Contributing to a Private Pension: Strategies for Securing Your Financial Future
17 Jun 2025
5
Minutes
Katrin Straub
CEO at nextsure
The statutory pension alone is often not enough to maintain the standard of living in retirement. By making targeted contributions to a private pension scheme, you can build an additional financial cushion. Discover how to structure your contributions and which aspects you should consider.
The topic in brief and concise terms
Regular contributions to a private pension plan are crucial to closing the pension gap; even small amounts add up over the years.
The private pension offers tax advantages during the payout phase, as often only the small earnings portion is taxed.
Pay attention to the cost structure (termination, administration, fund costs) and make use of flexible payment and withdrawal options.
Laying the Foundation: Understanding the Importance of Regular Contributions
The foundation of a solid private pension plan is consistent contribution payments. Even with monthly instalments, a substantial capital can accumulate over many years. The German pension landscape is based on a three-tier 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 faces challenges due to demographic changes, which highlights the necessity for private contributions. Engaging early with the topic of 'paying into private pensions' secures your financial flexibility in old age.
Optimise Post Design: Utilise Flexibility and Options
Modern private pension insurances offer a high degree of flexibility when it comes to contributions. You can often choose between monthly, annual, or one-time payments. Special contributions, for example, from a Christmas bonus, are possible at any time with many contracts and additionally increase the accrued capital. Some providers even allow contribution breaks during financially strained times, without having to terminate the contract directly. The amount of contributions should be adjusted to your financial situation and your retirement goals; a pension calculator can provide initial guidance here. Keep in mind that a longer contribution period often leads to a better outcome. The ability to adjust contributions is an important aspect when it comes to making private pension contributions.
Your options for configuring contributions often include:
Regular monthly payments starting from, for instance, 50 euros.
Annual one-off payments to take advantage of bonuses.
Flexible additional payments up to a certain amount per year.
The option to increase contributions by, for example, five percent annually.
Optional contribution breaks for up to 24 months.
This flexibility allows the pension scheme to be adapted to changing life circumstances, enhancing the appeal of private pension insurance.
Mastering Tax Aspects: Keeping an Eye on Deposits and Withdrawals
During the accumulation phase, contributions to a traditional private pension scheme are generally not tax-deductible, unlike the Riester or Rürup pensions. The major advantage becomes evident during the payout phase: with a lifelong pension payment, only the so-called earnings portion is taxed. This is legally specified under § 22 of the Income Tax Act (EStG) and depends on your age at the start of the pension – for example, at 65, it is only 18 percent. This means that for a monthly pension of 1,000 euros, only 180 euros would be taxable at an earnings portion of 18 percent. In the case of a lump-sum payment, under certain conditions (contract duration of at least twelve years, payout after the age of 62), the earnings may be half tax-free. A precise understanding of the tax treatment is essential when contributing to your unit-linked pension insurance.
Considering Return Opportunities: Classic vs. Unit-Linked Products
When paying into a private pension, you often have the choice between classic and unit-linked options. Classic contracts usually offer a guaranteed minimum interest rate, which is often low due to the current interest rate environment, for example, 0.25 per cent in 2022. Unit-linked pension insurance invests your contributions in investment funds, offering higher return opportunities but also carrying market risks. Many insurers now also offer hybrid models that combine security and the potential for returns. Choosing the right product largely depends on your risk tolerance and investment horizon. Consider carefully which savings form is best suited for your private additional pension.
A comparison of investment types shows different emphases:
Classic pension insurance: Focus on security with guaranteed interest (currently low, e.g., 0.25 per cent).
Unit-linked pension insurance: Higher return potential through equities/fund investments, but also with higher risk.
Hybrid models: Combination of guarantee portion and fund investment for a balanced strategy.
Indexed policies: Participation in an index with often limited downside risk.
The choice of an investment type significantly influences the development of your contributions until retirement begins.
Keeping Costs in Mind: Ensuring Transparency and Efficiency
The costs of a private pension insurance can reduce the return and should therefore be carefully examined. Typical costs include initial sales charges, administrative costs, and fund costs for unit-linked policies. For several years now, insurers have been required to disclose effective costs, which indicate the reduction in yield due to costs in percentage points. A cost ratio of over two percent is often considered too high and can significantly reduce the net return. When comparing offers, pay attention not only to promises of returns but also to clear disclosure of all fees. Reducing costs by just one percentage point can make a difference of several thousand euros over decades.
