To many people, it may seem like a far-fetched dream, but to an increasing number, early retirement is becoming an everyday reality. For some time now, workers in Germany have been able to pay additional contributions towards their pension in order to be able to retire early without penalties. The latest figures show that the scheme is becoming more and more popular - but it costs a pretty penny.

Voluntary pension contributions on the up

The Deutsche Rentenversicherung, the umbrella organisation covering all statutory pension schemes in Germany, recently announced that they received 207 million euros of voluntary (extra) pension contributions in 2018. 

That’s more than eight times the 24 million euros that were received in 2015. This is perhaps partly due to the so-called “Flexirentengesetz” (Flexi-Pension Law), passed in July 2017, which enabled workers to start making voluntary payments from the age of 50, rather than 55.

Retiring early costs you in Germany

Under the current system, anyone who wishes to retire before the statutory retirement age of 65 years and seven months (going up to 67 by 2029) pays a so-called age factor (Zugangsfaktor) penalty.  For every month that you retire early, 0,3 percent is deducted from your pension entitlement. This works out at 3,6 percent less pension per year of early retirement. 

So, as the latest figures from Deutsche Rentenversicherung show, if you expect a monthly pension of around 2.400 euros and you want to retire two years earlier, you’ll lose 172,80 euros per month. To avoid this penalty, it is possible to make additional payments into your pension to offset the years of missed contributions, either as a lump sum or in instalments. The figures show, however, that this option is only really open to those on high salaries. 

Early retirement only for the high-earners

For example, to avoid the 172,80 deduction mentioned above, someone expecting a monthly pension benefit of 2.400 euros would need to pay an additional 40.766 euros into their pension pot to retire two years early. For four years, an incredible 88.389,82 euros is required. 

Clearly, your average worker in Germany is not going to have that kind of money lying around, but that state does allow you to spread the payments out over several years and also makes the additional contributions tax-deductible as special expenses on your tax return.