How do pensions actually work in Germany.
After receiving such a resounding response about my post on Company Pensions, I feel compelled to share some information with you about how the pension system works here in Germany, what it all means and how it can potentially benefit you all.
Especially now, that today, a report came out in the German Newspaper “Bild” that a person who earns an average salary (€ Protected content the salary used for the calculation) will have to work nearly 30 years for a Net Pension, per month of…..€769per month from the German Public pension. I think we can all work out by this figure alone, that this is simply not going to be enough for our retirement. Therefore, I feel it is important to share some information with you:-
At the moment, a person of working age in Germany can invest anywhere up to € Protected content Pension products in Germany
The pensions system here is split into three defined levels or “Schichten”. Levels I II and III.
This first level of Pension is where you will all find the German Public Pension. Those of you, who are Employees here in Hamburg, will see this deduction in your Pay slip under the initials GRV. At this time 18.7% of your salary is deducted and paid into the German public pension (Gesetzliche RentenVersicherung….GRV). Half of that amount is paid for by your employer and half by you.
The earnings cap in the GRV is (in Protected content . That means if you earn € Protected content . then you will be paying 18.7% of € Protected content the public pension (half being paid by the employer). If however your salary is € Protected content ., then you will only be paying 18.7% of € Protected content . into the German public pension. Anything over that amount is not affected any more by the German public pension system.
So, that means that anybody with a salary of € Protected content over is paying a total of € Protected content per year into the GRV. Half of that comes from the employer €6788.10, and the other half from the employee €6788.10 (or €565.68per month). Deduct that amount from the total possible of € Protected content . and that would then leave a possible investment of €8423.30(€701.94per month) into pension products over and above the GRV. Logically, the lower the salary, the lower the contributions are into the GRV and therefore scope for potential extra investments are higher.
Also to be found in Level/Schicht I as the so called BASIS Rente (or Rürup Rente). Now, this is something that can be signed up for, over and above the GRV. This is a very attractive way of saving a big chunk of money that would normally be paid in Taxes. The Basis Rente is attractive to everybody in Germany, but I would imagine especially attractive to Self Employed / Freelancers.
Whatever you pay into a BASIS Rente, in Protected content % of those premiums can be offset against your income. In Protected content , you will be able to offset 82% of the premiums against your income, 84% in Protected content so on until we reach Protected content , when you can offset 100% of the premiums against your income.
N.B. This is not reducing your tax bill by 80%.
Let us take an example here:- Year Protected content . You invest €1000per month into a BASIS Rente. €820 of that €1000per month (82%) can be used to offset against your income. That means you could, using this example offset € Protected content Protected content your income. That means you are effectively reducing your taxable income by € Protected content 2016, € Protected content Protected content . Now, please don’t start asking me how this will affect your tax bill each year. That is something that you need to discuss with your Steuerberater/Tax Adviser. I am using these as examples only to give you an idea of how this can be potentially beneficial to you all.
Downsides to the BASIS Rente:- They are very inflexible. Because you are saving a good amount of tax money now, whatever you happen to get out of the BASIS Rente at pension age is fully Taxable income. So please be aware of that. You cannot cancel these types of Policy. You can freeze the payments yes, cancel no. The money is locked in until Pension age, which is suppose is the whole idea of a pension. Amongst other restrictions, you can’t use them as collateral on a loan and you can’t transfer them to anybody else and you cannot take a lump sum payment. The BASIS Rente will be paid monthly from the time of when you set the policy to run to, for the rest of your life.
This where you will find Company Pensions. Please see my other post about company pensions… :o)
N.B. Very important to note here, is that ALL pension products in Levels I and II are protected against insolvency. That basically means that if you hit hard times, lose your job etc these pensions cannot be taken into account when you potentially register for and draw Unemployment benefit.
Private pensions and life insurances.
I am going to concentrate on Private Pensions here.
Private pensions are also products that can be signed up to over and above the GRV. However, they are set out slightly differently tax wise.
The most important thing to note about private pensions is that you gain no immediate tax advantage on your monthly premiums. What you pay in today comes totally from your net money. It cannot be used as a tax advantage on your yearly earnings. However, the tax advantage comes at the time you draw your private pension. If the policy runs over 12 years long and goes over your 63rd birthday, then half of the PROFITS from the private pension are tax free and the other half is taxed at a very low level
Retire at 67, the tax on half the profits would be 17%.
Retire at 70, the tax on half the profits would be 15%.
Private pensions are far more flexible. You can cancel them (never recommended though), take monies out of them (penalties will apply), pay one off amounts into them and use them on collateral against a loan etc.
Private pensions are NOT protected against insolvency though.
Well I think that should do for now.
If anybody needs help with understanding this more, I will always help wherever I can