Riester pension: When it still really pays off for your future provision
23 Apr 2025
7
Minutes
Katrin Straub
CEO at nextsure
The Riester pension promises government allowances and tax benefits, but is it really the right component for your retirement provision? Many savers wonder whether it is still worth signing up given the costs and deferred taxation. This article sheds light on the facts and helps you make a decision.
The topic in brief and concise terms
The Riester pension can be worthwhile due to government subsidies (175 euros basic subsidy, up to 300 euros per child) and tax advantages (up to 2,100 euros deductible), especially for low-income earners and families.
Critical points often include high contract costs, which can diminish returns, as well as the full taxation of the pension in old age.
An individual review of the personal situation, contract conditions, and possible alternatives is crucial before one enters into or continues a Riester contract.
The Riester pension at a glance: What you need to know
The Riester pension is a government-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 euros. For each child, there is an additional child allowance of up to 300 euros. Young professionals under 25 years of age benefit from a one-time bonus of 200 euros. To receive the full subsidy, four percent of the previous year's gross income, up to a maximum of 2,100 euros, must be paid in. These contributions are tax-deductible during the accumulation phase. However, during the payout phase, the pension is fully taxed. The complexity and costs of some contracts are frequently mentioned disadvantages.
Make the most of government subsidies: Allowances and tax advantages
A key advantage of the Riester pension is the government subsidies. The basic allowance amounts to 175 euros annually for each eligible saver. For children born before 2008, there is a benefit of 185 euros, and for children born from 2008 onwards, even 300 euros per year. A young person under the age of 25 receives a one-off bonus of 200 euros upon signing the contract. To obtain these allowances in full, savers must contribute at least four percent of their previous year's gross income subject to pension insurance, with the subsidies already counted. The maximum subsidised amount is 2,100 euros per year. This amount can be claimed as a special expense in the tax return, which can lead to tax savings. The tax office automatically checks whether the tax benefit is higher than the allowances (favourable assessment). For an optimal tax planning, this is an important aspect. The subsidy rate can be very attractive, especially for low-income earners with children. For instance, a person with two children born from 2008 and a previous year's gross income of 30,000 euros can expect subsidies of 775 euros. The necessary personal contribution would be only 425 euros. Many savers underestimate the level of potential government grants. The application for the allowances is usually made through the provider.
These subsidies make the Riester pension particularly interesting for certain groups of people.
Who benefits most from the Riester pension?
The Riester pension does not unfold its advantages equally for every saver. Low-income earners can particularly benefit, as their personal contribution is often very low due to the allowances. Families with several children benefit greatly from child allowances, which can significantly reduce the personal contribution. A family with two children can receive 600 euros annually in child allowances, in addition to the basic allowance. Employees paying into the statutory pension insurance, civil servants, and parents eligible for child benefits are generally entitled to support. For high earners, the tax advantage through the special expenses deduction of up to 2,100 euros can be attractive, even if the allowances are less significant here. The combination of allowances and tax advantages is crucial for individual profitability. Spouses of those directly eligible for assistance may also be able to obtain the full basic allowance with a low personal contribution of 60 euros annually (indirect eligibility). An individual assessment of the personal situation is advisable here. The attachment protection of the saved capital during the saving phase and when receiving social benefits is another advantage.
However, besides these advantages, there are also aspects that need to be critically examined.
Costs, Returns, and Flexibility: The Critical Points of the Riester Pension
A common criticism of Riester contracts is the costs. Initial and administrative costs can reduce returns; sometimes one in four euros paid in is used for costs. The effective costs vary significantly between providers and can make a substantial difference to the later pension amount in long-term contracts. High costs can negate the government subsidy. The guaranteed contribution guarantee, which ensures that at least the paid-in contributions and allowances are paid out, often leads to conservative investment strategies with lower return opportunities. The guaranteed interest rate for traditional Riester retirement insurance has fallen to 0.25 percent in recent years. Flexibility is also limited. Termination of the contract is usually associated with the loss of government allowances and tax advantages. It is often better to suspend contributions or switch providers. The capital is primarily intended for retirement provision; early disposal is only possible under certain conditions, such as with Wohn-Riester for owner-occupied residential property, without loss of support. Considerations regarding a contract termination should therefore be well weighed.
The payout phase also contains important details that need to be considered.
