Design your private supplementary pension optimally: your path to financial security in retirement
11.04.25
8
Minutes
Katrin Straub
Managing Director at nextsure
The state pension alone is often not enough to maintain your usual standard of living in retirement. A private supplementary pension is therefore essential for many people. Find out how to choose the right retirement provision for you and avoid financial shortfalls.
The topic in brief and concise terms
The state pension is often not enough; a private supplementary pension is usually essential to secure your standard of living in retirement.
There are various forms of private supplementary pension (e.g. traditional, unit-linked, Riester, Rürup) which should be selected to suit individual circumstances.
Starting early, minimising costs and making use of state subsidies are key factors for successful private retirement planning.
Understanding the need for a private supplementary pension
The statutory pension forms the foundation of retirement provision in Germany, but its ability to provide for people is declining. In 2023, the average monthly retirement pension for men with at least 35 years of contributions was 1,800 euros, and for women it was only 1,333 euros. These amounts make it clear that additional provision is essential for most citizens. Many underestimate the resulting pension gap between their final net income and the actual statutory pension. Without a private supplementary pension, substantial financial restrictions threaten in old age. The need to pursue a private supplementary pension early on also arises from demographic change. It is therefore important to be familiar with the various options for private retirement provision and to develop the strategy that is suitable for your own situation.
Quick Facts: Key aspects of private supplementary pension
Before we delve deeper into the subject, here are the key points on private supplementary pensions in brief. A private supplementary pension bridges the gap to statutory provision and secures your standard of living. There are various implementation routes, including the classic private pension insurance, Riester and Rürup pensions, as well as unit-linked variants. State subsidies and tax advantages can increase the returns of certain products, such as the Riester pension. The choice of the right product depends on your individual life situation, risk appetite and financial goals. Early planning often makes it possible to build up significant assets even with small contributions. Contributions to a pure private pension insurance are generally not tax-deductible, but you benefit in the payout phase. The complexity of the products and possible costs require careful review and, ideally, expert advice.
Securing your standard of living in retirement.
Wide range of provision options available.
Take advantage of state subsidies.
Choosing the right product is crucial.
Starting early is often beneficial.
Weigh up costs and return potential.
These basics will help you better classify the more detailed information that follows.
Practical section: Real examples and comparison options for your supplementary pension
To make the theory more tangible, let us look at some practical examples. Suppose a 30-year-old person wants an additional monthly pension of 500 euros from the age of 67. With a unit-linked annuity insurance policy, depending on the expected return, they would have to save, for example, 100 euros a month. If the same person only starts at the age of 45, the monthly contribution rises to around 250 euros. This illustrates the advantage of starting early. An important factor when it comes to the payout is the so-called annuity factor, which indicates how much monthly pension is paid for every 10,000 euros of saved capital. An annuity factor of 30, for example, means a pension of 300 euros for 100,000 euros of capital. The level of the annuity factor can have a significant influence on the later pension. When choosing between a lump-sum payout or a lifetime annuity, tax aspects play a role. Compare offers carefully, pay attention to costs and the flexibility of the contracts.
Types of private supplementary pensions in detail
There are various forms of private supplementary pension, each with specific characteristics. The classic private pension insurance often offers a guaranteed minimum rate of interest; currently, the guaranteed interest rate has been 1.0 per cent since 1 January 2025. However, the return potential here is usually lower. An attractive alternative can be the unit-linked pension insurance, in which contributions flow into investment funds and offer higher return potential, although they are also associated with higher risks. State-supported options include the Riester pension, particularly suitable for families and low earners, and the Rürup pension (basic pension), which is aimed primarily at the self-employed and high earners. With the Riester pension, there are allowances from the state, for example a basic allowance of 175 euros per saver per year. [,""] The Rürup pension, by contrast, scores with the 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 potential with higher risk.
Riester pension: state allowances and tax advantages.
Rürup pension (basic pension): high tax deductibility of contributions.
Occupational pension provision (bAV): provision through the employer.
Private fund savings plans: flexible investment option with return potential.
Choosing the right form is an important step on the path to a secure future.
Expert depth: legal and tax framework conditions
The legal basis for private retirement provision contracts can be found in the German Civil Code (BGB), the Insurance Contract Act (VVG) and the providers’ General Terms and Conditions (AVB). Contracts are formed through application and acceptance. There are significant differences in taxation. Contributions to pure private annuity insurance policies (without state subsidies) are generally not tax-deductible during the savings phase under the Retirement Income Act, which came into force on 1 January 2005. An exception may apply to contracts concluded before 2005; in such cases, contributions may under certain circumstances be claimed as special expenses. In the payout phase, the lifelong annuity from a private pension insurance policy is taxed only on the earnings portion. This earnings portion is prescribed by law and depends on the age at which the pension starts; for example, if retirement begins at 67, it amounts to 17 per cent. Our expert tip: For older contracts (concluded before 2005), check the possibility of a tax-free lump-sum payout under certain conditions. For newer contracts (concluded after 31 December 2004), half of the gains may be taxable on a lump-sum payout under certain circumstances, if the contract has run for at least twelve years and the payout takes place no earlier than the age of 62. Understanding these tax details is crucial for optimising your retirement provision.
