Expat FAQ
German Pensions: How does it Work?
State Pension Plan
The German pensions system is managed centrally from Berlin by the Buendesversicherungsanstalt fuer Angestellte (BfA). Pension insurance provides you with protection against the risks of reduction in earnings capacity, old age and death.
The system is "pay as you go" which means that the contributions are deducted directly from the worker's salary each month. Deductions are usually labeled as "RV-Beitrag" on the pay slip. The "RV" stands for "Rentenversicherung" which literally translates to "retirement insurance".
Contributions
Participation is mandatory for all permanent employees in Germany, regardless of nationality. If a salary is being paid in Germany, and German taxes are being paid, the worker must pay the state pension contributions. Contributions are paid half by the employee and half by the employer. The contribution rate is currently 19.5 percent of the gross salary (gross = total salary before tax). This contribution is shared equally between employee and employer, meaning the employee usually pays 9.75 percent of their gross salary and the employer pays the same. The amount of the contribution is proportional to income, but only up to the contributions limit.
Self-employed workers are not legally obliged to contribute to the state pension fund. If they choose to contribute, they must pay the full amount entirely themselves.
Benefits
State pension benefits are paid out on retirement which begins at age 65-67 for both males and females. You must have contributed into the system for at least 5 years in order to qualify for benefits. The benefits paid out are about 70 percent of the average net income you earned while working. The exact amount paid out depends on how much you put in and for how long.
For example, if you worked from the age of 25 to 65 with an average yearly salary of 50,000 euro, your monthly pension benefits will be about 800 euro.
Company Plans
A bAV betriebliche Altersvorsorge is designed to supplement public pension plan. Arranged through your employment, government tax breaks and subsidies are available. Company plans are not compulsory, but about three-fifths of the working population invests in some form of company plan.
Contributions
Different companies offer different plans. The employee contributions are typically 3 to 15 percent of monthly gross salary. The company usually matches the employee contribution with a similar amount.
Most company pension schemes work with what is known as a "managed fund", meaning contributions are placed into a fund which is then invested for in various stocks and shares. A good return is around 9 percent growth per year.
Benefits
Benefits vary as it depends on the length of investment, amount of money invested, and success of the investments. Make sure that you have faith in company pension manager as their success will directly reflect on how much you may collect. A private plan offers greater independence.
In general, pensions on company plans usually commence at age 65. This is gradually increasing to 67.
Private Pension
The government is encouraging the adoption of private pensions through tax breaks and subsidies. This is because there are planned cuts to the current state pension benefits. These can be arranged through your bank or at most insurance company. If the policy is in German, consult with a professional to insure you understand all terms. Different plans have different terms and fees so shop around to find the policy that suits you. There are two primary types of plans: Foerder-Rente and Ruerup-Rente.
Foerder-Rente
This plan is named for Walter Riester, a former German Secretary of Labor. An important part of this plan includes government subsidies (bonuses).
- Anyone paying German income or wage taxes
- Employees subject to withholding tax (Lohnsteuer) who are enrolled in and contributing to the Public Retirement Insurance
- People receiving unemployment benefits
- Military conscripts and those completing the compulsory national service by doing community service work
- Civil servants
- People with permanent disability
To receive the government bonuses those enrolled in the plan must contribute a minimum payment (Sockelbeitrag) of 60 euro per year. To receive the maximum bonuses, at least 4 percent of annual income must be paid into the plan (Mindesbeitrag). A maximum of 2,100 euros per year (including the premiums and bonuses) can be saved.
The current government bonus is 154 euros if you are unmarried and 308 euros for married couples. There is an additional bonus of 185 euros for each child born before 2008 and 300 euros for every child born after 2008. An additional one-time bonus of 200 euros is paid to a new policyholder if under age 25 in the first year of the contract. All contributions (including the bonuses) qualify as a special expense for tax purposes and are tax deductible. (The maximum deduction is 2,100 euros per year.)
Ruerup-Rente
Also known as Basis-Rente, this plan was developed by Bernd Ruerup- a leading economist. It was developed for the self-employed, freelancers and high-income earners and has taxation and benefits attributes similar to the Public Retirement Insurance. However, unlike the Public Retirement Insurance, which is pay-as-you-go financing, the Ruerup-Rente works by capital cover.
Contributors to this plan do not receive any government bonuses. They do have greater flexibility and are allowed to deduct a considerable amount of their contributions from their taxes as special expenses. Additionally when revenues are collected they do not come under the flat tax rate.
The maximum tax-deductible amount that can be invested is 20,000 euro per year for single persons and 40,000 euro per year for married couples. The amount of savings can be divided freely between wife and husband.
The Ruerup-Rente pays a guaranteed life-long pension. This pension amount cannot be reduced even if a person may be collecting unemployment benefits. The amount invested is protected from any attachments or legal claims. The money in the plan normally may not be passed on or inherited after your death. The first pension payment may not be made before age 60. The amount of tax deductibility in 2011 is 72 percent. There is no lump sum option.
See our explanations on other pension systems:
[22-06-2011]
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