Optimally design private additional pension: Your path to financial security in retirement
11 Apr 2025
7
Minutes
Katrin Straub
CEO at nextsure
The state pension alone is often not enough to maintain the usual standard of living in retirement. A private pension is therefore essential for many. Learn how to find the right plan for you and avoid financial shortfalls.
The topic in brief and concise terms
The state pension is often not sufficient; a private supplementary pension is usually essential to maintain your standard of living in retirement.
There are various forms of private supplementary pensions (e.g., traditional, fund-linked, Riester, Rürup) that should be selected individually to suit one's needs.
Starting early, minimising costs, and taking advantage of government subsidies are key factors for a successful private pension plan.
Understanding the necessity of a private supplementary pension
The statutory pension is the foundation of retirement provision in Germany, but its effectiveness is decreasing. In 2023, the average monthly pension for men with at least 35 contribution years was 1,800 euros, and for women, it was only 1,333 euros. These amounts highlight that additional provision is essential for most citizens. Many underestimate the pension gap between the last net income and the actual statutory pension. Without a private supplementary pension, significant financial restrictions threaten in old age. The need to pursue a private supplementary pension early also arises from demographic changes. Therefore, it is important to know the various options for private retirement provision and to develop a strategy that fits your own situation.
Quick Facts: Key Aspects of Private Supplementary Pensions
Before we delve deeper into the subject, here are the key points about private supplementary pensions in brief. A private supplementary pension fills the gap in statutory provision and secures your standard of living. There are various implementation options, including the classic private pension insurance, Riester and Rürup pensions, and unit-linked variants. Government subsidies and tax advantages can increase the return on certain products, such as the Riester pension. Choosing the right product depends on your individual life situation, risk tolerance, and financial goals. Early planning often allows significant wealth accumulation even with small contributions. Contributions to pure private pension insurance are generally not tax-deductible, but you benefit in the payout phase. The complexity of the products and potential costs require careful examination and ideally expert advice.
Ensuring the standard of living in old age.
Variety of pension options available.
Make use of government subsidies.
Individual product selection is crucial.
Early start often beneficial.
Weigh costs and return opportunities.
These foundations help you to better understand the more detailed information that follows.
Practical Section: Real examples and comparative methods for your additional pension
To make the theory more tangible, let's look at some practical examples. Suppose a 30-year-old person wants an additional monthly pension of 500 euros starting at the age of 67. With a unit-linked pension insurance, they would need to save, depending on the expected return, for example, 100 euros per month. If the same person only starts at the age of 45, the monthly contribution increases to about 250 euros. This illustrates the advantage of an early start. An important factor during payout is the so-called pension factor, which indicates how much monthly pension is paid per 10,000 euros of saved capital. A pension factor of 30, for example, means 300 euros in pension with 100,000 euros in capital. The pension factor can significantly influence the later pension amount. When choosing between a capital payout or a lifelong pension, tax aspects play a role. Compare offers carefully, paying attention to costs and the flexibility of the contracts.
Forms of private supplementary pension in detail
There are various types of private supplementary pensions, each with specific characteristics. The classic private pension insurance often offers a guaranteed minimum interest rate; currently, the guaranteed interest rate has been at one point zero percent since the first of January 2025. However, the prospects for returns are usually lower here. An attractive alternative can be the unit-linked pension insurance, where contributions flow into investment funds, offering higher return opportunities but are also associated with higher risks. Government-sponsored options include the Riester pension, especially suitable for families and low-income earners, and the Rürup pension (basic pension), which is aimed primarily at the self-employed and high earners. With the Riester pension, there are state subsidies, such as a basic allowance of 175 euros annually per saver. The Rürup pension, on the other hand, scores with high tax deductibility of contributions. The following list shows common options:
Classic private pension insurance: Security with often lower returns.
Unit-linked pension insurance: Higher return opportunities with higher risk.
Riester pension: State subsidies and tax benefits.
Rürup pension (basic pension): High tax deductibility of contributions.
Company pension plan (bAV): Retirement provision through the employer.
Private fund savings plans: Flexible investment form with return opportunities.
Choosing the right form is an important step towards a secure future.
