Investment & Wealth
Riester pension
3 layers of retirement provision
The 3 Pillars of Retirement Provision: Your Guide to a Secure Pension
The state pension alone is often no longer sufficient. Understand the 3-layer model of retirement provision and secure your standard of living in old age with government support and clever private strategies.
The topic in brief and concise terms
The three-tier model (basic, supplementary, private) structures retirement provision in Germany by combining mandatory statutory systems with subsidised and free pension options.
Each tier offers specific tax advantages and disadvantages, along with varying degrees of flexibility in the accumulation and payout phases.
An early and strategic combination of all three layers is crucial to closing the individual pension gap and ensuring the standard of living in retirement.
The Foundation: Understanding basic provision as the first layer
The first layer, basic provision, forms the foundation of your retirement planning 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 replace this. Self-employed individuals can establish a similar basic provision through the Rürup pension (also known as base pension). Contributions to this layer are largely tax-advantaged: For example, in 2024, 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 savings phase. Payout occurs in retirement as a lifelong pension, which is then subject to deferred taxation. This means the pension is taxed only in retirement, often at a lower personal tax rate. However, flexibility is limited here; a lump-sum payout is generally not possible. Basic provision ensures a basic income, but is usually 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 sole building block for your financial future.
Targeted supplement: Using the second layer with government support
The second layer of retirement provision, the funded supplementary pension, aims to specifically enhance the benefits of the basic provision and benefits from government support. This includes occupational pensions (bAV) and the Riester pension. With occupational pensions, employees convert part of their gross salary, saving on taxes and social security contributions. Employers are required, since 2019 (for new contracts) and 2022 (for existing contracts), to provide at least a fifteen percent contribution if they save on social insurance 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). Particularly 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 for tax purposes up to 2,100 euros annually. The payout is mostly in the form of a pension, although with the Riester pension up to thirty percent of the capital can be withdrawn at the beginning of the payout phase. Therefore, this layer offers a good opportunity to reduce the pension gap with government help. Find out about the advantages of the Riester pension. The combination of tax savings and allowances makes the second layer an important pillar of the 3 layers of retirement provision.
Customise: The Third Layer of Private Pension Provision
The third layer of retirement planning includes 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 schemes, endowment insurance policies, bank savings plans, shares, funds, or even property. According to a survey, 56 percent of Germans save for their private retirement provision. Contributions to these products are generally made from net income that has already been taxed. For this reason, taxation during the payout phase is often more favourable. In the case of private pension schemes that have run for at least twelve years and where the payout takes place from the age of 62, only half of the earnings have to be taxed (half-income procedure). The high flexibility in deposits and withdrawals is the greatest advantage of this layer. You can determine your investment strategy yourself and often adjust it during the term. An example is investing in broadly diversified equity ETFs like the MSCI World, which has historically achieved an average return of eight to nine percent per year, although it also involves risks. This layer is essential to achieve individual retirement goals and to comprehensively secure the standard of living in old age. Consider also an endowment insurance policy as a building block. Private provision rounds off the system of the 3 layers of retirement planning and enables tailor-made protection.
Practical Part: Comparing the 3 Layers of Retirement Provision
To make the differences and interplay of the 3 layers of pension provision more tangible, we consider the most important aspects in an overview. Each layer has specific features regarding incentives, flexibility, and taxation. A 40-year-old employee might, for example, pay into the statutory pension (layer one), additionally build up an occupational pension scheme (layer two) through their employer with a fifteen percent employer contribution, and furthermore invest 100 euros monthly in an ETF savings plan (layer three). The strategic combination of layers is crucial for comprehensive retirement provision. The following points illustrate the differences:
Tax Treatment (Savings Phase): Layers one (e.g., Rürup) and two (occupational pension, Riester) offer high deductibility of contributions. Layer three is usually funded from taxed income.
Government Incentives: 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 up to thirty percent capital withdrawal. Layer three offers the highest flexibility (pension or capital).
Inheritance: Inheritance possibilities vary depending on the product and layer. Rürup pensions are only partially inheritable, whereas Riester contracts are often better.