Plan Payout Phase: Options and Design Tips
At the end of the saving phase, you usually have the choice between a lifelong monthly pension or a one-time lump-sum payment. The decision depends on your personal situation and financial goals. A lifelong pension provides security, as it is paid regardless of your life expectancy. The one-time lump-sum payment offers flexibility for larger purchases, but requires disciplined further investment. There are also flexible pension models such as the dynamic pension, where the payout can increase annually, or partially dynamic variants. Inform yourself early about your options for how you would like your private pension to be paid out.
Important considerations for the payout phase are:
Lifelong pension: Guaranteed income until the end of life, often with favourable earnings-related taxation.
One-time lump-sum payment: Full control over the capital, consider tax aspects (partial income method).
Pension guarantee period: Secures the pension payment for a specific period, also payable to dependants in the event of death.
Dynamic pension models: Can offer inflation compensation, but often start with a lower initial pension.
Survivor protection: Check options such as premium refunds or widow's/orphan's pension.
Careful planning of the payout phase is crucial to optimally benefit from the fruits of your long-term contributions.
Deepen Expert Knowledge: Legal Foundations and Recent Judgments
The taxation of private pensions is governed by the Income Tax Act (EStG), particularly in § 22 EStG. This section defines other income, which also includes annuities, and sets the table for the percentage of return. For contracts concluded before 2005, different tax regulations may apply, especially in the case of capital payout. The Federal Fiscal Court (BFH) has clarified aspects of pension taxation in various rulings, for example, the tax exemption of pension payments from old contracts with a capital option up to the accumulation of the saved capital (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 questions, consulting a tax expert or a specialised insurance advisor can be advisable.
Our expert tip: Think long-term and stay flexible
More useful links
Deutsche Rentenversicherung offers comprehensive information on the various options for retirement provision.
The Deutsche Rentenversicherung explains the three-pillar model of retirement provision in Germany.
A glossary entry on private retirement provision can be found at the Deutsche Rentenversicherung.
The Rentenübersicht is the central point for an overview of your various pension entitlements.
The Deutsche Rentenversicherung provides information on who may benefit from the Riester pension.
The official website of the Zentrale Zulagenstelle für Altersvermögen (ZfA) offers further information.
Even just before retirement, the Deutsche Rentenversicherung offers tips on retirement provision.
A comprehensive PDF on private retirement provision from A to Z is available for download at the Deutsche Rentenversicherung.
Find out more about the responsibilities of the Zentrale Zulagenstelle für Altersvermögen (ZfA) on their website.
FAQ
Is it still worthwhile to pay into a private pension insurance today?
Yes, contributing to a private pension plan remains a crucial component of retirement planning to close the gap left by the state pension and to maintain your standard of living in retirement. The flexibility and tax benefits during the payout phase are key reasons for this.
What are the costs associated with depositing into a private pension?
Typical costs include initial and distribution costs (often charged in the first five years), ongoing administrative expenses, and additional fund charges for unit-linked policies. Pay attention to the declared effective costs.
How flexible am I with the deposits?
Modern contracts offer great flexibility. You can often adjust the contribution amount, make special payments, or even take breaks from contributions.
What is the difference between traditional and unit-linked pension insurance in terms of contributions?
In the traditional option, your deposits are invested securely with a guaranteed interest rate. In the fund-linked option, your contributions are invested in mutual funds, which offer higher potential returns but also come with risks.
How is my private pension taxed if I choose to have the capital paid out in a lump sum?
If the contract has been in place for at least twelve years and the payout occurs after the age of 62, usually only half of the income (difference between payout and contributions made) is taxed at your personal tax rate (half-income procedure).
What does the taxation of the profit share mean in the case of a monthly pension payment?
For lifelong pension payments, only a small, legally determined percentage of the pension (the yield portion, depending on the age at the start of the pension) needs to be taxed. If the pension begins at the age of 65, the yield portion is, for example, 18 percent.