Expert Depth: Legal and Fiscal Frameworks
The legal foundations for private pension contracts can be found in the Civil Code (BGB), the Insurance Contract Act (VVG), and the general terms and conditions of the providers. Contracts are formed through application and acceptance. There are significant differences in taxation. Contributions to purely private pension insurances (without state support) are generally not tax-deductible during the accumulation phase according to the Pension Income Act, which came into effect on January 1, 2005. An exception may apply to contracts concluded before 2005; in such cases, contributions may potentially be claimed as special expenses. During the payout phase, the lifelong pension from a private pension insurance is only taxed on the profit portion. This profit portion is legally defined and depends on the age at pension commencement; for example, at a retirement start age of 67, it amounts to 17 percent. Our expert tip: For older contracts (concluded before 2005), check the possibility of tax-free capital payout under certain conditions. For newer contracts (concluded after December 31, 2004), half of the gains may be taxable upon capital payout if the contract has run for at least twelve years and the payout occurs no earlier than age 62. Understanding these tax details is crucial for optimizing your retirement planning.
Costs and Returns: What Your Additional Pension Really Brings
The return on a private supplementary pension is significantly influenced by costs. Initial and distribution costs, as well as ongoing administrative fees, can reduce profits. For unit-linked pension insurances, additional fund costs are added. A cost ratio of two percent or more can significantly reduce returns. [,""] Therefore, pay attention to the effective costs, which take all types of costs into account. The return opportunities vary greatly depending on the product. Traditional policies often offer only a low ongoing interest rate, which has been around two to two and a half percent in recent years, while unit-linked products can achieve higher returns but are also subject to market fluctuations. A pension calculator can help explore different scenarios. Choosing a cost-effective ETF within a unit-linked policy can positively influence returns. [,""] Compare the guaranteed pension and the pension factor of different providers to find the best offer for you. A careful analysis of the cost structure is essential to maximize the net return on your retirement savings.
Understanding the three layers of retirement provision
The German pension system is based on a three-tier model. The first tier forms the basic provision, which includes the statutory pension insurance, Rürup pension, and professional pension schemes. This tier serves to ensure basic needs are met. The second tier encompasses supplementary provision, such as the Riester pension and occupational pension schemes (bAV). There are government incentives here in the form of allowances or tax benefits. The private supplementary pension, which is not directly subsidised by the state, belongs to the third tier. This includes, for example, private pension insurance, whole-life insurance policies (concluded after 2004), and investment savings plans. These products often offer high flexibility in terms of contract design and payout. Understanding this structure helps to optimally set up your own pension strategy and sensibly combine the various components. This way, you can specifically aim for a private supplementary pension that meets your individual needs.
Recommended actions: Your next steps towards a private supplementary pension
Conclusion: Proactively securing your financial future in retirement
More useful links
Das Bundesfinanzministerium offers insights into the law for the reform of occupational pensions (pAV-ReformG).
The German Pension Insurance provides comprehensive information on the various retirement planning options in Germany.
Destatis, the Federal Statistical Office, publishes a press release here on the number of people receiving basic old-age security.
The Consumer Centre offers independent consumer advice on private pension insurance and its suitability for retirement planning.
The DIW Berlin (German Institute for Economic Research) provides information on retirement planning here.
Destatis offers detailed information here on the poverty risk of older people in the context of demographic change.
The Federal Ministry of Labour and Social Affairs (BMAS) provides information on the various aspects of additional retirement provision.
FAQ
What is meant by the pension gap?
The pension gap is the difference between your last net income before retirement and the expected state pension. A private supplementary pension helps to close this gap.
Are the contributions to private pension insurance tax-deductible?
Contributions to private pension insurance policies (without government subsidies like Riester or Rürup) are generally not tax-deductible. Exceptions can apply to contracts concluded before 2005.
What is the pension factor?
The pension factor indicates how much monthly pension is paid out for every €10,000 of saved capital. A higher guaranteed pension factor means a higher guaranteed pension.
What role do costs play in a private supplementary pension?
The costs (concluding, distribution, and administrative costs) can significantly reduce the return on a private supplementary pension. It is important to pay attention to low effective costs.
Is a lump sum payment possible with a private pension insurance?
Yes, many private pension schemes offer a capital option, meaning you can choose at the start of your pension whether you want a lifelong pension or a one-time capital payment. The tax treatment differs.
What are the benefits of a unit-linked pension insurance?
A unit-linked pension insurance offers the opportunity for higher returns compared to traditional models, as the contributions are invested in investment funds. However, this also comes with higher investment risks.
