Riester pension: When it really still pays off for your retirement savings
23.04.25
11
Minutes
Katrin Straub
Managing Director at nextsure
The Riester pension promises state subsidies and tax advantages, but is it really the right building block for your retirement provision? Many savers ask themselves whether, in light of costs and deferred taxation, taking out a policy is still worthwhile. This article examines the facts and helps you make your decision.
The topic in brief and concise terms
Riester pensions can be worthwhile thanks to state subsidies (175 euros basic allowance, up to 300 euros per child) and tax advantages (up to 2,100 euros deductible), especially for low earners and families.
Critical points are often high contract costs, which can reduce returns, as well as the full taxation of the pension in old age.
An individual review of your personal situation, the contract terms and possible alternatives is crucial before taking out or continuing a Riester contract. [,]
Riester pension at a glance: What you need to know
The Riester pension is a state-subsidised form of private retirement provision in Germany. It aims to close the pension gap in old age. Savers receive annual basic allowances of €175. For each child, there is also an additional child allowance of up to €300. Career starters under the age of 25 benefit from a one-off bonus of €200. To receive the full subsidy, four per cent of the previous year’s gross income, up to a maximum of €2,100, must be paid in. These contributions are tax-deductible during the accumulation phase. However, in the payout phase, the pension is taxed in full. The complexity and the costs of some contracts are often cited disadvantages.
Make the most of government funding: allowances and tax benefits
A key advantage of the Riester pension is the state allowances. The basic allowance is 175 euros per year for every eligible saver. For children born before 2008, there is 185 euros; for children born in 2008 or later, even 300 euros per year. A young person under 25 receives a one-off bonus of 200 euros when the contract is concluded. To receive these allowances in full, savers must pay in at least four per cent of their previous year’s gross income subject to pension insurance, with the allowances already taken into account. The maximum subsidised amount is 2,100 euros per year. This amount can be claimed as a special expense on the tax return, which can result in tax savings. The tax office automatically checks whether the tax advantage is greater than the allowances (favourable assessment). For optimal tax planning, this is an important aspect. The subsidy rate can be very attractive, especially for low earners with children. For example, a person with two children born in 2008 or later and a previous year’s gross income of 30,000 euros can expect allowances of 775 euros. The necessary own contribution would then be only 425 euros. Many savers underestimate the amount of the possible government grants. The allowances are usually applied for via the provider.
These incentives make the Riester pension particularly interesting for certain groups of people.
Who is the Riester pension particularly beneficial for?
The Riester pension does not offer the same benefits to every saver. Low earners can benefit in particular, as their own contribution is often very low thanks to the allowances. Families with several children benefit greatly from the child allowances, which can significantly reduce their own contribution. A family with two children can thus receive EUR 600 in child allowances per year, in addition to the basic allowance. Employees who pay into the statutory pension insurance scheme, civil servants and parents entitled to child benefit are also generally eligible for state support. [,2] For high earners, the tax advantage from the special expenses deduction of up to EUR 2,100 can be attractive, even if the allowances count for less here. [2,] The combination of allowances and tax advantages is crucial for individual profitability. Spouses of those directly eligible for support may also, in some circumstances, receive the full basic allowance with a small own contribution of EUR 60 per year (indirect eligibility for support). [,] An individual assessment of the personal situation is advisable here. The protection from seizure of the accumulated capital during the savings phase and when receiving social benefits is another advantage.
However, alongside these advantages, there are also aspects that need to be viewed critically.
Costs, returns and flexibility: the critical points of the Riester pension
A common criticism of Riester contracts is the cost. Entry and administrative costs can reduce returns; in some cases, every fourth euro paid in is used for costs. [1,] The effective costs vary greatly between providers and can make a significant difference to the eventual pension amount in long-term contracts. [,] High costs can wipe out the state subsidy. The guaranteed contribution protection, which ensures that at least the contributions paid in and bonuses are paid out, often leads to conservative investment strategies with lower return potential. [2,] The guaranteed interest rate on traditional Riester pension policies has fallen to 0.25 per cent in recent years. [,] Flexibility is also limited. Cancelling the contract is usually associated with the loss of state bonuses and tax advantages. A contribution holiday or switching provider is often better. The capital is primarily intended for retirement provision; early access is only possible under certain conditions, such as with Wohn-Riester for owner-occupied property, without losing the subsidy. Considerations regarding a contract cancellation should therefore be weighed carefully.
The payout phase also involves important details that need to be taken into account.
