Until a few years ago, the statutory pension insurance was considered the most important provision for old age. Since there are more and more seniors in Germany, but fewer and fewer working people who pay contributions into the pension, the benefits from the statutory pension had to be gradually reduced. As a result, the statutory pension insurance is no longer sufficient for most retirees – especially if they want to maintain their accustomed standard of living in old age. Those who want to provide for their retirement should exhaust all their options and rely on the 3-pillar system of retirement provision in Germany.
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What exactly the 3 pillars of retirement provision in germany are, why the model is so important today and which retirement provision could be right for you, we have summarized for you in this guide.
Pension gap: Due to demographic change, the pension level will continue to decline year after year. In concrete terms, this means that for many people their pensions will no longer be sufficient to maintain their previous standard of living as pensioners.
Retirement provision: Simply explained, retirement provision in Germany is based on 3 pillars: statutory pension insurance, company pension and private retirement provision (e.g. Riester and Rürup pensions, private pension insurance or other investment products).
What can you do: Every employee is usually covered via the first pillar. Those who wish to make additional provisions via the second and third pillars can do so independently. It is possible, for example, to take out a company pension plan and invest money to build up assets.
The 3 pillars of retirement provision in Germany
In Germany, a distinction is made between 3 pillars of retirement provision. By definition, the model provides for three different ways of providing for old age: statutory pension insurance, company pension plans and private pension plans.
Compulsory public pension scheme (“gesetzliche Rentenversicherung”)
The first pillar of retirement provision in Germany comprises the state’s compulsory systems under public law. The so-called basic provision includes statutory pension insurance and occupational pension schemes. Almost 90 percent of the working population in Germany is compulsorily insured under the statutory pension insurance scheme.
As soon as you have paid contributions to the pension insurance for five years, you are entitled to the regular old-age pension from the age of 67. This applies to full-time employees and mini-jobbers as well as to freelancers and self-employed persons, provided they voluntarily pay into the statutory pension insurance.
If you want to be optimally secured in old age, you should know your pension entitlement: The pension insurance company informs you once a year about how much pension you will receive. You will receive this once you have paid into the pension for at least five years and are 27 years old.
For further information:
Company pension scheme (“betriebliche Altersvorsorge” or “bAV”)
The second pillar of retirement provision in Germany covers subsidized pension plans. Those who opt for such a form of provision take out contracts for occupational pension provision. This is primarily aimed at employees, because anyone who is compulsorily insured under the statutory pension scheme is automatically entitled to a company pension.
There are five ways of implementing the company pension plan, which are organized by the employer:
- Direct insurance
- “Pensionsfond”
- “Pensionskasse”
- Support fund
- Direct commitment
If the employer already offers a pension fund (“Pensionskasse” or “Pensionsfonds”), he does not have to pay any additional company pension. Normally, only big companies offer such pension fund, like Audi, Siemens, Allianz.
In other cases, he must at least offer a direct insurance. Since 2019, employers have been obliged to subsidize employees’ deferred compensation by 15 percent. This is the most common option in Germany.
Private provision (“private Vorsorge”)
The third pillar of retirement provision in Germany refers to private provision, such as life insurance or pension insurance. In addition, you can also make private provisions for old age with other investment options. Depending on the form of provision, private retirement provision in Germany is completely independent of the state and employer. For example, you can take out private life or pension insurance, invest your money in savings plans or invest directly in shares or real estate.
As part of the 3-pillar model of retirement provision in Germany, you can also take out a Riester or Rürup contract. Here you either receive state subsidies or can deduct contributions from your taxes – however, you must meet certain requirements for the state subsidies. When investing through financial products, you are more flexible and independent.
Why are there the 3 pillars of retirement provision?
The introduction of the three pillars of retirement provision in Germany is a reaction by the German government to the falling pension level: fewer and fewer contributors have to pay for more and more pensioners. In order to maintain their standard of living in retirement, employees can take out company and private pension plans in addition to their pension insurance.
Pension provision for women also deserves special mention. Housewives in particular are affected by very low pensions in old age and are most at risk of old-age poverty – additional coverage makes sense in any case.
Are there still supplements to the 3 pillars of retirement provision in Germany?
The three pillars of retirement provision in Germany do not have to be the only income in old age. For example, there are some people who are still gainfully employed at retirement age – including the self-employed and pensioners who still want to pursue a sideline job. These are mostly marginal jobs, so-called mini-jobs.
Why are the 2nd and 3rd pillars of retirement provision in Germany becoming increasingly important?
Since the introduction of the Riester pension in 2001, a simultaneous reduction in the level of pension provision has been initiated. The German government intends to close the gaps in provision that are appearing – supported by state allowances and tax benefits – by expanding private provision and company pension schemes.
Retirement provision in Germany: Which of the pillars is right for me?
The choice of the right retirement provision in Germany depends on your individual financial and life situation. If you are an employee subject to social insurance, you already cover one of the 3 pillars of retirement provision – the statutory pension insurance.
However, this only provides you with a basic insurance that is paid out to you from the start of your pension. Therefore, it makes sense to further expand these statutory contributions with additional investment products. A perfect retirement provision in Germany consists of products from all 3 pillars of the retirement provision model.
Conclusion: a relaxed retirement with the 3-pillar pension model
So that you do not have to struggle with a pension gap in old age, you should tackle the topic of retirement provision in Germany at an early stage. You have several retirement provision options: statutory pension insurance, occupational pension provision and private provision.
As soon as you have dealt with the subject of pensions, you may find that the contributions to your future pension may not be sufficient to maintain your standard of living in old age. Therefore, it may be worthwhile to cover your pension gap with an additional pension plan. Which forms of provision are possible for you, so that you cover all 3 pillars of retirement provision in Germany, depends on your individual life situation.
For more information about the retirement provision in Germany:
- www.deutsche-rentenversicherung.de (“gesetzliche Rentenversicherung”)
- www.deutsche-rentenversicherung.de (“betriebliche Altersvorsorge”)
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