs in the savings and payout phase and low returns. We, therefore, suggest using alternatives.

Who can get a Rürup contract?

The basic pension, better known as the Rürup pension, was introduced to provide a basic pension similar to the public pension for self-employed and freelancers. However, the Rürup pension is not restricted to these occupational groups; in principle, it is open to all taxpayers in Germany. For example, as a public pension-paying employed person, you can use the Rürup up to the maximum of your public pension contribution.

Types of Rürup pension

As with all insurance companies-based pension plans in Germany, there are three different types to choose from in the pay-in phase:

Classic pension insurance gives you a 100 percent payout guarantee. Unfortunately, because this type is linked to the extremely low guaranteed interest rate, you are assured of a minimal return. Note that for Rürup, in contrast to Riester, the guarantee is after cost. If your return is just the 0,25 % guaranteed interest, and the cost is 2 %, you are not even getting your nominal contributions back.

The same applies to the second type of pension insurance: the new-classical options with guarantees on part of the investments. These may seem attractive but have very low returns, as the negative/low net return on the guaranteed part drags down the overall return and should be avoided as well.

The only option we can recommend even considering is the plans where you directly and fully invest in low-cost stock ETFs.

Tax advantages with Rürup pension

Tax benefits fund the state subsidy of the Rürup pension. The contributions you make during the savings phase are now fully tax-deductible. It was initially expected that 100% of contributions would be tax-deductible only by 2025, but they are already fully deductible now. The tax benefits are capped at 29.344 € for single individuals and 58.688 € for married people per year.

Unfortunately, the disadvantages outweigh these tax advantages.

Drawbacks of Rürup pension

There are a few key reasons why the Rürup pension is not worthwhile for many people. First are the high administrative costs. In the savings phase, you have a cost of 2,85 % on average (we compared the costs of all 44 providers), which more than halves the result even if you invest in high-return stock ETFs.

Second, there is a very poor return in the pay-out phase, which you cannot avoid. As the return on your savings in the retirement phase has to be guaranteed, they are very conservatively invested, with no positive return after cost. You are also bound to the conservative life expectancy assumptions of life insurance companies. This combined amounts to a 'Rentenfaktor' tax, and hence, you will not even get the nominal amount of the savings accumulated at 67 back, but only 65 % if you have the current average life expectancy. Only those lucky enough to live a very long life benefit from more generous payouts since they profit from the surpluses of the deceased individuals in their cohort.

This 'Rentenfaktor tax' is a drawback that affects both the Riester pension and Rürup. For Riester we can then offer the Wohn-Riester solution, for Rürup there is at present no solution. Your only hope is that the reforms, which the government has already announced, will change the system for the better.

Find out if a Rürup pension works for you with our Rürup calculator

Company pension plans: Why they often don't pay off

The company pension plan (“betriebliche Altersvorsorge” or bAV) is a collective term for various forms of pension provision by the employer. Initially, these were separate pension funds, well-managed and properly invested by professional fund managers. These funds would also spread the risk of longevity across all participants. Hence, they have two major benefits and are typically quite beneficial for you. Unfortunately, these plans are becoming rarer and rarer as companies worry about the liabilities of these funds. The most typical form these days is, therefore, direct insurance (“Direktversicherung”).

These direct insurances have the same weaknesses as the other voluntary pension options: high costs and low returns. In addition, you pay less to your public pension, which has a positive net return higher than the company pension with current low interest rates. On top of that, if you change employers, you lose your subsidies unless the new employer happens to have the same insurance contract. Your enormous upfront costs are then basically lost.

We have a special article on this topic and a calculator to help you review your personal company pension situation. Review this, as it typically is about the worst pension decision you can make. Instead, you should consider alternatives like a Private Pension Plan as a long-term tax-efficient ETF savings plan or saving up for your home or investment property.

How does a direct company pension work?

With a company pension direct insurance, you pay a monthly contribution to this contract out of your wage. In Germany, this is referred to as deferred compensation ('Entgeltumwandlung'). Deferred compensation implies that contributions of up to 322 € a month are free of social security contributions, and you don't have to pay taxes on up to 644 € per month during the savings phase. These two maximum limits are valid for the year 2025 and are adjusted annually.

Since your employer also saves their social contributions, they must top up the deposit with usually 15 % of your contribution. And if you are lucky, your employer participates to a greater extent.

At the end of the savings phase, usually upon retirement, and with the beginning of the payout phase, you will receive your monthly pension, which you then have to pay tax on, and social security contributions, including what is usually the employers' part. Alternatively, you can sometimes also take a complete or partial lump sum, but then you will fall into a high tax bracket.

Disadvantages of company pension plans

The disadvantages are such that it makes the direct company pension one of the least attractive pension products:

• Upfront costs imply that a negative return is almost guaranteed if you change jobs and terminate your plan – the subsidies fall away in most cases unless your new employer happens to offer the same program.

• Your savings are not well invested, as there are legal requirements that force employers to limit the investment options to products that are deemed safe. After cost, this implies returns in the current environment are about zero. In any case, returns are far less than a direct investment in stocks/ETFs.

