Companies and Expats often have questions about German Pensions. It can be about entitlements and premiums. Or related issues like (inter)national taxation, investments or (individual/collective) transfer of value.
In order to prevent confusion, we will now address the most relevant general aspects of German Pensions. If you might have specific questions, feel free to contact us. We are experienced in German Pensions and have usefull contacts in Germany.
A) German Pension System
1] Three Pillars
Germany has three Pension Pillars:
- Mandatory State Pensions;
- Mandatory/voluntary Workplace Pensions;
- Voluntary Individual Pensions.
Combined they provide the regular Total Pension Claim.
2] Optimal Planning
When planning your pension build up, please always:
- Use all tax benefits (if possible);
- Focus on low costs;
- Strive to have maximum flexibility;
- Acquire advice in case of transfer of value.
If there are no tax benefits, you should ask yourself why you should participate voluntarily, as it would only commit you to the strict legal/tax pension regime.
B) State Pensions
The amount of Old Age Pension when retired depends especially on the previous income and the number of years one has worked in Germany.
The German State Pension Claim can be substantially higher than that of other EU countries if you have had the maximum build up in the past. The current maximum annual build up amounts to gross € 745,-.
Even though one only has a legal claim to receive pension terms if one has participated for at least for 5 years, this is mitigated by the fact that years participating in other EU countries can also be included to reach those 5 years. In that case, the pay-out will also be pro-rata.
Regarding the retirement age, like most EU countries Germany is gradually increasing that age to age 67 in the near future.
The amount of mandatory old age pension premium that during the build up phase has to be paid is related to the annual income.
In general employer and employee each pay 9,35% of the annual wages up to a maximum. The current maximum annual amount of premium an employee has to pay amounts to € 7.477,-.
3] International Aspects
If you have an entitlement, this will also be paid to you if you retire outside of Germany.
Please watch out for double taxation: Where you live and at source in Germany. Tax Treaties might be able to prevent or mitigate double taxation. As these issues and treaties can be rather complex, it seems advisable to acquire sound advice.
For more information please check the German State Website:
C) Corporate Pensions
1] Pension Basics
German pension law defines an occupational pension claim as a claim regarding:
- Old age;
- Next of kin;
- Disability coverage.
Occupational pensions are in general not mandatory. They are often organised by the social partners.
2] Allowed Institutions
German pension law grants i.e. four kind of institutions the opportunity to cover occupational pension claims:
I. Pension Fund (Pensionskasse-Pensionsfonds)
Under the scope of the EU IORP Directive assets are segregated from the sponsoring company. Participants have a direct claim against assets. This is i.e. comparable to for example Dutch pension funds.
II. Direct Insurance (Direktversicherung)
Under the scope of the EU Solvency 2 Directive this regards the classic pension insurance scheme of an insurance company. Participants have a direct claim towards the insurance company. This is i.e. comparable to for example Dutch insured pension plans.
III. Incompany Coverage (Direktzusage)
Outside of the scope of the EU IORP/Solvency 2 Directives this regards only a book reserve scheme. Assets are not required to be separated from the sponsoring company. Participants have no direct claim against underlying assets.
Where in option I. and II. the assets are safeguarded outside of the sponsoring company, in this option the participants only have a general claim towards the employer. This option saves the company and employees the profit and costs surplus of an insurance company.
For participants this results in increased risk in case the company is not healthy. The average employee is due to the BetrAVG in case of insolvency of the employer conditionally protected by the legally mandatory coverage of the PSVaG in Cologne. Which takes care of the reinsurance to a consortium of 51 life insurers. The employers pay the related premium which is linked to the present value of the accrued vested benefits.
There are also companies who cover the insolvency risk by direct reinsurance. This is especially welcome for managers and directors who might not have the mentioned PSVaG coverage.
In for example Holland incompany coverage is not possible for collective pension plans. Dutch pension law prefers pension capital to be out of reach of the sponsoring company.
IV. Support Fund (Unterstützungskasse)
Outside the scope of the EU IORP Directive it is a separate entity that implements pension claims as granted by the employer. It is a book reserve scheme. Assets are not required to be separated from the sponsoring company. Participants have no direct claim against underlying assets. They do have a claim towards their employer.
In the ‘pauschaldotierten‘ version it is usual to invest the premium meant for capital creation freely in the sponsoring company. In the ‘rückgedeckten’ version the pension claims are usually reinsured.
