The Riester pension (named after its “inventor”, the former German Minister of Social Affairs Walter Riester) belongs to the second layer of the German pension system. In 2002, the German government wanted to convert parts of the pension system to a direct capital cover because the pay-as-you-go system of the German public pension is becoming less and less effective and due to demographic issues might well become unsustainable in the future.
The reason for this is the fall in birth rates in Germany and that in the future fewer contributors will be unable to finance growing numbers of pensioners with their monthly contributions. Similar to the 401(k) plan or Roth IRA as known in the USA or SIPP in the UK, the German government promotes payments into the Riester pension with allowances or tax benefits. At the same time, however, the state has significantly reduced the percentage of payout from the German pension insurance (DRV). Mathematically, pension entitlements were reduced as if each contributor would in future pay 4 percent of their gross income into a Riester pension.
Accordingly, the Riester investor is to pay the fictitious 4 percent of the annual income expected by the government into the Riester pension. For example, if you earn 4,000 euros gross per month (48,000 euros per year), you actually have to pay 4 percent (1,920 euros) per year into the Riester contract. However, there is an upper limit. You can only invest 2,100 EUR per year max. into a Riester pension plan. Therefore it may be considered only as one of several necessary stepping stones for your pension planning.
What makes saving into a Riester plan often quite attractive are the fixed allowances from the state:
175 euros p.a. for the adult saver (since 2018, previously 154 EUR p.a.)
185 euros per child p.a. (born before 2008)
300 euros per child p.a. (born 2008 or later)
Instead of collecting these direct subsidies, the Riester investor can also deduct his or her contribution (up to 2,100 euros per year) from the tax. What is more favorable for the investor is automatically calculated by the German tax office (“Günstigerprüfung”).
If both spouses pay into the pension scheme, they can both sign a Riester contract and everyone receives the basic bonus. The maximum amount of funding is then increased to 4,200 euros. However, the child benefit is paid only once per couple. For the sake of clarity, we therefore recommend allocating all child allowances to one partner. If only one spouse pays into the pension insurance scheme, the other spouse is still indirectly entitled to receive funding. In order to receive the basic allowance, the second spouse only has to pay the basic amount of 60 euros per year into a separate Riester contract. The subsidy limit rises to 2,160 euros accordingly. In such a case with a non-working spouse, it gets really attractive if you have one or more children. Because then the employee of the couple takes the full tax deductions, whereas the non-working spouse receives all children bonus payments. Example: a spouse with three children can receive a total of 1,075 EUR (175 EUR for the adult and 300 EUR each per child) from the government paid into the pension plan by just investing that 60 EUR per year. If one spouse is an employee and the other is self-employed, the self-employed partner can also use a Riester plan for pension savings. Other than that, Riester plans are not permitted for the self-employed.
The pension, when paid out, is fully taxable and can be paid out from as early as the age of 63. You can draw out 30% of the total capital when reaching pension age without penalties. If you take out more than that, you’ll receive only the money you invested minus the allowances/subsidies and tax paybacks received!
You can draw your pension also without penalties while residing in any other EU member state. Only if you move outside the EU will you eventually lose the allowances/subsidies and tax pay-backs received while saving.
TIP: Germany is still mostly a commission-driven market for pension advice. There are usually high commissions when you take out a Riester pension in Germany. This can be disadvantageous for you if you are staying in Germany for a limited period of time. For this reason, CR&Cie. can also broker Riester contracts in variants that do not incur high acquisition costs. However, you will have to pay a direct fee to CR&Cie.
Pro-TIP: If you leave Germany and the European Union before retirement, you would have to pay back the allowances or tax benefits received. In this case, however, you should and may wait for the repayment of your pension until the start of the pension application. You will then continue to receive interest on the existing capital for years to come; the “borrowed” capital will work as a turbo-return for you. There is NO interest on the repayments.