The 3 Pillars of Pension Planning: Your Guide to a Secure Retirement
15 May 2025
6
Minutes
Katrin Straub
CEO at nextsure
The statutory pension alone is often no longer enough. Understand the three-layer model of retirement planning and secure your standard of living in old age with government subsidies and clever private strategies.
The topic in brief and concise terms
The 3-tier model (basic, additional, private) structures retirement planning in Germany and combines compulsory statutory systems with subsidized and voluntary pension options.
Each layer offers specific tax advantages and disadvantages, as well as varying degrees of flexibility during the accumulation and payout phases.
An early and strategic combination of all three layers is crucial to close the individual pension gap and ensure the standard of living in old age.
The Foundation: Understand 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 automatically pay. For certain professional groups like doctors or lawyers, the professional pension schemes take its place. Self-employed individuals can build a similar basic protection with the Rürup pension (also known as the basic pension). Contributions to this layer are heavily tax-favored: in 2024, for example, up to 27,566 euros (single) or 55,132 euros (married) can be claimed as special expenses. The full tax deductibility of contributions is a significant advantage during the accumulation phase. Payment is made in retirement as a lifelong pension, which is then subject to deferred taxation. This means the pension is only taxed in retirement, often at a potentially lower personal tax rate. However, flexibility here is limited; a lump sum payout is generally not possible. The basic provision ensures a fundamental income, but it is often not sufficient to maintain the accustomed standard of living. Learn more about the Rürup pension as an option for your basic provision. This first layer is thus an important, but often not the only component of your financial future.
Targeted supplementation: Use the second layer with government support
The second layer of pension provision, the funded supplementary pension, aims to specifically top up the benefits of the basic provision and benefits from state support. This includes occupational pensions (bAV) and the Riester pension. In the occupational pension scheme, employees convert part of their gross salary, thus saving on taxes and social security contributions. Since 2019 (for new contracts) and 2022 (for existing contracts), employers are obliged to contribute at least fifteen percent if they save on social security contributions. The Riester pension is supported by government allowances: the basic allowance is 175 euros per year per person. For each child eligible for child benefit, there is an additional 185 euros (born before 2008) or 300 euros (born after 2008). Especially for families and low earners, the Riester pension can be attractive due to these allowances. Contributions to the Riester pension can be claimed as special expenses up to 2,100 euros annually. Payouts are also mainly in the form of a pension, with up to thirty percent of the capital being able to be withdrawn at the beginning of the payout phase. This layer thus offers a good opportunity to reduce the pension gap with government assistance. Find out about the benefits of the Riester pension. The combination of tax savings and allowances makes the second layer an important pillar of the 3 layers of pension provision.
Customise: The third layer of private retirement provision
The third layer of retirement provision encompasses all private forms of provision that are not directly subsidised by the state but offer the greatest flexibility. This includes classic and unit-linked private pension insurances, endowment life insurances, bank savings plans, shares, funds, or property. According to a survey, 56 percent of Germans save for their private retirement provision. The contributions to these products are usually made from already taxed net income. Therefore, taxation in the payout phase is often more favourable. For private pension insurances that have run for at least twelve years and where the payout occurs from the age of 62, for example, only half of the earnings are taxable (half-income procedure). The high flexibility in deposits and withdrawals is the biggest advantage of this layer. You can determine your investment strategy yourself and often adjust it during the term. An example is investing in widely diversified equity ETFs like the MSCI World, which historically achieved an average return of eight to nine percent per year but also carries risks. This layer is essential to achieve individual retirement goals and to comprehensively secure the standard of living in old age. Also consider an endowment life insurance as a component. Private provision rounds off the 3-layer retirement provision system and allows for tailored security.
Practical Part: Comparing the Three Layers of Retirement Provision
To make the differences and interactions of the three layers of retirement provision more tangible, we review the key aspects in an overview. Each layer has specific characteristics regarding benefits, flexibility, and taxation. A 40-year-old employee could, for example, make contributions to the statutory pension (layer one), additionally build up an occupational pension scheme (layer two) through their employer with an employer's contribution of fifteen percent, and furthermore invest 100 euros monthly in an ETF savings plan (layer three). The strategic combination of the layers is crucial for comprehensive retirement provision. The following points highlight the differences:
Tax treatment (accumulation phase): Layer one (e.g., Rürup) and two (bAV, Riester) offer high deductibility of contributions. Layer three is mostly saved from taxed income.
State support: Direct allowances are primarily available in layer two (Riester). Layer one and two benefit from tax advantages.
Flexibility (payout): Layer one is the least flexible (pension only). Layer two (Riester) allows up to thirty percent capital withdrawal. Layer three offers the highest flexibility (pension or capital).
Inheritance: The possibilities for inheritance vary depending on the product and layer. Rürup pensions are only inheritable to a limited extent, while Riester contracts are often better.
Capital guarantee: Riester products must provide a contribution guarantee at the start of retirement. Many products in layer three do not offer guarantees but have higher return chances.
Access during the accumulation phase: In layer one and often two, access before retirement is hardly possible. Layer three offers more options here.
This comparison shows that there is not one best layer but rather that the individual mix makes the success. A detailed analysis of your situation helps to find the suitable pension insurance. In this way, retirement provision is optimally tailored to your needs.
