Paying into a Private Pension: Strategies for Securing Your Financial Future
17.06.25
11
Minutes
Katrin Straub
Managing Director at nextsure
The state pension alone is often not enough to maintain your standard of living in retirement. By making targeted contributions to a private pension insurance policy, you build up an additional financial cushion. Find out how to structure your contributions and which aspects you should bear in mind.
The topic in brief and concise terms
Regular contributions to a private pension insurance scheme are crucial to closing the pension gap; even small amounts add up over the years.
Private pensions offer tax advantages in the payout phase, as often only the small earnings portion is taxed.
Pay attention to the cost structure (initial, administrative and fund costs) and use flexible deposit and withdrawal options.
Laying the Foundations: Understanding the Importance of Regular Deposits
The basis of a solid private retirement provision is the consistent payment of contributions. Even with monthly instalments, a substantial amount of capital can build up over many years. The German pension landscape is based on a three-pillar model, with private provision playing an increasingly important role. Many underestimate that even small but regular contributions over a period of 30 years can lead to a significant additional pension. The pay-as-you-go system of the statutory pension is facing challenges due to demographic change, which underlines the need for private contributions. Early engagement with the topic of “paying into a private pension” secures your financial flexibility in retirement.
Optimising contribution design: making use of flexibility and options
Modern private pension insurance policies offer a high degree of flexibility when it comes to contributions. You can often choose between monthly, annual or one-off contributions. Additional payments, for example from a Christmas bonus, are possible at any time with many policies and further increase the capital saved. Some providers even allow contribution pauses in financially tight times without having to cancel the policy directly. The amount of contributions should be tailored to your financial situation and your retirement provision goals; a pension calculator can provide an initial indication here. Bear in mind that a longer contribution period often leads to a better result. The ability to adjust contributions is an important aspect when it comes to paying into a private pension.
Your options for structuring contributions often include:
Regular monthly payments starting at, for example, 50 euros.
Annual lump-sum payments to make use of bonuses.
Flexible top-up payments up to a certain amount per year.
Option to index contributions by, for example, five per cent per year.
Optional contribution pauses for up to 24 months.
This flexibility makes it possible to adapt retirement provision to changing life circumstances, which increases the appeal of private pension insurance.
Mastering Tax Aspects: Keeping an Eye on Deposits and Withdrawals
During the savings phase, contributions to a traditional private pension insurance policy are generally not tax-deductible, unlike Riester or Rürup pensions. However, the major advantage becomes apparent in the payout phase: for a lifelong pension payment, only the so-called taxable earnings portion is taxed. This is legally set out in Section 22 of the Income Tax Act (EStG) and depends on your age when the pension starts – at 65, for example, it is only 18 per cent. This means that, of a monthly pension of 1,000 euros, only 180 euros would be taxable at an earnings portion of 18 per cent. In the case of a lump-sum payout, under certain conditions (contract term of at least twelve years, payout after the age of 62), half of the gains may be tax-free. A precise understanding of the tax treatment is essential if you pay into your unit-linked pension insurance.
Considering Return Opportunities: Traditional vs Fund-Linked Products
When paying into a private pension, you often have the choice between traditional and unit-linked options. Traditional contracts usually offer a guaranteed minimum interest rate, but this is often low at present due to the level of interest rates, for example 0.25 per cent in 2022. Unit-linked pension insurance invests your contributions in investment funds and offers higher return potential, but also carries market risks. Many insurers now also offer hybrid models that combine security and return potential. The choice of the right product depends heavily on your risk appetite and investment horizon. Think carefully about which form of saving is best suited to your private supplementary pension.
A comparison of the investment options shows different focuses:
Traditional pension insurance: focus on security with a guaranteed interest rate (currently low, e.g. 0.25 per cent).
Unit-linked pension insurance: greater return potential through equities/fund investments, but also higher risk.
Hybrid models: a combination of guaranteed portion and fund investment for a balanced strategy.
Index-linked policies: participation in an index with often limited downside risk.
The decision for one type of investment significantly influences the development of your contributions up to retirement.
Keeping an Eye on Costs: Ensuring Transparency and Effectiveness
The costs of a private pension insurance policy can reduce returns and should therefore be examined carefully. Typical costs include acquisition and distribution costs, administration costs, and fund charges for unit-linked policies. For some years now, insurers have been required to disclose effective costs, which indicate the reduction in investment performance caused by costs in percentage points. A cost ratio of more than two per cent is often considered too high and can significantly reduce net returns. When comparing offers, pay attention not only to return promises, but also to clear disclosure of all fees. A reduction in costs of just one percentage point can make a difference of several thousand euros over decades.
