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PENSIONS

How to maximize your German pension – even if you plan to retire elsewhere

Expat financial adviser Patrick Ott tells The Local how to plan for a pension: even if you are self-employed, still in the early stages of a career, or plan to retire outside of Germany.

How to maximize your German pension - even if you plan to retire elsewhere
Photo: DPA

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If you are an employee in Germany, you will most likely notice nearly a fifth of your income disappearing every month from your payslip into a retirement fund. Those losses are what expat adviser Patrick Ott considers an ever-growing gain at retirement age.

He talked with The Local about how the German pension plan, or retirement savings, doesn’t just benefit full-time employees, but also freelancers, families and those who plan to retire in other corners of the world.

“The German pension plan is a great social welfare system that’s been around since Germany still had an emperor,” says Ott, a senior financial adviser with Chambervelt, Roose and Co.

Who pays?

If you are working full-time in Germany, no matter the amount of time, pension contributions tend to be non-negotiable and are required by law. Yet freelancers, anyone working less than 15 hours a week, and those in Germany on short-term contracts are only legally required to pay health insurance.

For the typical state pension (gesetzliche Rentenversicherung) employees pay around 19 percent of their salary into the system, with employers matching that contribution. It’s possible to claim a German pension after only five years of working in Germany, says Ott. The first step is to make sure that you have been working for a German employer who has been contributing to the Deutsche Rentenversicherungbund (DRB).

You can calculate your German pension with this online tool

Anyone who has a German pension, regardless of where they live now, should continue to update the DRB about their residential address, advises Ott. “Then you get yearly statements that tell you what monthly pension you can expect when you reach the pension age.”

Contributions to public pensions are usually capped. Therefore, you are no longer required to make contributions from your salary above a defined amount (€78,000 in 2018).

German retirement age

Photo: DPA

At the moment, the official pension age for both men and women in Germany is a standard 67 years for everyone born after 1964. Nonetheless, anyone can claim an early retirement in Germany if they have contributed to a pension for at least 35 years, in which case they can retire at 63 with a state pension.

Still in many cases it might be best to stick out working for a couple more years, as retiring early could be penalized with a reduction of the German pension of up to 14.5 percent.

Benefiting from a German pension after leaving the Bundesrepublik

Some countries such as the US, Canada and Australia have agreements with Germany allowing an individual to collect a pension with the employee's portion of the contribution from both countries if the person has worked more than 60 months in Germany. If you have worked elsewhere within the EU, you may also be able to apply these years towards a German pension, as well.

“There are cases where pensions are paid out separately, and in some cases it can be combined,” says Ott. “If you’ve lived for three years in London and paid into the British public system, and then you come to Germany and work here for two years, you would have 60 months compiled and would get the money back.”

Within the EU, however, both the employer and employee portion of the pension are paid back upon retirement due to a mutual recognition of social welfare systems.

What if you work in Germany for less than 60 months and then move? For non-EU citizens, after two years living outside of Germany and the EU you can file a claim with the Deutsche Rentenversicherung (DRV) to have the employee’s contribution of the public pension paid out to you, even before retirement age, says Ott.

Freelancer pension plans

Ott recommends that freelancers pay into their own private pension plan. As of 2018, a person can put up to €23,362 per month away – or €46,724 as a married couple – and receive an 88 percent deduction which can be made on general income. That figure will grow to 100 percent by 2025.

The self-employed generally don’t have access to the public pension system but can take advantage of a so-called RÜRUP plan, which protects the money from everyone (including the investors themselves) until retirement age. They can also sign up for a German bAV (betriebliche Altersvorsorge, or company pension scheme) if they are incorporated, and pay themselves as a director or employee.

As with the public pension, the money that is deposited cannot be removed until at least the age of 63. “For self-employed people, having a RÜRUP pension is a huge security,” says Ott. “You can’t even be tempted in hard times to cash into your old age pension or to get a loan or a mortgage based on your pension. That is your nest age for old age.”

Photo: DPA

RIESTER: A sound plan for families

The RIESTER plan came about in 2004, to help bridge the gap the German government left when it reduced the public pension. If you are an employee and have a spouse and children, each family member benefits from a direct subsidy paid for by the government — an amount increased in January this year.