Costs and returns: What your supplementary pension really delivers
The return on a private supplementary pension is significantly influenced by costs. Initial and distribution costs as well as ongoing administration costs can reduce returns. For unit-linked pension insurance policies, fund charges are added as well. A cost ratio of two per cent or more can significantly reduce returns. [,""] Therefore, pay attention to the effective costs, which take all cost types into account. Return prospects vary greatly depending on the product. Traditional policies often offer only a low ongoing interest rate, which in recent years has been around two to two and a half per cent, whereas unit-linked products can achieve higher returns but are also subject to market fluctuations. A pension calculator can help you model various scenarios. Choosing a low-cost ETF within a unit-linked policy can positively influence returns. [,""] Compare the guaranteed annuity and annuity factor of different providers to find the best offer for you. A careful analysis of the cost structure is essential to maximise the net return of your retirement provision.
The German retirement provision system is based on a three-pillar model. The first pillar forms the basic provision, which includes statutory pension insurance, the Rürup pension and occupational pension schemes. [,""] This pillar serves to secure basic needs. The second pillar covers supplementary provision, such as the Riester pension and occupational pension provision (bAV). [,""] Here there is state support in the form of allowances or tax advantages. The private supplementary pension, which is not directly supported by the state, belongs to the third pillar. [,""] This includes, for example, private pension insurance policies, endowment life insurance policies (taken out after 2004) and fund savings plans. These products often offer a high degree of flexibility in contract design and payout. An understanding of this structure helps you set up your own pension strategy optimally and combine the various building blocks sensibly. This enables you to target a private supplementary pension that meets your individual needs.
Recommendations for action: Your next steps towards a private supplementary pension
The path to the right private supplementary pension begins with an honest assessment of your current financial situation and your retirement goals. Determine your projected pension gap, i.e. the difference between your desired income in retirement and your expected benefits from the statutory pension. Define how much you can contribute each month to your retirement provision; often, ten to fifteen per cent of net income is a good guideline. [,""] Find out more comprehensively about the various products and their advantages and disadvantages. Here are some specific steps:
Determine your pension gap: How much money do you need in addition to the statutory pension?
Set realistic savings goals: What amount can and do you want to invest each month?
Compare different offers: Obtain at least three quotes for the products under consideration.
Pay attention to costs: Compare the effective costs and not just the stated return.
Check the flexibility: Are adjustments to contributions or additional payments possible?
Take your risk appetite into account: Choose products that match your risk profile.
Seek independent advice: An expert can help you make the right decision.
Start saving as early as possible to benefit as much as possible from the compound interest effect. Careful planning and selection is the key if you want to successfully build a private supplementary pension. Also consider whether there is a health insurance obligation for your private pension.
Conclusion: Proactively secure your financial future in later life
Seeking a private supplementary pension is a crucial step in ensuring financial security and independence in later life. Given the declining benefits of the statutory pension scheme, individual initiative is required. The wide range of products, from traditional pension insurance policies to unit-linked models and state-subsidised options such as Riester and Rürup, offers a suitable solution for almost every life situation. What matters is early and careful planning, taking account of your own financial means and risk appetite, as well as a close look at costs and return potential. The complexity of the subject should not be off-putting, but rather serve as an incentive to obtain well-founded information and, where appropriate, seek professional support. Remember that even small but regular contributions over a long period can make a significant difference. If you are asking yourself "Not enough pension, what should you do?", a private supplementary pension is one of the most important answers. Take an active role in planning for your retirement.
Request your individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific optimisation recommendations.
More useful links
The Federal Ministry of Finance provides insights into the law on reforming company pension schemes (pAV-ReformG).
The German Pension Insurance provides comprehensive information about the various options for retirement provision in Germany.
Destatis, the Federal Statistical Office, publishes a press release here on the number of people receiving basic income support in old age.
The Consumer Advice Centre offers independent consumer advice on private pension insurance and its suitability for retirement provision.
The DIW Berlin (German Institute for Economic Research) provides information on retirement provision here.
Destatis provides detailed information here on the risk of poverty among older people in the context of demographic change.
The Federal Ministry of Labour and Social Affairs (BMAS) provides information on the various aspects of supplementary retirement provision.
FAQ
What is meant by the pension gap?
The pension gap is the difference between the last net income before retirement and the expected statutory pension. A private supplementary pension helps to close this gap.
Are contributions to private pension insurance tax-deductible?
Contributions to pure private pension insurance policies (without state support such as Riester or Rürup) are generally not tax-deductible. Exceptions may apply to contracts concluded before 2005.
What is the annuity factor?
The annuity factor indicates how much monthly pension is paid out per €10,000 of accumulated capital. A higher guaranteed annuity factor means a higher guaranteed pension.
What role do costs play in a private supplementary pension?
The costs (initial, distribution and administration 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 payout possible with a private pension insurance policy?
Yes, many private pension insurance policies offer a capital option, i.e. you can decide at the start of retirement whether you would like to receive a lifelong pension or a one-off capital payment. The tax treatment differs.
What are the advantages of a unit-linked pension insurance policy?
A unit-linked annuity policy offers the chance of higher returns than traditional models, as the contributions are invested in investment funds. However, this is also associated with higher investment risks.
