Optimising private provision: strategies for a financially secure retirement
26.05.25
3
Minutes
Katrin Straub
Managing Director at nextsure
The state pension alone is often not enough to maintain your usual standard of living in retirement. Additional private provision is therefore essential for many people. Discover how to plan your private pension and avoid pitfalls.
The topic in brief and concise terms
Private provision is essential to close the gap in the state pension and secure your standard of living in retirement.
When choosing a private pension insurance policy, pay particular attention to the effective costs, as these can have a significant impact on returns; figures below two per cent should be aimed for.
State subsidies such as Riester allowances and tax advantages can make private pension provision more attractive; check whether you are eligible.
Laying the foundation: Understanding the three pillars of retirement provision
The German retirement provision system rests on three pillars to ensure comprehensive protection. The first pillar is the statutory pension insurance, which is compulsory for most employees. Around 60 per cent of employees also have company pension provision (bAV), the second pillar. The third pillar, private provision, closes individual gaps in cover and secures the accustomed standard of living. Early planning across all three pillars is crucial for financial security in retirement. The private pension insurance plays an important role here. This understanding is the first step towards solid retirement funding.
Quick Facts: Private pension at a glance
Private pension provision offers tailored solutions for your individual needs in later life. Here are the key points at a glance:
Flexibility: Many contracts allow adjustments to contributions and payout options, often from the age of 62 onwards.
Return potential: Unit-linked policies offer higher return potential than traditional models, but also involve risks.
Tax advantages: In the payout phase, only the earnings portion is often taxed, which can result in a lower tax burden.
State support: For certain products such as the Riester pension, there are allowances and tax advantages; up to 2,100 euros per year can be deducted as special expenses.
Cost transparency: Pay attention to effective costs; these can reduce returns by one to three percentage points.
Security: Traditional products offer guarantees, while modern products often combine security and return potential.
This quick overview helps you categorise the key aspects of private pension provision before we delve deeper into practice.
Practical check: returns, costs and selecting suitable products
When choosing a private pension insurance policy, expected returns and costs are decisive factors. Costs can significantly reduce returns; for example, with a monthly contribution of 200 euros over 35 years, initial charges of more than 3,500 euros may be incurred. An expense ratio above two per cent is often considered too expensive. Unit-linked insurance policies offer the potential for returns of, for example, five to seven per cent, but are subject to fluctuations. Traditional pension insurance policies with a guaranteed interest rate (currently one per cent since January 2025) are more security-oriented, but offer lower returns. A comparison of different offers is essential. Consider which risk-return combination suits your life planning before deciding on a product.
Worked examples and comparison: What private provision can achieve
A concrete example illustrates the impact of costs and returns. Assume you pay in €100 a month for 30 years. With an assumed annual net return of three per cent after costs, this would result in a capital sum of around €58,274. If costs reduced the return by one percentage point (that is, only two per cent net return), the amount would be only around €49,273 – almost €9,000 less. Even small differences in costs have a major long-term impact. Therefore, compare not only the advertised gross return, but always the effective costs and the guaranteed minimum benefit. A unit-linked pension insurance policy can offer greater opportunities, but here too the costs are crucial. Choosing the right product depends heavily on your willingness to take risks and your financial goals.
Expert depth: tax aspects and legal framework
The tax treatment of private pension provision is an important aspect. Contributions to non-subsidised private pension insurance policies are usually not tax-deductible during the accumulation phase (exception: old contracts concluded before 2005). In the payout phase, however, you benefit: with a lifetime annuity payment, only the so-called income share is taxed. Under § 22 No. 1 sentence 3a bb EStG, this depends on the age at the start of the pension; for example, if you retire at 67, it is only 17 per cent. Our expert tip: Check whether a lump-sum payment or a lifetime annuity is more favourable for your tax situation. For lump-sum payments from contracts from 2005 onwards, half of the gains are taxable if the contract ran for at least twelve years and the payment is made from the age of 62. Different rules apply to subsidised products such as the Rürup pension; here, contributions are tax-deductible, but the pension is later fully taxable. The exact regulations can also be found in the Income Tax Act and the Pension Provision Contracts Certification Act. These details are important for optimising your retirement provision.
