Retirement provision: Statutory pension, company pension and private provision

In short: Retirement provision rests on three pillars: statutory pension, company and private provision; whoever starts early needs to save less each month.

In more detail: The statutory pension alone will not suffice for many, because the pension level falls and the population ages. So several pillars are relied on. Even with a small amount an early start pays off thanks to compound interest. Amounts and rules change; check the current status with the responsible body.

In Depth

1st pillar: Statutory pension

It is financed by pay-as-you-go: today’s contributions pay today’s pensions. Employed people pay about 18.6 % of gross pay (split with the employer). Pension points arise depending on earnings; a pension statement is provided by the German Pension Insurance. For the standard old-age pension you need at least 5 years of contributions; the retirement age rises to 67. Training periods also count.

2nd pillar: Company pension

The employer offers direct insurance, pension fund or similar. Salary conversion saves taxes and social contributions, and the employer must generally give a 15 % subsidy. Mind portability when changing jobs and taxation of the payout.

3rd pillar: Private provision

Savings plans, ETF savings plans, private pension insurance, Riester and Rürup (basic pension) with state subsidies or tax advantages. Important are costs, flexibility and realistic return assumptions. Contracts with high acquisition and administration costs are often bad.

How to start

Get an overview (pension statement), build an emergency reserve of several months’ expenses, then choose a simple, cheap route, such as a broadly diversified fund/ETF savings plan, and raise the rate with pay rises. Get independent advice (consumer advice, fee-based advisers) rather than from agents on commission. Retirement provision is a marathon, not a sprint.

See also: Social insurance, Inflation