Retirement – Tips for the financial cushion in old age

So far, most Germans relied on the statutory old-age pension when it came to their financial retirement plans. The pension system introduced by Bismarck secured the majority of retirees at a satisfactory level in recent decades, with the result that most retirees were adequately nursed in their old age. In the 1990s, in the face of demographic change, it became increasingly clear that the system needed reform. In 2001, the Bundestag passed the Pension Act. The aim of the legislator is to keep the amount of pension insurance contributions constant. In return, the pension level drops. In the future, everyone is responsible for closing the resulting gap with company and private pensions.

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The three pillars of old-age provision


Pensions in Germany are based on three pillars . The first pillar is the various forms of statutory pension insurance. This area includes all compulsory insurance . These are not only for employees, but also for certain occupational groups that are not employed. The second pillar is private retirement provision , for which the state grants subsidies or tax breaks . The third pillar includes forms of private old-age provision without state support . Occasionally, the so-called column 0 is added to the official three-pillar model. All forms of asset accumulation, which can also be considered as a financial cushion for retirement, are classified in this segment.

The following overview provides information on the structure of the new pension system, the various models of retirement provision and the options for government-sponsored individual retirement provision through subsidies or tax advantages. For a better understanding, the four columns are explained in more detail. Which model or variant of old-age provision is optimal depends on several individual factors.

Pillar 1: basic provision

The first pillar of the pension plan is the most important and easy-to-calculate part of old-age insurance for most insured persons. The insurance carriers – for example, the German pension insurance or the Knappschaft – regularly provide information on the right to benefit which the insured person can expect when reaching the retirement age . Since most employees are compulsorily insured, there is hardly any need for action in this area. Similarly, it is for freelancers who pay compulsory contributions to a professional pension scheme. Self-employed persons who are not subject to compulsory insurance have the option of concluding a Rürup pension contract. The various forms of basic provision are favored for tax purposes . The contributions act as special expenses tax-reducing . The percentage of deductible contributions for contributions will be gradually increased to 100 per cent. At the same time, the proportion of the pension that is taxable increases.

Pillar 2: subsidized private pension

This pillar is most interesting for private security because it is funded by the state . This segment includes the different forms of occupational pensions and all variants of Riester contracts . The contributions to such insurance are tax-free. In addition, under certain conditions there are supplements from the state. The pension, which the insured person later receives, is included in the taxable income.

Pillar 3: Non-promoted private pension plans

Even before the reforms of the pension insurance system, many people have taken their own responsibility for their age and for the protection of their relatives. These private forms of old-age provision will continue to play an important role in the future . Such contracts are not funded. The insured person uses taxed income to pay the contributions. The advantage of these life and annuity policies is that the pensions are tax-free.

Pillar 0: Other types of investments that serve as pensions

This column is not part of the official three-pillar model. Nevertheless, these forms of capital investment play an important role in connection with old-age provision. Savings plans or real estate can generate attractive returns under favorable conditions. In terms of taxation, these forms of investment offer no advantages.

Overview of forms of old-age provision in Germany

Columns no. Column 1 Column 2 Column 3
Forms of preparedness Basic pension Private provision (funded) Private provision (not funded)
Examples Statutory pension insurance Riester pension life insurance
  pension funds direct insurance pension Insurance
  Rürup pension pension funds Pension insurance with fund savings plan
Taxes contributions tax Favored untaxed From taxed income
Tax pension taxable taxable tax Favored


The unofficial column 0 was not included in this overview. All forms of flexible investment are counted towards this pillar. For example, unit-linked savings plans or ETF savings plans are popular . This form of saving is easy to use and makes it easy to create a solid financial cushion for old age , even at low savings rates. With regard to tax treatment, these forms of investment offer no advantages.

Which criteria lead consumers to the right model?