Expert Depth: Tax Aspects and Legal Frameworks
The foundation of the 3-layer model is the Retirement Income Act (AltEinkG) of 2005. It governs deferred taxation for the first and second layers: contributions are tax-deductible during the accumulation phase, while pension benefits are taxable during the payout phase. In 2024, the taxable portion of a newly commencing pension from the basic provision is 84 percent and increases annually until it reaches 100 percent in 2040. Our expert tip: Regularly check your allowances and maximum limits to fully utilize the tax advantages. For contributions to the basic provision, a maximum amount of 27,566 euros applies for singles in 2024. For the Riester pension, up to 2,100 euros annually can be deducted as special expenses. In occupational pension schemes, up to eight percent of the pension insurance contribution assessment ceiling can be paid tax-free (2024: 7,248 euros), of which four percent is exempt from social security contributions (2024: 3,624 euros). A recent ruling by the Federal Fiscal Court may influence the taxation of pensions, so it is advisable to monitor developments. Questions like "Where do I enter retirement provision in the tax return?" are central here. A precise knowledge of sections, such as § 10 EStG (special expenses) and § 22 EStG (other income, including pensions), is crucial for optimizing your retirement planning. These details highlight the complexity but also the opportunities for structuring within the 3 layers of retirement provisions.
Recommendations: Developing your personal retirement strategy
A solid retirement plan is based on a thoughtful strategy that takes into account all three layers of pension provision. Begin with an honest assessment: What is your current pension gap? A private pension calculator can provide some initial insights here. For young people under 25 years of age, a one-time career starter bonus of 200 euros can be beneficial with the Riester pension. Our expert tip: Start building your retirement plan as early as possible, even with small amounts. Compound interest plays a significant role over long periods. Regularly review existing contracts, at least every five years, and adjust them to changing life circumstances (marriage, children, job change, salary increase). Consistently take advantage of state subsidies, especially in the second layer. Diversify your investments in the third layer to spread risks— a mix of secure and return-oriented investments is often sensible. Consider the question: " Is a company pension scheme worthwhile for me?" The answer depends on your individual situation and your employer's offerings. In case of uncertainties or complex situations, professional advice can be very valuable. If you find yourself thinking "Too little pension, what to do?", proactive action is required. Careful planning across all three layers is the key to a financially worry-free retirement.
Here are concrete steps for your planning:
Determine your pension gap: Compare your current net income with your anticipated state pension.
Check claims from layer one: What are your current entitlements from the state pension or pension schemes?
Make use of subsidies in layer two: Find out about company pension scheme offers from your employer and check the Riester subsidies.
Individually design layer three: Choose suitable private investment forms according to your risk appetite and return goals.
Consider inflation: Plan for an annual depreciation of your money of about two percent.
Seek professional advice: Especially in complex financial situations or to optimise your tax burden.
Document your contracts: Keep all documents related to your retirement products orderly.
Regularly adjust your strategy: At least every five years or during major life events.
With these steps, you lay the foundation for a solid retirement plan.
Conclusion: With foresight through the 3 layers to financial security in retirement
The three-layer pension system provides a structured framework for actively shaping your financial future in retirement. The basic provision secures a foundation, subsidised supplementary pension helps fill gaps, and private pension provides individual freedom and return opportunities. Relying solely on the statutory pension is no longer sufficient for most people to maintain the usual standard of living, typically 80 percent of the last net income. The combination of all three layers, tailored to personal life situations and financial possibilities, is the key to success. Remember, early and continuous engagement with pension planning is crucial. Take advantage of the various subsidies and tax benefits that the system offers. Careful planning and, if necessary, professional advice will help you make the right decisions for a worry-free future. The three layers of pension provision are your toolbox for a financially secure retirement.
Request an individual risk analysis now: Have your insurance situation reviewed for free and receive specific optimisation suggestions.
More useful links
Deutsche Rentenversicherung offers comprehensive information on retirement planning in a detailed brochure.
The Federal Ministry of Labour and Social Affairs (BMAS) provides a current research report on the prevalence of retirement provision in 2023.
The Federal Statistical Office (Destatis) offers an article on retirement provision with relevant statistical data.
The Federal Agency for Civic Education (bpb) delivers a thorough overview of the 3-pillar system of retirement security.
The Federal Ministry of Finance publishes the final report of a focus group on private retirement provision.
The Working Group on Occupational Pensions (aba) provides current statistics on the spread of occupational pension schemes.
The ifo Institute makes a scientific study on retirement provision available.
The Deutsche Bundesbank offers data and analyses on reserve funds in the context of retirement provision.
FAQ
What is the difference between the 3-pillar model and the 3-layer model?
The 3-layer model replaced the older 3-pillar model (statutory, occupational, private) with the Retirement Income Act in 2005. The layer model differentiates more in terms of tax treatment and promotional aspects, particularly through the introduction of Rürup and Riester pensions.
How much percentage of my income should I allocate for retirement planning?
Experts often recommend setting aside between ten and fifteen percent of your net income for retirement savings. The exact requirement depends on your individual situation, age, and goals.
Can I have capital paid out from all three layers?
No. In the basic provision (Layer One), only a lifelong pension payment is usually possible. With the Riester pension (Layer Two), up to thirty percent can be paid out as a lump sum. In private savings (Layer Three), there are often flexible options for capital withdrawals.
What role does inflation play in retirement planning?
Inflation reduces the purchasing power of your money over time. An annual inflation rate of, for example, two percent 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 through the effect of compound interest. Starting early makes it easier to build up a sufficient provision.
Are my pension contributions protected during unemployment?
Contributions to the Rürup pension and often also to the Riester pension are protected up to certain limits in the case of citizen's allowance receipt (formerly known as unemployment benefit II). There are also protective mechanisms for occupational pensions in the event of employer insolvency.
