The 3 pillars of retirement provision: your guide to a secure pension
15.05.25
5
Minutes
Katrin Straub
Managing Director at nextsure
The state pension alone is often no longer enough. Understand the three-tier model of retirement provision and secure your standard of living in later life with government support and smart private strategies.
The topic in brief and concise terms
The three-pillar model (basic, supplementary, private) structures retirement provision in Germany and combines statutory mandatory schemes with subsidised and private pension options.
Each layer offers specific tax advantages and disadvantages as well as varying degrees of flexibility during the accumulation and payout phases.
A timely and strategic combination of all three pillars is crucial to closing the individual pension gap and securing living standards in retirement.
The foundation: Understanding basic care as the first layer
The first layer, basic provision, forms the foundation of your retirement security and is mandatory for many citizens. It primarily includes the statutory pension insurance, into which employees pay automatically. For certain professional groups such as doctors or lawyers, occupational pension schemes take its place. Self-employed people can build up a similar basic level of provision via the Rürup pension (also known as a basis pension). Contributions to this layer are heavily tax-advantaged: in 2024, for example, up to EUR 27,566 (single) or EUR 55,132 (married) can be claimed as special expenses. Full tax deductibility of contributions is a significant advantage during the accumulation phase. Benefits are paid out in old age as a lifelong pension, which is then subject to deferred taxation. This means the pension is taxed only in old age, often at a lower personal tax rate at that time. However, flexibility is limited here; a lump-sum payment is generally not possible. Basic provision secures a basic income, but it is usually not sufficient to maintain the accustomed standard of living. Find out more about the Rürup pension as an option for your basic provision. This first layer is therefore an important, but often not the only, building block for your financial future.
Targeted supplementation: Use the second layer with state funding
The second tier of retirement provision, the funded supplementary pension, is designed to top up the benefits of the basic provision in a targeted way and benefits from state support. These include occupational pension provision (bAV) and the Riester pension. In the occupational pension provision , employees convert part of their gross salary, thereby saving tax and social security contributions. Since 2019 (for new contracts) and 2022 (for existing contracts), employers have been required to pay at least fifteen per cent in top-up contributions if they save social security contributions. The Riester pension is supported by state allowances: the basic allowance is 175 euros per year and person. For each child eligible for child benefit, there is an additional 185 euros (born before 2008) or 300 euros (born from 2008 onwards). Especially for families and low earners, the Riester pension can be attractive thanks to these allowances. Contributions to the Riester pension can be claimed for tax purposes as special expenses of up to 2,100 euros per year. Payments are also made mainly as a pension, although with the Riester pension up to thirty per cent of the capital can be withdrawn at the start of the payout phase. This tier therefore offers a good way to reduce the pension gap with state support. Find out about the advantages of the Riester pension. The combination of tax savings and allowances makes the second tier an important pillar of the 3 tiers of retirement provision.
Tailor it to your needs: The third pillar of private retirement provision
The third tier of retirement provision comprises all private pension arrangements that are not directly subsidised by the state, but offer maximum flexibility. These include traditional and unit-linked private pension insurance policies, endowment life insurance policies, savings plans, shares, funds or property. According to a survey, 56 per cent of Germans save for their private retirement provision. Contributions to these products are usually made from net income that has already been taxed. In return, taxation during the payout phase is often more favourable. For example, in the case of private pension insurance policies that have run for at least twelve years and are paid out from the age of 62, only half of the gains have to be taxed (half-income method). The high level of flexibility for contributions and withdrawals is the greatest advantage of this tier. You can decide on your own investment strategy and often adjust it during the term as well. One example is investing in broadly diversified equity ETFs such as the MSCI World, which has historically achieved an average return of eight to nine per cent per year, but also carries risks. This tier is essential for achieving individual provision goals and comprehensively securing your standard of living in old age. Also consider a endowment life insurance policy as a building block. Private provision rounds off the three-tier retirement provision system and enables tailor-made protection.
Practical section: The 3 pillars of retirement provision compared
To make the differences and interplay of the three layers of retirement provision more tangible, we look at the key aspects in an overview. Each layer has specific characteristics in terms of incentives, flexibility and taxation. A 40-year-old employee could, for example, pay contributions into the state pension scheme (layer one), build up occupational pension provision (layer two) through their employer with an employer contribution of fifteen per cent, and also invest 100 euros a month in an ETF savings plan (layer three). The strategic combination of the layers is crucial for comprehensive retirement provision. The following points illustrate the differences:
Tax treatment (savings phase): Layer one (e.g. Rürup) and two (occupational pension scheme, Riester) offer high deductibility of contributions. Layer three is usually funded from taxed income.
State support: Direct allowances are mainly available in layer two (Riester). Layers one and two benefit from tax advantages.
Flexibility (payout): Layer one is the least flexible (pension only). Layer two (Riester) allows withdrawal of up to thirty per cent of the capital. Layer three offers the highest flexibility (pension or capital).
Inheritability: The options for inheritance vary depending on the product and layer. Rürup pensions can only be inherited to a limited extent; Riester contracts are often more favourable.
Capital guarantee: Riester products must offer a contribution guarantee at the start of retirement. Many layer-three products have no guarantees, but offer greater potential returns.
Access during the savings phase: In layer one and often also layer two, access before retirement is hardly possible. Layer three offers more options here.
This comparison shows that there is no single best layer; rather, it is the individual mix that determines success. A precise analysis of your situation helps to find the right pension insurance. This means retirement provision is tailored optimally to your needs.
