state-subsidized old-age provision

Riester pension in Germany

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First things first

Riester belongs to the 2nd layer in the German pension system and is subsidized by the state. The subsidy is either a tax break or a direct subsidy to the savings plan.

The pension from the Riester contract can be claimed at the earliest at the age of 63. Upon reaching retirement age, up to 30% of the capital can be withdrawn once without losing the allowances.

Especially for families with three children and only one full-time employee, Riester is a good investment. Over € 1,000 in subsidies can be used annually, as well as the tax benefits.

The pension from the Riester contract can be paid out without disadvantages in all EU member states. If you move outside the EU, you will lose the state subsidy.

Riester Pension

Patrick Ott
Patrick Oliver Ott
Expert for insurance and finance
30. March 2022
popular form of provision since 2002

What is Riester pension?

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.

Why is Riester pension worthwhile?

What makes saving into a Riester plan often quite attractive are the fixed allowances from the state:
€ 175 euros p.a. for the adult saver (since 2018, previously € 154 p.a.)
€ 185 euros per child p.a. (born before 2008)
€ 300 euros per child p.a. (born 2008 or later)
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.
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Payment of the Riester pension

The pension, when paid out, is fully taxable and can be paid out from as early as the age of 63. You can draw out 30% of the total capital when reaching pension age without penalties. If you take out more than that, you’ll receive only the money you invested minus the allowances/subsidies and tax paybacks received.

You can draw your pension also without penalties while residing in any other EU member state. Only if you move outside the EU will you eventually lose the allowances/subsidies and tax pay-backs received while saving.

Good to know: Germany is still mostly a commission-driven market for pension advice. There are usually high commissions when you take out a Riester pension in Germany. This can be disadvantageous for you if you are staying in Germany for a limited period of time. For this reason, CR&Cie can also broker Riester contracts in variants that do not incur high acquisition costs. However, you will have to pay a direct fee to CR&Cie.

If you leave Germany and the European Union before retirement, you would have to pay back the allowances or tax benefits received. In this case, however, you should and may wait for the repayment of your pension until the start of the pension application. You will then continue to receive interest on the existing capital for years to come; the “borrowed” capital will work as a turbo-return for you. There is NO interest on the repayments.

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