Then they can write off the payments they make in their income declaration against their taxable income. The current maximum amount per year that can be invested into the RIESTER plan is set at €2,100.

For someone with a non-working spouse and children, the spouse can be set up with a €5 per month contribution into their own RIESTER plan. Then the government pays an additional €175 per year for the spouse as a direct subsidy, plus €300 for each child born after 2008, and €175 for each one born before 2008.

Taking additional steps for the future

Germany’s pension system was originally based on the belief that a larger, younger population could support an older, ageing one. But now “we are a shrinking population, with fewer and fewer people paying into the system,” says Ott.

He recommends people balance their pension savings with private savings that they can dip into down the road should they need capital.

He urges expats not to make a “typical German mistake” of putting all extra income into a pension plan. “When something happens they have to figure out which of the pension plans can be accessed and where they can get capital, which comes with huge losses and penalties. So you basically destroy a lot of the performance that you build up.”

A standard rule of thumb, says Ott, should be putting five percent in pension plans, and five percent in investment plans with passive investment funds like ETFs (exchange traded funds) so that there is always some capital left on the side for investments. “Then when you reach retirement age,” he says, “you can still use other capital that you have accumulated.”

To sum it up, here is your checklist of steps to take to prepare for a German pension

  • Check how much you have accumulated so far through the Deutsche Rentenversicherungbund (DRB), or German Pensions Agency.

  • If you’re self employed or don’t have an occupational pension, consider establishing a private savings in order to compensate.

  • If you have a family in Germany, consider setting up a RIESTER Plan.

  • Think about whether you want to set up additional pensions savings.

  • Keep the DRB informed about your address if you leave the country.

Member comments

  1. Unfortunately this article doesn’t give the whole truth I became self-employed approximately 14 years ago and it’s possible to continue paying into the Deutsche rentenversicherung as long as you accept that you will be paying not only your own part of the contribution but also the employers bad as well.
    This year they have now introduced a new minimum payment which means if you are a low earner they take that into account – although previously this was not the case.

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For members

WORKING IN GERMANY

7 tips for how to survive as a freelancer in Germany

Taking the decision to go it alone and freelance in Germany can be a daunting prospect. But, if you do it right, it can be an exciting and liberating path. Here are some of our top tips on how to survive.

7 tips for how to survive as a freelancer in Germany

1. Get a tax advisor

The German tax system is complicated, even for Germans. All the associated paperwork uses the Amtsprache (authority language) which is more like legalese than ‘normal’ German, and mistakes when filling out tax forms can cause you, at best, a massive headache and, at worst, a costly fine. So it’s best that you employ someone who knows what they’re doing to help you out.

That person is called a Steuerberater (tax advisor) in Germany. They will help you register with the tax office, correspond with them and submit your tax declarations.

Be aware that, in Germany, different deadlines apply for tax returns depending on whether you employ an official tax advisor or not. If you are doing the tax return on your own, the deadline for submitting your annual tax return is earlier than if you use a tax advisor’s services. 

READ ALSO: What NOT to do when you’re freelancing in Germany

When looking for a tax advisor, a top tip is to use your network to get recommendations. Ideally, you want someone who will do more than just fill in the forms for you, but who will actually advise you on how best to manage your business finances so that you can make tax savings.

2. Keep your accounting in order

The better you keep your own accounts in order, the easier it will be for your tax advisor to compile your tax declarations and therefore the cheaper their services will be.

As a freelancer, there are a lot of costs you can deduct from your taxes – from train tickets, working materials, to meals out – so it’s best to keep hold of all your receipts and to keep them in good order.

2 euros and 50 cents lie on a receipt in a beer garden. Photo: picture alliance/dpa | Peter Kneffel

In Germany, you’re obliged to keep hold of receipts for two years, in case of a tax inspection, so it’s a good idea to photocopy the type of machine-printed receipts you get from restaurants so that they stay legible for a long time.

There are also a few things to be aware of when writing your own invoices. Firstly, make sure that you include your tax number. This isn’t the 11-digit Steueridentifikationsnummer that everyone gets when registering in Germany, but the 10-digit Steuernummer you get from the Finanzamt after registering yourself as a freelancer. 

