The Riester pension (named after its “inventor”, the former German Minister of Social Affairs Walter Riester) belongs to the
second layer of the
German pension system. In 2002, the German government wanted to convert parts of the pension system to a direct capital cover because the pay-as-you-go system of the
German public pension is becoming less and less effective and due to demographic issues might well become unsustainable in the future.
The reason for this is the fall in birth rates in Germany and that in the future fewer contributors will be unable to finance growing numbers of pensioners with their monthly contributions.
Similar to the 401(k) plan or Roth IRA as known in the USA or SIPP in the UK, the German government promotes payments into the Riester pension with
allowances or tax benefits. At the same time, however, the state has significantly reduced the percentage of payout from the German pension insurance (DRV). Mathematically, pension entitlements were reduced as if each contributor would in future pay 4% of their gross income into a Riester pension.
Accordingly, the
Riester investor is to pay the fictitious 4% of the annual income expected by the government into the Riester pension. For example, if you earn € 4,000 gross per month (€ 48,000 per year), you actually have to pay 4% (€ 1,920) per year into the Riester contract.
However, there is an upper limit.
You can only invest € 2,100 per year max. into a Riester pension plan. Therefore it may be considered only as one of several necessary stepping stones for your pension planning.
What makes saving into a Riester plan often quite attractive are the fixed allowances from the state:
Instead of collecting these direct subsidies, the Riester investor can also deduct his or her contribution (up to € 2,100 per year) from the tax. What is more favorable for the investor is automatically calculated by the German tax office (“Günstigerprüfung”).
If both spouses pay into the pension scheme, they can both sign a Riester contract and everyone receives the basic bonus. The maximum amount of funding is then increased to € 4,200. However, the child benefit is paid only once per couple.
For the sake of clarity, we therefore recommend allocating all child allowances to one partner. If only one spouse pays into the pension insurance scheme, the other spouse is still indirectly entitled to receive funding. In order to receive the basic allowance, the second spouse only has to pay the basic amount of € 60 per year into a separate Riester contract. The subsidy limit rises to € 2,160 euros accordingly.
In such a case with a non-working spouse, it gets really attractive if you have one or more children. Because then the employee of the couple takes the full tax deductions, whereas the non-working spouse receives all children bonus payments.
Example: a spouse with three children can receive a total of € 1,075 EUR (€ 175 for the adult and € 300 each per child) from the government paid into the pension plan by just investing that € 60 per year.
If one spouse is an employee and the other is self-employed, the self-employed partner can also use a Riester plan for pension savings. Other than that, Riester plans are not permitted for the self-employed.