Planning the Payout Phase: Options and Design Tips
At the end of the accumulation phase, you usually have the choice between a lifelong monthly annuity or a one-off lump sum payment. The decision depends on your personal situation and your financial goals. A lifelong annuity offers security, as it is paid regardless of your life expectancy. The one-off lump sum payment offers flexibility for larger purchases, but requires disciplined further investment. There are also flexible annuity models such as the dynamic annuity, where payments can increase each year, or partly dynamic variants. Find out early about your options for how you would like to have your private pension paid out.
Important considerations for the payout phase are:
Lifelong annuity: Guaranteed income until the end of life, often with favourable taxation of the earnings portion.
Lump sum payment: Full control over the capital, take tax aspects (half-income method) into account.
Guarantee period: Secures pension payments for a certain period, even in the event of death to surviving dependants.
Dynamic annuity models: Can provide inflation compensation, but often start with a lower initial annuity.
Surviving dependants’ protection: Check options such as return of contributions or widow’s/orphan’s pension.
Careful planning of the payout phase is crucial in order to make the most of the fruits of your long years of contributions.
The taxation of private pensions is regulated in the Income Tax Act (EStG), in particular in section 22 EStG. This paragraph defines other income, which also includes annuities, and sets out the table for the income portion. For contracts concluded before 2005, different tax rules apply in some cases, particularly for lump-sum payment. The Federal Fiscal Court (BFH) has clarified aspects of pension taxation in various rulings, for example regarding the tax exemption of pension payments from old contracts with a capital option until the accumulated capital is reached (BFH, ref. VIII R 4/18). It is advisable to keep an eye on current rulings and changes in legislation, as these can affect your net pension. For complex issues, advice from a tax expert or a specialised insurance adviser can be worthwhile.
Our Expert Tip: Think Long Term and Stay Flexible
Start contributing to your private pension as early as possible, even with smaller amounts from €25 per month. The compound interest effect is particularly strong over many years. Make use of the flexibility of modern contracts: adjust your contributions to suit your personal circumstances and check options for additional payments or pauses. Compare at least three offers in terms of costs and return potential before signing a contract. Pay attention to transparent cost structures; the effective costs should ideally be below 1.5 per cent. Review your contract every five to ten years and, if necessary, adapt it to new goals or market conditions. A combination with a Riester pension can bring additional benefits for certain groups of people.
Request an individual risk analysis now: have your insurance situation checked free of charge and receive concrete suggestions for optimisation.
More useful links
German Pension Insurance offers comprehensive information on the various options for retirement provision.
The German Pension Insurance explains the three-pillar model of retirement provision in Germany.
You can find a glossary entry on private retirement provision at the German Pension Insurance.
The Pension Overview is the central place for an overview of your various pension entitlements.
The German Pension Insurance provides information on who the Riester pension is worthwhile for.
The official website of the Central Allowance Office for Retirement Assets (ZfA) offers further information.
Even shortly before retirement, the German Pension Insurance gives tips on retirement provision.
A comprehensive PDF on private retirement provision from A to Z is available for download at the German Pension Insurance.
Find out more about the tasks of the Central Allowance Office for Retirement Assets (ZfA) on its website.
FAQ
Is paying into a private pension insurance policy still worthwhile today?
Yes, paying into a private pension plan remains an important part of retirement provision, helping to close the gap in the state pension and secure your standard of living in retirement. The flexibility and tax advantages during the payout phase are key arguments in favour of this.
What costs are incurred when paying into a private pension insurance policy?
Typical costs include initial and distribution costs (often charged over the first five years), ongoing administrative costs and, in unit-linked policies, additional fund costs. Pay attention to the stated effective costs.
How flexible am I with deposits?
Modern contracts offer a high degree of flexibility. You can often adjust the contribution amount, make additional payments or take contribution breaks.
What is the difference between a classic and unit-linked pension insurance policy when it comes to contributions?
In the classic variant, your contributions are invested with a focus on security and a guaranteed interest rate. In the unit-linked variant, your contributions are invested in funds, which offers higher return opportunities but also involves risks.
How is my private pension taxed if I have the capital paid out as a lump sum?
If the contract has run for at least twelve years and the payout is made after the age of 62, usually only half of the earnings (the difference between the payout and the contributions paid in) is taxed at your personal tax rate (half-income taxation).
What does taxation of the taxable portion mean for monthly pension payments?
With a lifelong pension, only a small, statutory percentage of the pension (the taxable portion, depending on age at the start of retirement) has to be taxed. If the pension starts at age 65, the taxable portion is 18 per cent, for example.