Most companies won’t pay you if you don’t have this on your invoices so make sure you include it.

You should also make sure that you number your invoices properly – ideally in ascending order so that you can easily keep track of them. You are not allowed to issue two invoices with the same number and if you do so and the finance office notices, you could face an inspection of your whole accounting system.

There are numerous great accounting software programmes you can use to help you, such as Lexoffice and Sevdesk and, even if you have to pay for them, the costs will be tax deductible!

3. Find out if you’re eligible for financial support

In Germany, there are several opportunities for freelancers to gain financial support and to cut their outgoings, and its worth finding out if you’re eligible for them.

If you’re claiming unemployment benefits under ALG 1 and are thinking about becoming a freelancer, the employment office offers a special type of financial support to help you to get your freelance business off the ground.

Called the Grundungszuschuss (“foundation grant”) the payment is a six-month grant equalling your monthly entitlement under ALG 1 plus €300 towards your insurance costs can be applied for those in receipt of this unemployment benefit.

READ ALSO: Will freelancers benefit from Germany’s €300 energy allowance?

If you are engaged in some form of artistic profession in Germany – which can include journalism to pottery – you may be entitled to membership to the Kunstlersozialkasse (artists’ social insurance).

Being a member of the KSK means you only have to pay half of your health insurance and pension contributions, and the KSK will pay the rest.

4. Work out how much you think you will earn

As with starting any business, you need to have some idea of your expected earnings from the outset.

If you’re just starting out as a freelancer, or have some freelance gigs on the side of an employment position, then it might be worth considering registering yourself as a Kleinunternehmer (“small business”).

As a Kleinunternehmer, you can currently earn up to €22.000 per year without having to charge VAT and having to submit only yearly tax declarations. 

An income tax declaration form lies on a table. Photo: picture alliance/dpa/dpa-Zentralbild | Hans-Jürgen Wiedl

Be aware that if you are registered as this kind of freelancer, you must include the following sentence in your invoices: ‘Gemäß § 19 UStG wird keine Umsatzsteuer berechnet’ which means ‘In accordance with Paragrah19 of the German VAT law, no VAT has been added to this invoice.’

READ ALSO: Everything you need to know about your German tax return in 2022

If you think you will earn more than €22.000 per year, you will need to pay Umsatzsteuer (VAT) and will have to submit tax declarations in advance and more often. Depending on how much you earn, this could be every month or every quarter. 

5. Get your insurance in order

In Germany, it’s a legal requirement to have health insurance.

If you’ve just made the move from employment to being a freelancer and want to keep the same health insurer, you should get in contact with your health insurance provider straight away to tell them about your change of circumstances. They will ask you to re-register and to tell them your projected freelance earnings for the year, so they can amend your monthly fees.

If you don’t keep your health insurer provider updated, you could continue to be charged the higher rate that you had from your previous salary.

The insurance cards of the health insurance companies DAK, AOK, Barmer and Techniker-Krankenkasse TK lie with euro notes under a stethoscope. Photo: picture alliance / dpa | Daniel Karmann

It’s not just health insurance you need to think about as a freelancer. It’s also wise to think about protecting yourself from any sort of claims that could arise as a result of any working mishaps. 

If, for example, you lose your laptop which contains confidential client information, you need to be protected against claims.

That’s why it’s good to have both Betriebshaftversicherung (business liability insurance) and Rechtschutzversicherung (legal protection insurance).

6. Plan your time wisely

All of these bureaucratic obligations take time. So it’s really important that you take account of that when planning your time. For example, planning half a day a week to deal with your invoices, filing, emails to clients, and conversations with authorities can be really beneficial when scheduling your working time. 

7. Grow your network

As a freelancer, networking is absolutely crucial to success. 

Keep an up-to-date profile on websites like LinkedIn and German equivalent XING and keep in contact with anyone you’ve ever worked with, no matter how brief the contact was. 

Having a network is not only about getting more clients, but also about building a support network in your field to exchange advice, tips and generally for your own enrichment. 

Participating in workshops related to your field, going to seminars, and meet-ups, can be great ways of broadening your network. 

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