Expert depth: tax aspects and legal framework
The foundation of the three-pillar model is the Retirement Income Act (AltEinkG) of 2005. It regulates deferred taxation for pillars one and two: contributions are tax-deductible during the accumulation phase, while pension benefits are taxable during the payout phase. For 2024, the taxable portion of a newly starting pension from the basic provision is 84 per cent and rises each year until it reaches 100 per cent in 2040. Our expert tip: Review your allowances and limits regularly to make full use of the tax advantages. For contributions to basic provision, a maximum amount of EUR 27,566 applies in 2024 for single people. For the Riester pension, up to EUR 2,100 per year is deductible as special expenses. In occupational pension provision, up to eight per cent of the contribution assessment ceiling of the statutory pension insurance can be paid in tax-free (2024: EUR 7,248), of which four per cent is exempt from social security contributions (2024: EUR 3,624). A recent ruling by the Federal Fiscal Court may affect the taxation of pensions, so it is advisable to keep an eye on developments. Questions such as "Where do I enter retirement provision in my tax return?" are central here. Precise knowledge of the sections, such as Section 10 of the Income Tax Act (special expenses) and Section 22 of the Income Tax Act (other income, including pensions), is crucial for optimising your retirement provision. These details show the complexity, but also the scope for structuring within the three layers of retirement provision.
Recommended actions: Develop your personal retirement planning strategy
A sound retirement plan is based on a well-considered strategy that takes all three pillars of retirement provision into account. Start with an honest assessment: How large is your current pension gap? A private pension calculator can provide an initial indication here. For young people under 25, a one-off career starter bonus of 200 euros can be worthwhile with the Riester pension. Our expert tip: Start building your retirement provision as early as possible, even with small amounts. The compound interest effect plays a significant role over long periods. Review existing contracts regularly, at least every five years, and adjust them to changed life circumstances (marriage, children, job change, pay rise). Make full use of state incentives, especially in the second pillar. Diversify your investments in the third pillar to spread risk – a mix of low-risk and return-oriented investments is often sensible. Consider the question: " Is an occupational pension scheme worthwhile for me?" The answer depends on your individual situation and the options offered by your employer. If you are unsure or have complex circumstances, professional advice can be very valuable. If you find "Too little pension, what should I do?", proactive action is called for. Careful planning across all three pillars is the key to a financially worry-free retirement.
Here are the concrete steps for your plan:
Determine your pension gap: Compare your current net income with your projected state pension.
Check entitlements from pillar one: How high are your current entitlements from the statutory pension scheme or professional pension schemes?
Use incentives in pillar two: Find out about your employer’s occupational pension scheme offers and check the Riester incentives.
Shape pillar three individually: Choose suitable private investment options according to your risk appetite and return targets.
Take inflation into account: Plan for an annual loss in value of your money of around two per cent.
Seek professional advice: Especially in complex financial situations or to optimise your tax burden.
Keep your contracts documented: Keep all documents relating to your retirement provision products organised and readily available.
Adjust your strategy regularly: At least every five years or after major life events.
With these steps, you lay the foundation for a solid retirement plan.
The three-pillar system of retirement provision offers a structured framework for actively shaping your financial future in retirement. Basic provision provides a foundation, state-subsidised supplementary provision helps close gaps, and private provision enables individual freedom and opportunities for returns. Relying solely on the state pension is no longer sufficient for most people to maintain their accustomed standard of living, which averages around 80 per cent of their final net income. The combination of all three pillars, adapted to your personal circumstances and financial means, is the key to success. Remember that early and ongoing engagement with the topic of retirement provision is crucial. Take advantage of the various subsidies and tax benefits the system offers. Careful planning and, where necessary, professional advice will help you make the right decisions for a worry-free future. The three pillars of retirement provision are your toolkit for a financially secure retirement.
Request an individual risk analysis now: Have your insurance situation checked free of charge and receive specific suggestions for improvement.
More useful links
German Pension Insurance offers comprehensive information on planning for retirement provision in a detailed brochure.
The Federal Ministry of Labour and Social Affairs (BMAS) provides an up-to-date research report on the spread of retirement provision in 2023.
The Federal Statistical Office (Destatis) offers an article on pension provision with relevant statistical data.
The Federal Agency for Civic Education (bpb) provides a well-founded overview of the three-pillar system of old-age security.
The Federal Ministry of Finance publishes the final report of a focus group on private retirement provision.
The Working Group for Occupational Pensions (aba) offers current statistics on the prevalence of occupational pension provision.
The ifo Institute provides a scientific study on retirement provision.
The Deutsche Bundesbank offers data and analyses on funding assets in the context of retirement provision.
FAQ
What is the difference between the three-pillar model and the three-layer model?
In 2005, the 3-tier model replaced the older 3-pillar model (statutory, occupational, private) with the Retirement Income Act. The tier model differentiates more strongly according to tax treatment and subsidy aspects, in particular through the introduction of the Rürup and Riester pensions.
What percentage of my income should I set aside for retirement?
Experts often recommend setting aside between ten and fifteen percent of net income for retirement planning. The exact amount you need depends on your individual situation, your age and your goals.
Can I have capital paid out from all three layers?
No. In basic provision (pillar one), in general only a lifelong pension payment is possible. With the Riester pension (pillar two), up to thirty per cent can be paid out as a lump sum. With private provision (pillar three), there are often flexible options for capital payouts.
What role does inflation play in retirement planning?
Inflation reduces the purchasing power of your money over time. Annual inflation of, for example, two per cent means that your pension will be worth less in the future. This should be taken into account when planning savings goals and selecting investment products.
When should I start planning for retirement?
As early as possible. Even small amounts can grow significantly over a long period thanks to compound interest. Starting early makes it easier to build sufficient provision.
Are my pension contributions protected in the event of unemployment?
Contributions to a Rürup pension and often also to a Riester pension are protected up to certain limits when receiving Bürgergeld (formerly Arbeitslosengeld II). There are also protective mechanisms for occupational pension provision in the event of the employer’s insolvency.