Regarding the insolvency risk the coverage as mentioned under ‘Incompany coverage (Direktzusage)’ is applicable.
3] Allowed Institutions on Tax & Prudential Requirements
Each institution has its own tax and prudential requirements position. For example regarding the treatment of contributions, benefits, own funds, investment restrictions and underfunding.
It is advisable to take these differences into account during the selection process.
4] Allowed Systems
German pension law allows three kind of pension systems:
I. Defined Benefit (DB)
In this system the granted pension claim is a totally guaranteed pension annuity. The participant has no investment or interest risk.
The one uncertainty that might exist is that it is not always included for the pension to be annually totally indexed in order to compensate for inflation:
- There is no obligation to index DB claims during the deferred period.
- Pensions in payment must be indexed with the Consumer Prices Index every three years.
- Pensions financed by contributions from the employees must be indexed by at least 1% annually.
- In case of a Pensionskasse the benefits have to be indexed with 2.25% annually.
Due to low interest rates this system has become expensive and increasingly out of fashion.
II. Defined Contribution (DC)
In a pure DC system the pension claim consists only of the annual deposited premium. This premium will be invested. The total thus created capital will at pension age be used to acquire an annuity. Only the participant has the mentioned total investment and interest risk.
A pure DC system is allowed according to German pension law since 2018. Before 2018 it did not accept a system which gives the total risk to the participant. Therefore it only allowed DC if there was a certain (costly) minimum return on investment.
Since 2018 it is possible to have a pure DC system with tax incentives and with a modified PSVaG coverage. As this system is less expensive than the DB system, it has become increasingly popular in Germany.
III. Hybrid System
This system is a combination of a DB and DC system.
5] Own Contribution
In Germany it is increasingly standard for an employee who participates in a pension plan to have an own contribution.
6] International Transfer of Value
German pension law does not in general forbid transfer of value. However, there are many strict tailormade regulations.
Therefore it is advisable for expats to seek advice on this issue before participating and investing in a pension plan.
Please also take into account the possible double taxation in home country and at source if there will be no transfer of value. Double taxation might be prevented or mitigated by international tax treaties.
D) Private Individual Pensions
1] Riester and Rürup Pensions
As of 2002 each resident/expat can invest in a voluntary individual pension plan with tax incentives.
It seems advisable to check this possibility against other options for additional coverage. Especially good to compare:
- The amount of tax benefits;
- The amount and kind of coverages;
- The kind and minimum period of pay-out;
The total onetime/annual costs.
E) Social Security System
Tax and social security regulations and authorities are legally separated from each other. Social security issues are not handled by tax authorities.
2] Mandatory Participants
Germany’s social security system applies to all employees who work and are paid in Germany.
3] German Social Security Coverage
The German social security coverage entails 6 coverages:
- Old age pension insurance
- Health insurance
- Unemployment insurance
- Invalidity insurance
- Social care
- Child support
We will now mention certain notable facts:
I Health Insurance
From many insurance companies the employee can choose the prefered one. The employer will then register the employee with that fund. The basic premium is the same whichever health fund one chooses. Some funds demand an additional contribution.
If the annual income exceeds € 54.900,- one is not bound to be a member of a statutory insurance fund. One is still obliged to be insured but one can join a private health insurance fund.
II. Unemployment Insurance
The unemployment benefits usually are only paid to those who have at least paid full social security premiums for two years.
III. German Social Security Premium
The premium is paid equally by employees and employers. The employer pays the total contribution directly to the insurance funds. In general it amounts for each to 21% of the wages up to a ceiling.
The premiums regarding old age pension and health coverage are the most substantial. The amount of premium can differ slightly due to location, kind of branch and size of the company. Due to the lower income in the former eastern part, it has a reduced premium due to a lower ceiling.
Expats residing in Germany fall within the realm of German social security. However, often double coverage is prevented by EU regulations or bilateral agreements.
Expats who are seconded to Germany for a limited period and continue to be paid by their non-resident employer are therefore often not subject to German social security premiums. An obligation to withhold social security premiums therefore does not generally arise for non-resident employers.
V. Desired Coverage For Expats
Expats have to decide what kind and amount of coverage they prefer for their family regarding in general disability, passing away prematurely and old age risks.
VI. Voluntary Continuation Of Homeland Coverage
In several home countries it is possible to voluntarily continue the domestic coverage while working abroad as expat. It is advisable to carefully compare the offered coverage with the required premium.