Which model or variant of old-age provision is optimal depends on several individual factors. Everyone has to take responsibility for their retirement into their own hands. These figures illustrate the problem: in 2017, an average earner who worked for 48 years is entitled to a pension of about € 1,200 per month. This corresponds to 48.2% of the average income in Germany. By 2030, the pension level is expected to be reduced to 43% of the average income . This shows how important it is to have retirement provision in good time. Anyone who fails to do so will have to accept severe sacrifices in their standard of living.

In order not to lose the overview, a stepwise procedure is recommended. The statutory pension insurance publishes once a year information about the acquired claims . The insured person should immediately check whether the contributions paid are correctly booked.

In the second step, it makes sense to consider how big the difference to the actual need for life is. To close the calculated gap, further precautionary measures must be planned. Those who are employed and still have many years to retire can choose from a variety of options. The conclusion of a company pension or the construction of a home – much is possible. The Riester pension is particularly attractive for families with children, because the youngest are also provided with allowances.

Tax aspects play an important role, above all, for working people who earn a high income. The contributions for the old-age pension reduce the tax . The future pension is taxable. Since the income is usually lower in old age, the bill goes on nonetheless.

The shorter the gap to retirement, the fewer opportunities there are. Under certain circumstances, it makes sense to pay a larger sum, for example from an inheritance, into a contract.

Tips for choosing the right retirement plan:

  • Become active early
  • Inventory of which benefits are to be expected from basic benefits
  • Comprehensively informing which individual possibilities exist
  • Use professional counseling services (independent pension consultants, consumer advice centers)
  • Consult tax accountants to take advantage of tax benefits

The basic precaution


Pillar 1 of the hedging model is considered as basic provision . However, the benefits that insureds derive from these forms of protection are generally insufficient to maintain the established standard of living in old age. Anyone who does not want to be dependent on benefits from basic security when retired must take additional precautions in accordance with their financial, family and professional requirements.

The statutory pension insurance

The majority of employees are compulsorily insured under the statutory pension scheme. In addition, there are compulsory insurance policies for certain occupational groups. Anyone who has a competent profession – for example, doctors, pharmacists, notaries, lawyers, architects and accountants – is insured in the Berufsständische Versorgungswerk and pays compulsory contributions to cover the period after employment . In order to protect artists, there is the Künstlersozialkasse in Germany, which is also part of the statutory pension insurance system.

The statutory pension insurance for workers and employees works according to the pay-as-you-go system . This means that the pension payments are financed directly from the contributions of the employees . Except for a small reserve, with which certain fluctuations can be compensated, the insurance carrier has no capital stock. No contributions were paid for certain statutory pension insurance benefits. These include, among other things, pension entitlements for child-raising periods or from the law on foreign pensions. In order to compensate for this demand, funds from the federal budget flow annually into the pension insurance system .

The amount of the contribution to the statutory pension insurance depends on the income level. Currently, the contribution rate is 18.6 percent . Half of these contributions are borne by the employer and one employee.

example An employee earns a monthly gross salary of 3,000 euros. With a contribution rate of 18.6%, a mandatory contribution of 558 euros is due. The employee’s share is 279 euros. Together with the contributions for health, long-term care and unemployment insurance, the pension insurance contribution is withheld from the salary or salary and, together with the employer’s contributions, transferred to the social security office. This forwards the contributions to the individual insurance carriers.

Ceiling amount
The contribution amount is capped. Every year, the contribution assessment limit is set by law . For the part of the gross salary, which is above the contribution assessment limit, no compulsory contributions are levied. Different contribution assessment limits apply to the old and new federal states.

In 2018, the following values ​​apply:

West : 6,500 euros,

East : 5,800 euros.

Rürup pension

The first pillar of the pension scheme includes the basic pension. Colloquially, she is better known as Rürup pension. This form of provision was developed by economist Bert Rürup to give self-employed the opportunity to build a basic provision. This form of retirement provision is open to every person. This model is particularly attractive for high-earners, as the contributions to the Rürup pension are taken into account as tax-reducing . As income during working life is generally higher than at retirement, it can save taxes.