Current rulings and consumer protection: What you need to watch out for
Recent court rulings strengthen consumers' rights in the area of private pension insurance. An important issue is the annuity factor, which determines how much pension is paid out per €10,000 of capital. Several courts, such as the Berlin Regional Court (case no. 4 O 177/23, judgment of 30 April 2025), have ruled unilateral reductions of the annuity factor by insurers to be invalid. Our expert tip: Check your contract documents and pension information for possible adjustments to the annuity factor and have them reviewed by a lawyer if necessary. Consumer advice centres also repeatedly point to high costs or incorrect cancellation instructions, which in some circumstances could make it possible to cancel the contract even years later. Look out for transparent contract terms and do not let yourself be put under pressure. A good distinction between the types of contract is helpful here. These legal aspects can have a significant impact on your claims.
To design your private pension provision optimally, you should proceed systematically. Here are specific recommendations for action:
Needs analysis: Determine your retirement gap by comparing your expected state pension with your financial needs in retirement (approx. 80 per cent of your last net income).
Compare quotes: Obtain at least three quotes from different providers and compare effective costs, guarantees and flexibility.
Check incentives: Clarify whether state-subsidised products such as Riester or Rürup pensions are suitable for you and how they fit into your tax return.
Understand the contract details: Read the product information sheet and the General Insurance Conditions (AVB) carefully. Pay attention to the rules on the annuity factor and the costs.
Plan for the long term: Start saving for your pension as early as possible to benefit from compound interest. Even small monthly contributions from €25 can make a difference in the long term.
Regular review: Adjust your retirement planning strategy to your life situation every five to ten years.
These steps will help you make an informed decision about your private retirement provision and thus pave the way for a financially secure retirement.
nextsure: Your partner for private pension provision
The complexity of private pension provision requires careful planning and tailored solutions. As a digital insurance portal, nextsure offers transparent comparisons and expert advice to help you find the right private pension policy for your needs. We help you choose the best option from a wide range of products, from traditional pension insurance to the unit-linked variant. Our experts support you in taking advantage of return opportunities and avoiding cost traps. With our digital platform, you can organise your retirement provision in a simple and easy-to-understand way. We support you from the initial information stage through to completion and beyond. Use our expertise for your financial future.
More useful links
The Federal Ministry of Labour and Social Affairs offers statistics on Riester contracts and supplementary private pension provision.
The Federal Statistical Office (Destatis) publishes press releases that may contain relevant figures on retirement provision.
The German Pension Insurance provides comprehensive statistics and reports on the statutory pension insurance scheme.
The Federal Ministry of Finance offers statistics on Riester subsidies up to 2023.
The German Pension Insurance offers a PDF publication, 'Pension Insurance in Figures 2024', for download.
The Deutsche Bundesbank publishes speeches on the sustainability of old-age provision.
Wikipedia offers a comprehensive article on the topic of retirement provision.
Wikipedia explains pension insurance as endowment insurance.
Wikipedia explains the Retirement Assets Act.
The Federal Statistical Office (Destatis) provides information on people covered by statutory pension insurance.
FAQ
What is the difference between the state pension and a private pension?
The statutory pension is part of the state compulsory system and is based on a pay-as-you-go system. The private pension is a voluntary, funded supplementary provision to top up the statutory pension and secure your standard of living in old age.
What types of private pension insurance are there?
There are traditional pension insurance policies (with a guaranteed interest rate), unit-linked pension insurance policies (higher return potential, but also risks), Riester pension (state-subsidised), Rürup pension (basic pension, tax-advantaged, mainly for the self-employed) and hybrid models. For more information, see private pension insurance.
How is private pension taxed upon payout?
For lifetime pension payments, only the taxable portion is taxed, the amount of which depends on the age at which the pension starts (e.g. 17 per cent at age 67). For lump-sum payment (contracts from 2005 onwards), half of the gains are taxable if the contract ran for at least 12 years and the payout is made from the age of 62.
What happens to my private pension in the event of death?
This depends on the contract. Often there are options such as a guaranteed annuity period for dependants or a lump-sum payout of the remaining balance. These options should be clarified when the contract is concluded.
How do I find the best private pension insurance for me?
Compare offers in terms of costs (effective cost rate), return opportunities, guarantees, flexibility and contract terms. Independent advice, such as that offered by nextsure, can help you find the right solution for your individual situation.
Are contributions to private pension insurance tax-deductible?
Contributions to privately funded private pension insurance policies (third pillar) are generally not tax-deductible (exception: existing policies taken out before 2005). For Riester and Rürup pensions, contributions can be claimed as special expenses within the limits of maximum amounts. You can also find details under retirement provision tax return.