Payout phase: taxes, social security contributions and options
Payments from a Riester contract are subject to the so-called deferred taxation. This means the entire pension must be taxed at the individual's personal income tax rate in retirement. [1,3,] This is an important difference compared with many other private investment products. The individual tax rate in retirement is often difficult to predict today. At the start of retirement, savers can have up to 30 per cent of the accumulated capital paid out once; this amount is also fully taxable. [,] The remaining amount is paid as a lifelong monthly pension. In the case of very small pensions (small pensions, in 2024 under EUR 35.35 per month), a full lump-sum payment can also be made, which is then taxed. [] The tax burden in old age can significantly reduce the net pension. Social security contributions, i.e. contributions to health and long-term care insurance, are generally not due on Riester pensions for retirees covered by compulsory insurance. [] The situation may be different for those voluntarily insured under the statutory health insurance scheme or for Riester contracts as part of occupational pension provision. [] Here, a careful review of the contribution liability is important.
To navigate the complexity, expert advice is often helpful.
Expert tips and current legal aspects
When choosing a Riester contract, a close look at the cost structure is essential. The statutory product information sheet shows effective costs, making comparison possible. [] Our expert tip: Do not just look at the level of allowances, but compare the total costs and flexibility of different offers. Changing provider is generally possible, even shortly before retirement begins, for example to switch to a cheaper contract, although the number of providers willing to accept transfers may be limited. [] Recent court rulings have declared certain cost clauses in Riester contracts invalid, particularly in the transition to the payout phase. [,.] For example, on 21 November 2023 (case no. XI ZR 290/22), the Federal Court of Justice (BGH) found a clause on initial and intermediary costs in annuitisation to be opaque. [,] Reductions in the pension factor by insurers have also been reviewed by the courts. [] It is worth reviewing the contract terms carefully and, if anything is unclear, seeking independent advice, such as from the consumer advice centres. [] For comprehensive retirement planning, it can also make sense to look at alternatives such as the Rürup pension or a private pension insurance policy.
In summary, the decision for or against the Riester pension depends on many individual factors.
The question of whether the Riester pension is worthwhile cannot be answered in general. For low earners and families with children, it can often be worthwhile thanks to the high subsidy rates via allowances. [3,] A single parent with two children and a low income, for example, can receive a significant part of their contributions from the state. The tax advantage during the accumulation phase can also be an argument for higher earners, although the deferred taxation in retirement must be taken into account. The potential returns are limited by the contribution guarantee and often high costs. [1,] A careful assessment of the individual situation, the contract costs and personal return expectations is essential. According to a publication, the average Riester pension payment was around 132 euros per month, which underlines the need for additional provision. [] Check alternatives and, if necessary, seek independent advice. Retirement planning should always be multi-layered. If you already have a contract, check its terms and whether an adjustment or switch makes sense. We would be happy to provide a detailed analysis of your situation and concrete optimisation suggestions.
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More useful links
The Federal Ministry of Finance provides current statistics on Riester subsidies up to the year 2023.
The Federal Ministry of Finance offers detailed payout statistics for Riester pensions for the year 2023.
The German Pension Insurance provides comprehensive information about Riester pensions and how they work.
The Consumer Advice Centre offers independent advice on which groups of people Riester pensions may be worthwhile for.
The Consumer Advice Centre publishes the results of a survey on the satisfaction and experiences of Riester savers.
The Federal Ministry of Labour and Social Affairs (BMAS) provides official statistics on existing Riester contracts and additional retirement provision.
The German Insurance Association (GDV) provides statistics on the stock and new business of Riester contracts in the German insurance industry.
FAQ
How high is the government subsidy for the Riester pension?
The basic allowance is 175 euros per year. For children, there is an additional 185 euros (born before 2008) or 300 euros (born from 2008 onwards). New entrants to the workforce under 25 receive a one-off bonus of 200 euros.
Do I have to pay tax on the Riester pension?
Yes, payments from the Riester pension must be taxed in full at the personal income tax rate during the retirement phase (deferred taxation).
Can I cancel my Riester contract?
Termination is possible, but it usually leads to the loss of government allowances and tax benefits. Often, contribution-free status or switching provider are better alternatives.
What happens to my Riester pension if I die?
The inheritability of the Riester pension is limited. During the accumulation phase, the balance can be paid out to heirs in a way that is detrimental to subsidy eligibility, or transferred to the spouse’s Riester contract. For the pension phase, there are options such as a guaranteed annuity period.
What costs apply to a Riester contract?
There may be initial, distribution and ongoing administration costs. These vary greatly depending on the provider and contract type and can significantly affect returns. [1,]
Is Riester worthwhile for low earners?
Yes, for low earners, the Riester pension can often be worthwhile, as their own contribution can be very low thanks to the state allowances and the subsidy rate is therefore high. [3,]
