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If you are an employee in Germany, you will most likely notice nearly a fifth of your income disappearing every month from your payslip into a retirement fund. Those losses are what expat adviser Patrick Ott considers an ever-growing gain at retirement age.
He talked with The Local about how the German pension plan, or retirement savings, doesn’t just benefit full-time employees, but also freelancers, families and those who plan to retire in other corners of the world.
"The German pension plan is a great social welfare system that’s been around since Germany still had an emperor," says Ott, a senior financial adviser with Chambervelt, Roose and Co.
Who pays?
If you are working full-time in Germany, no matter the amount of time, pension contributions tend to be non-negotiable and are required by law. Yet freelancers, anyone working less than 15 hours a week, and those in Germany on short-term contracts are only legally required to pay health insurance.
For the typical state pension (gesetzliche Rentenversicherung) employees pay around 19 percent of their salary into the system, with employers matching that contribution. It’s possible to claim a German pension after only five years of working in Germany, says Ott. The first step is to make sure that you have been working for a German employer who has been contributing to the Deutsche Rentenversicherungbund (DRB).
You can calculate your German pension with this online tool
Anyone who has a German pension, regardless of where they live now, should continue to update the DRB about their residential address, advises Ott. “Then you get yearly statements that tell you what monthly pension you can expect when you reach the pension age.”
Contributions to public pensions are usually capped. Therefore, you are no longer required to make contributions from your salary above a defined amount (€78,000 in 2018).
German retirement age
Photo: DPA
At the moment, the official pension age for both men and women in Germany is a standard 67 years for everyone born after 1964. Nonetheless, anyone can claim an early retirement in Germany if they have contributed to a pension for at least 35 years, in which case they can retire at 63 with a state pension.
Still in many cases it might be best to stick out working for a couple more years, as retiring early could be penalized with a reduction of the German pension of up to 14.5 percent.
Benefiting from a German pension after leaving the Bundesrepublik
Some countries such as the US, Canada and Australia have agreements with Germany allowing an individual to collect a pension with the employee's portion of the contribution from both countries if the person has worked more than 60 months in Germany. If you have worked elsewhere within the EU, you may also be able to apply these years towards a German pension, as well.
“There are cases where pensions are paid out separately, and in some cases it can be combined," says Ott. “If you’ve lived for three years in London and paid into the British public system, and then you come to Germany and work here for two years, you would have 60 months compiled and would get the money back."
Within the EU, however, both the employer and employee portion of the pension are paid back upon retirement due to a mutual recognition of social welfare systems.
What if you work in Germany for less than 60 months and then move? For non-EU citizens, after two years living outside of Germany and the EU you can file a claim with the Deutsche Rentenversicherung (DRV) to have the employee’s contribution of the public pension paid out to you, even before retirement age, says Ott.
Freelancer pension plans
Ott recommends that freelancers pay into their own private pension plan. As of 2018, a person can put up to €23,362 per month away - or €46,724 as a married couple - and receive an 88 percent deduction which can be made on general income. That figure will grow to 100 percent by 2025.
The self-employed generally don’t have access to the public pension system but can take advantage of a so-called RÜRUP plan, which protects the money from everyone (including the investors themselves) until retirement age. They can also sign up for a German bAV (betriebliche Altersvorsorge, or company pension scheme) if they are incorporated, and pay themselves as a director or employee.
As with the public pension, the money that is deposited cannot be removed until at least the age of 63. “For self-employed people, having a RÜRUP pension is a huge security," says Ott. "You can’t even be tempted in hard times to cash into your old age pension or to get a loan or a mortgage based on your pension. That is your nest age for old age.”
Photo: DPA
RIESTER: A sound plan for families
The RIESTER plan came about in 2004, to help bridge the gap the German government left when it reduced the public pension. If you are an employee and have a spouse and children, each family member benefits from a direct subsidy paid for by the government -- an amount increased in January this year.
Then they can write off the payments they make in their income declaration against their taxable income. The current maximum amount per year that can be invested into the RIESTER plan is set at €2,100.
For someone with a non-working spouse and children, the spouse can be set up with a €5 per month contribution into their own RIESTER plan. Then the government pays an additional €175 per year for the spouse as a direct subsidy, plus €300 for each child born after 2008, and €175 for each one born before 2008.
Taking additional steps for the future
Germany’s pension system was originally based on the belief that a larger, younger population could support an older, ageing one. But now “we are a shrinking population, with fewer and fewer people paying into the system,” says Ott.
He recommends people balance their pension savings with private savings that they can dip into down the road should they need capital.
He urges expats not to make a “typical German mistake” of putting all extra income into a pension plan. “When something happens they have to figure out which of the pension plans can be accessed and where they can get capital, which comes with huge losses and penalties. So you basically destroy a lot of the performance that you build up.”
A standard rule of thumb, says Ott, should be putting five percent in pension plans, and five percent in investment plans with passive investment funds like ETFs (exchange traded funds) so that there is always some capital left on the side for investments. “Then when you reach retirement age,” he says, “you can still use other capital that you have accumulated.”
To sum it up, here is your checklist of steps to take to prepare for a German pension
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Check how much you have accumulated so far through the Deutsche Rentenversicherungbund (DRB), or German Pensions Agency.
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If you’re self employed or don’t have an occupational pension, consider establishing a private savings in order to compensate.
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If you have a family in Germany, consider setting up a RIESTER Plan.
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Think about whether you want to set up additional pensions savings.
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Keep the DRB informed about your address if you leave the country.
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