There is a common feature of all insurance models that belong to the first pillar: Both the contributions to the general statutory pension insurance, as well as contributions to occupational pension funds or a Rürup pension can be claimed as special expenses in the income tax return . The contributions to the statutory pension insurance and to the pension scheme are fully deductible . In Rürup contracts, the tax-privileged part is gradually being increased. In 2017 insured persons were able to sell 84 percent. By 2025, the deductible portion will gradually increase to 100 percent.

Employer-funded pension

Employer-funded pension

The second pillar of old-age provision plays a particularly important role in the public debate. In particular, about the advantages and disadvantages of the Riester pension is argued violently. Who concludes such a contract, should be well advised . Independent pension consultants or consumer centers help to find the optimal pension plan. Such consultations are subject to a fee . The money for the advice is well invested, because unfavorable contracts hardly pay off.

Riester pension

The model of the Riester pension supports employees and civil servants in building up adequate old-age provision , which guarantees the standard of living at the usual level. This form of provision is heavily subsidized by government allowances and additionally by the special deduction . Eligible for a supplement are, inter alia, employees who are subject to compulsory pension insurance, self-employed persons subject to compulsory pension insurance, recipients of unemployment benefits and unemployment benefit II, persons serving military service or marginally employed persons who have not been exempted from the pension insurance obligation.

Supplements are granted only for certified contracts . The annual basic allowance has been 175 euros since 2018 . If the insured has children, there is an additional 185 euros per child per year. For children born on 01.01.2008 the allowance increases to 300 Euro. To be eligible for the full allowance, the insured person must pay 4 percent of his pensionable income into the Riester contract.

Riester contracts are offered in different variants:

  • Classic pension insurance
  • Housing Riester
  • Riester savings agreement
  • Riester Bank Savings Plan

It is recommended to seek advice from an independent expert before concluding a Riester contract . The costs of certain Riester contracts are high. Who changes later to another provider suffers significant losses.

The company pension plan in detail

Under the umbrella term occupational retirement provision (BAA) various offers are summarized, which are of particular interest to employees. Not every company offers its own pension fund or a classic occupational pension. However, every company is required to provide its employees with a company pension if so desired . In particular, smaller companies delegate this task to external service providers and allow the contributions to flow into a classic or unit-linked pension insurance or into a fund savings plan. These contributions are funded by the state . The insured person receives annual allowances upon application. In addition, the contributions have a tax-reducing effect. If the employer pays a subsidy, this form of retirement provision is particularly worthwhile.

direct insurance

A special form of occupational pension is direct insurance. The contributions are paid directly by the employer into a classic pension insurance. The employee benefits in two ways: In addition to the pension entitlement from the statutory pension insurance, he acquires a right to a company pension through his professional activity. The contributions are deducted from the gross wage. That is, the employee pays less payroll taxes and less social security contributions. There is one disadvantage: If the employee becomes ill or unemployed, he receives less benefits because of the reduced social security contributions.

Company pensions are fully taxed . In addition, the insured person must pay health and care insurance contributions for his company pension. Real estate is still a high priority as a form of retirement provision. This is especially true if it is a self-inhabited house.

Models for private pensions


The third pillar of the German old-age provision model includes private preventive measures, for which there is no state subsidy. These include the classic life and annuity insurance policies offered by all renowned insurance companies . For several years, the number of those who opt instead of the classic for a fund savings plan. Insured persons pay contributions from already taxed income . It is advantageous that dividends and other income from such hedges are not taxable. The pension, which the insured person later receives, is also partially tax-deductible. Only for the income share taxes are payable.

Life insurance and pension insurance

Classic life insurance enjoyed great popularity in Germany for decades. The contract is concluded with such insurance to a certain amount. If the insured person dies before, the survivors receive the benefit and are thus secured . Otherwise, the amount will be paid out at the agreed time. Just a few years ago, such contracts yielded attractive returns that are also tax-free. The guaranteed interest rate has been lowered further and further. Some experts assume that it will be completely abolished, as the insurance companies are also suffering from the low interest rate policy. The conclusion of such insurance is not recommended . Who has an old contract, which offers no advantages, it provides the best free of charge. A termination is associated with financial losses. In order to secure dependents, it is more advantageous to take out a term life insurance.

