Employees in Germany have a wide selection of pension plans to invest for their retirement.
Public pension is obligatory because the contributions are directly deducted from your gross salary every month. And as soon as you have contributed for more than 60 months to the German pension system, you have an irrefutable lifelong claim to receive a pension paid out to you once you reach the age of 67 (legal starting age for retirement in Germany as per 2018). This is also true if you have had 60 months’ worth of contributions split over multiple EU member states, by the way!
Due to some cuts in the public pension system in 2002, the so-called Riester pension plans were introduced. This is a private pension plan into which you pay from your net salary, but claim some tax pay-backs when you do your tax declaration later. Since this was just meant to replace the cuts made way back when, the yearly contribution is limited to 2,100 EUR per year. So, obviously it is just a minor additional stepping stone in everyone’s pension planning. But due to some direct subsidies and additional payments into the plan by the German governments for your children as well as the tax benefits it can be well worthwhile investing in a Riester plan. However, of crucial importance are the costs of such plans. Usually they are being sold in Germany with rather high commission costs that negate the tax benefits for you during the first years. We recommend using so-called “Netto-Plan” pensions where you pay a simple fee to your advisor instead of high commission costs. You can learn more about Riester plans here.
The currently most attractive option for employees is the use of a company pension scheme (bAV – betriebliche Altersvorsorge). You have an instant tax benefit because the contributions are being made out of your gross salary. Often employers offer attractive co-payments already and starting 2019 they have to contribute at least 15% of your contributions by law. Since January 2018 you can defer up to 520 EUR per month (i.e. 6,240 EUR per year) from your gross salary into a company pension via a so-called “Direktversicherung bAV”. For high earners who like to invest more or where the employer likes to contribute significantly to their salary, there are additional tax-free options available in the form, for instance, of an “Unterstützungskasse”. You can find more detailed info here. And international employers who have employees in Germany can receive a complete strategy for company pensions and fringe benefits from us and our expert network, please read more HERE. As with Riester pension plans, costs play an important factor when choosing a company pension plan. Often your employer limits your choice of pension plans – which by law is the right of the employer. You should, however, insist in such cases that there is a decent group discount negotiated by the employer for the costs and that the employer offers a decent co-contribution. We can offer company pension plans with such rebates or, if the employer allows a free choice of plans, even a commission-free option where you only pay a fee to us.
Rürup pension plans were mainly created in the past to offer the self-employed a substitute for the public pension. However, high-earners among employees might want to save higher amounts for retirement and find the amounts they can put away in Riester plans and company pension schemes (bAV) unsatisfactory. In such cases a Rürup pension plan allows singles to invest (and write off against their income to save taxes) up to 23,712 EUR year; married employees can invest double that.
Of course, investing in pension plans with tax subsidies always comes with some caveats. Usually you can’t take out the invested capital, at least not during the time until retirement – because the government only offers tax benefits if the money is earmarked for retirement and nothing else. If you feel that such limitations are not for you and/or if you are planning on moving to many countries to work and earn money in the coming decades, an offshore pension plan may be a good solution for you. While these offshore pension plans are usually not offering real tax benefits anywhere, they allow for deferred taxation in most countries. And you have to handle just one plan in one jurisdiction while developing your global career. But: please read our warning info here on this website. A large number of so-called offshore plans are money-burning tools that benefit only the salesmen who offer them to you. They come with extremely high (and most often intransparent) commission costs that make it nigh on impossible to generate a decent yield over time. We are among the few IFAs (independent financial advisors) for expats that can offer commission-free offshore pension plans with transparent cost structures. Our advice is fee-based and there are no hidden commission costs and kick-backs. If you would like to know more about our offshore pension plans, do not hesitate to contact us for more info here.