Capital Guarantee: Riester products must offer a contribution guarantee at the start of retirement. Many products in layer three do not offer guarantees but have higher return potential.
Access During Savings Phase: In layers one and often two, access before retirement is hardly possible. Layer three offers more options here.
This comparison shows that there is no single best layer; rather, the individual mix is what makes it successful. A detailed analysis of your situation helps find the right pension insurance. This way, retirement provision is optimally tailored to your needs.
Recommended Actions: Develop Your Personal Retirement Strategy
A solid retirement plan is based on a well-thought-out strategy that considers all three layers of retirement provision. Start with an honest assessment: What is your current pension gap? A private pension calculator can provide initial guidance here. For young people under 25, the Riester pension can offer a one-off career starter bonus of 200 euros. 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. Regularly review existing contracts, at least every five years, and adapt them to changing life circumstances (marriage, children, job changes, salary increases). Consistently use government grants, 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 occupational retirement provision sensible for me?" The answer depends on your individual situation and your employer's offers. In case of uncertainties or complex scenarios, professional advice can be very valuable. If you find yourself saying "Not enough pension, what can I do?", proactive measures are 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 expected state pension.
Check entitlements from layer one: What are your current entitlements from the state pension or pension schemes?
Utilise benefits in layer two: Find out about your employer's occupational pension offers and check the Riester subsidy.
Design layer three individually: Choose suitable private investment forms according to your risk appetite and return targets.
Consider inflation: Plan for an annual devaluation of your money by about two percent.
Seek professional advice: Especially for complex financial situations or to optimise your tax burden.
Document your contracts: Keep all documents related to your retirement products organised and ready.
Regularly adjust your strategy: At least every five years or during important 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 offers a structured framework to actively shape your financial future in retirement. The basic provision provides a foundation, the subsidised additional provision helps to close gaps, and private provision allows for individual freedom and return opportunities. Relying solely on the state pension is no longer sufficient for most people to maintain the accustomed standard of living at an average of 80 percent of their last net income. The combination of all three layers, tailored to your personal life situation and financial possibilities, is the key to success. Remember, engaging with retirement planning early and continuously is crucial. Take advantage of the various incentives and tax benefits the system offers. Careful planning and possibly professional advice will help you make the right decisions for a worry-free future. The three layers of retirement provision are your toolbox for a financially secure retirement.
Request your individual risk analysis now: Have your insurance situation checked free of charge and receive specific optimisation suggestions.
More useful links
Deutsche Rentenversicherung provides comprehensive information on retirement planning in a detailed brochure.
The Federal Ministry of Labour and Social Affairs (BMAS) offers a current research report on the spread of retirement provision in the year 2023.
The Federal Statistical Office (Destatis) provides an article on retirement provision with relevant statistical data.
The Federal Agency for Civic Education (bpb) delivers a well-founded overview of the 3-pillar retirement security system.
The Federal Ministry of Finance publishes the final report of a focus group on private retirement provision.
The Occupational Pension Association (aba) offers up-to-date statistics on the dissemination of occupational pensions.
The ifo Institute provides an academic study on retirement provision.
The Deutsche Bundesbank offers data and analyses on cover 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 superseded the older 3-Pillar Model (statutory, occupational, private) in 2005 with the Retirement Income Act. The Layer Model more strongly differentiates according to tax treatment and promotional aspects, especially through the introduction of the Rürup and Riester pensions.
What percentage of my income should I set aside for retirement planning?
Experts often recommend setting aside between ten and fifteen per cent of net income for retirement planning. The exact requirement depends on your individual situation, age, and goals.
Can I withdraw capital from all three layers?
No. In general, the basic provision (Layer One) only allows for a life-long pension payment. With the Riester pension (Layer Two), up to thirty per cent can be paid out as a lump sum. In private provision (Layer 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. An annual inflation rate 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 due to the compounding effect. Starting early makes it easier to build up adequate provision.
Are my retirement contributions protected in the event of unemployment?
Contributions to the Rürup pension and often also to the Riester pension are protected up to certain limits in the event of citizens' income receipt (formerly unemployment benefit II). There are also protection mechanisms for occupational pensions in the event of employer insolvency.