Unit-linked life and annuity insurance

Unit-linked life and annuity insurance is a form of private retirement provision

popular. For these contracts, some of the contributions are paid into investment funds . In this way , the return of paid-up capital usually increases. If a unit-linked insurance serves as an old-age insurance, it makes sense to switch over to secure investment forms several years before the pension begins. Otherwise, there may be losses due to price fluctuations on the financial markets and pension provision would be jeopardized.

Alternative investments

It goes without saying that it is possible to do something for one’s own old-age provision, regardless of statutory and occupational pension systems. Anyone who is continuously saving money builds up a financial cushion over the course of their life years. A disadvantage of this form of retirement provision that this form of asset accumulation is not favored for tax purposes . The savings come from taxed income. If the saver profits from his investment, these are taxable.

Real estate as an investment of old-age provision

Real estate is still a high priority as a form of retirement provision. This is especially true if it is a self-inhabited house. Who has financed a home, does not pay rent and does not have to fear rising rental costs. Nevertheless, homeowners do not live free of charge. Land tax, building insurance and similar running costs can not be avoided . In addition, homeowners must make a reserve for maintenance and repair work to keep the house in a habitable condition. Nevertheless, investing in a home is in most cases recommended as a retirement plan.

A property that is rented brings the retired real estate owner ongoing income. Anyone who buys a property for this reason as a part of the retirement plan, must check the conditions before buying very carefully. In most major cities and metropolitan areas, demand for apartments exceeds supply. However, there are regions with vacancy and stagnating rents.

equity funds

Savers are struggling in the face of persistently low interest rates. With fixed-income securities can be achieved no returns. If the saved is parked on the passbook or time deposit account, the saver suffers from inflation bad value losses . That is why experts agree that there is no way around the stock market in asset accumulation. Many private investors shy away from this form of investment. In fact, it is difficult for laymen to realistically assess the value of individual stocks and the development potential of companies . For such investors, equity funds are a good alternative. By acquiring shares, the buyer benefits from the opportunities of the stock market. Although there are price fluctuations, in the long term shares can generate attractive returns .

In addition, the risk of loss, which is also borne by shareholders, can be minimized by spreading the investment as broadly as possible. This can be realized even with smaller amounts through the sale of ETFs. ETFs are funds that are traded on the stock exchange. They are also referred to as index funds, as they each replicate a specific index. In this way, the investor has the opportunity to acquire shares in many companies or to invest in certain industries, the development potential of which he assesses as above average. Saving plans can be easily handled on ETFs. They are offered by many banks and financial service providers from a monthly savings of 50, – Euro. In this way, a considerable fortune can be built up in the course of working life, which at the same time serves as a hedge for retirement .

Financing old-age provision

Financing old-age provision

Pension provision is indeed funded by the state. Nevertheless, it is difficult for part of the population to provide enough for their own age. For example, to receive grants for a Riester pension, certain contributions are required. Especially low earners or single parents quickly reach their financial limits . These people are then forced to get by on a budget.

How can a small pension be increased?

Retirees have the opportunity to plan their finances exactly. You know exactly on which day which amount is credited to your account. With unexpected expenses, there can be a financial bottleneck despite the greatest discipline in the management of the budget. The washing machine is on strike or the extra payment for a hospital stay and medications are very high – in such or similar situations, many people can guess.

If pensioners apply for a loan from their principal bank, they are often dismissed because of their higher age. In such cases, a loan helps pensioners. This is a loan suitable for retirees. Here are the bureaucratic hurdles of a loan application much lower than local banks. The pension loan is applied for online via the WebIdent process. In addition to the personal details and the account details, the intended use must be indicated. In addition, proof of the amount of the pension is required. The amount of the pension should be at least 500 euros per month . If there are no concerns regarding the Schufa information, the loan will be approved and paid within a short period of time.