Payout Phase: Taxes, Social Contributions, and Options
The payouts from a Riester contract are subject to what is called deferred taxation. This means the entire pension must be taxed at the personal income tax rate upon retirement. [1,3,] This is an important difference from many other private investment forms. The individual tax rate at retirement age is often difficult to predict today. At the start of retirement, savers can choose to have up to 30 percent of the accumulated capital paid out in a lump sum; this amount is also fully taxable. [,] The remaining amount is paid as a lifetime monthly pension. For very small pensions (small pensions, under 35.35 euros monthly in 2024), a full capital payout can also take place, which is then taxed. [] The tax burden in retirement can significantly reduce the net pension. Social contributions, such as those for health and long-term care insurance, usually do not apply to Riester pensions for pensioners with mandatory insurance. [] The situation can be different for those voluntarily insured by statutory insurance or for Riester contracts within the framework of a company pension scheme. [] Here, a careful examination of the liability for contributions is important.
To navigate the complexity, expert advice is often helpful.
Expert tips and current legal aspects
When selecting a Riester contract, a close examination of the cost structure is essential. The legally required product information sheet shows effective costs, which allow for comparison. [] Our expert tip: Pay attention not only to the amount of allowances but also compare the total costs and flexibility of different offers. Changing providers is generally possible, even shortly before retirement begins, for example, to switch to a cheaper contract, although the number of accepting providers may be limited. [] Recent court rulings have declared certain cost clauses in Riester contracts ineffective, particularly during the transition to the payout phase. [,.] On 21 November 2023, the Federal Court of Justice (BGH) found a clause on initial and brokerage costs during annuitization to be non-transparent (Case No. XI ZR 290/22). [,] Reductions in the annuity factor by insurers have also been reviewed by the courts. [] It is worthwhile to carefully check the contract terms and seek independent advice, such as from consumer advice centres, in case of uncertainties. [] For a comprehensive retirement planning strategy, considering alternatives such as the Rürup pension or a private pension insurance can also be worthwhile.
In summary, the decision for or against the Riester pension depends on many individual factors.
Conclusion: Is the Riester pension personally worthwhile for you?
It is not possible to answer the question of whether the Riester pension is worthwhile across the board. For low-income earners and families with children, it can often be worthwhile due to the high subsidies. [3,] A single parent with two children and a low income, for example, can receive a significant portion of their contributions from the state. The tax advantage during the saving phase can also be an argument for high earners, although the subsequent taxation in retirement must be offset. The potential returns are limited by the contribution guarantee and often high costs. [1,] A careful consideration of the individual situation, contract costs, and personal return expectations is essential. According to a publication, the average Riester pension payout was about 132 euros per month, which underscores the need for further provision. [] Examine alternatives and seek independent advice if necessary. Retirement planning should always be multi-layered. If you already have a contract, review its terms to see if an adjustment or change is advisable. We are at your disposal for a detailed analysis of your situation and specific optimization suggestions.
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More useful links
The Federal Ministry of Finance provides current statistics on Riester funding up to the year 2023.
The Federal Ministry of Finance offers detailed payout statistics for the Riester pension for the year 2023.
The German Pension Insurance provides comprehensive information about the Riester pension and how it works.
The Consumer Centre offers independent advice on which groups of people may benefit from the Riester pension.
The Consumer 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 planning.
The German Insurance Association (GDV) supplies statistics on the stock and new additions of Riester contracts in the German insurance industry.
FAQ
What is the level of government support 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). Early career entrants under 25 years old receive a one-time bonus of 200 euros.
Do I have to pay tax on the Riester pension?
Yes, the payouts from the Riester pension must be fully taxed at the personal income tax rate during the retirement phase (deferred taxation).
Can I cancel my Riester contract?
Termination is possible, but it generally results in the loss of government subsidies and tax benefits. Often, a premium waiver or switching providers 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 affects the benefits, or it can be transferred to the Riester contract of the spouse. For the pension phase, there are options such as a guaranteed pension period.
What costs are associated with a Riester contract?
There may be closing, distribution, and ongoing administrative costs. These can vary greatly depending on the provider and type of contract and can significantly impact the return. [1,]
Is the Riester pension worth it for low-income earners?
Yes, for low-income earners, the Riester pension can often be worthwhile, as their personal contribution can be very low due to state allowances, resulting in a high funding rate. [3,]