• The tax subsidies you get are not real subsidies – they are de facto loans, and you have to pay them back through taxes and social security levies in retirement. The subsidies at most double your return, but doubling a low or even negative return does not make the option much better.

• As you don't pay social security premiums on your company pension contribution, you also pay in less to the public pension, and your entitlement drops. When we run the numbers, we find that these losses are surprisingly high, as the public pension has no cost and an expected return on the order of the inflation rate.

We would advise you to check carefully whether it is really worthwhile for you to join the company pension plan.

Find out more about why direct company pension plans don't make sense

Tip: Most people we talk to think their employer pays the subsidies as some extra, but that is rarely the case. These are usually just deferments of taxation and social security obligations that come out of your pocket.

Already signed up for a contract? Find out how you can cancel your company pension plan.

Private pension plans have the best potential

Ok, so we have shown you why the public pension will not be enough to maintain your standard of living in retirement. At the same time, we have also told you that the state-subsidized forms of saving for old age do not make much sense in most cases. So what are you going to do about it? How should you close your pension gap now?

In our opinion, a wisely chosen private pension plan (known as 'private Rentenversicherung' in German) is the best answer to this question, as it allows you to combine tax advantages with a reasonable return.

A private pension plan invested in ETFs: The most promising addition to your retirement plan

The traditional classic and the revamped new classic versions of the private pension plans suffer from the same weaknesses already described for Riester and Rürup: low returns as the full or partial premium guarantees force investment in low interest rate investments like government bonds. Costs will then eat a considerable part of the return, sometimes leading to negative returns.

Instead, for a sound financial future, you need to use your private pension plan to invest in widespread stock indices. Over the long run, they return 6-7 %, historically even higher. The beauty of wide stock ETFs is that, over the long run, they become relatively more stable. The simple reason is that stocks grow with the economy as companies grow with the economy. In the short term, they suffer from volatility as there is uncertainty in the outlook, which translates into valuation questions and price volatility. However, over time, that becomes less and less important as the underlying value keeps growing. This is nicely illustrated in the following figure.

What this means is that for your pension, you need to invest in stock index ETFs. Such stock indices are the best for the long run – a minimum of 10–15 years, and the longer, the better. The good news is that:

1. These investments in ETFs of broad stock indices are very, very cheap. With 0,1-0,2 %, the costs are much lower than those of mutual funds or other solutions used in the past.

2. The private pension plan provides a very attractive solution from a tax perspective. If you hold ETFs directly, you, in principle, will have to pay capital gains tax every time you sell and make a profit. With a private pension plan, you pay only once. If you hold the plan for over 12 years and take the assets out in one go after the age of 62, you also benefit from half the capital gains tax rate at about 13,19 %.

The following graph demonstrates the benefit of using a private pension plan over investing directly in ETFs, considering the provided costs.

So, for us, the most attractive form of additional pension is ETF-based private pension insurance. You won’t get any guarantees with that type of private pension plan, but if you choose a broad index and hold the course, you will likely have a very significant return over the long run.

Discover Pensionfriend's Pension Plan, the smart solution for your retirement

We, therefore, recommend that you consider the option of an ETF-based private pension plan for a long-term savings plan, as this allows you to benefit from a high return over the long term.

In addition, it is key to choose a low-cost provider. A fee of 1,7 % on a return of 6-7 % sounds modest. But over 30 years, you could have double the amount if you choose a provider with just 0,7 % cost.

To help this process, we have reviewed all providers for their cost and selected the one with the lowest costs that is still available to provide a good menu of ETFs, good tracking of your assets, and necessary features like automatic rebalancing.

You also have as an alternative a fund-linked private pension plan (or 'fondsgebundene Rentenversicherung' in German). Instead of owning an ETF outright, you get paid based on an index. We have seen examples of poorly constructed and expensive indices. We also consider that owning an ETF outright gives you better protection: You can seek to have your ETFs transferred to another company.

You might be wondering why you should take out an ETF-based private pension plan when you can invest in ETFs independently. You benefit above all from the tax shield, so you're saving taxes in the savings phase. You can cancel at any time. We have an option where you do NOT pay upfront fees. In addition, you can choose whether to receive a monthly annuity or take the lump sum and then reinvest when you take the lump sum.

Tax benefits with a private pension plan

With an ETF-based private pension plan, you can benefit from the so-called “tax shield” function, which helps to shield your investment earnings from tax.

You only pay capital gains tax at the very end. If you pay capital gains tax every year when you rebalance your portfolio, this can cut substantially into your net return.

If you have your private pension plan paid out as a monthly annuity, you must pay tax on it at your individual tax rate. However, you can also have the entire value of your private pension plan paid out at the beginning of your pension. In this case, if you hold the private pension plan for over 12 years and take the assets out after the age of 62, you pay capital gain tax only once, and only half of the return on your investments is subject to taxation.

You can also, late in life, choose to have your private pension plan paid out as an annuity, a constant monthly payment. If you do this at a late age, it has even further tax benefits: the effective tax rate drops with age to below even the lump sum tax rate of 13,1875 %, and you accumulate even longer tax-free.

More about private pension plans and your best options