Is it worth getting a private pension in Germany?

If you’re an expat in Germany, building wealth should feel as routine as taking your dog for a walk - it’s all about consistency and looking ahead. But when it comes to retirement, there’s more to consider than just daily habits.

Luckily, with a three-pillared pension system, Germany gives expats a number of options when it comes to saving for your golden years. In this article, financial experts LeX-Wealth dig into how the retirement system in Germany works and explore what is arguably the most important of the three pillars: the private pension. 

How does the pension system work in Germany?

Like a sturdy bar stool, Germany's pension system has three pillars, designed to provide stability and security for retirees. 

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This multi-tiered system may seem a bit complicated to those trying to navigate it for the first time, but it has its advantages. When used together in a diversified strategy, these three pillars can help to bridge any gaps in your retirement planning and set you up with a stable income for the long term. 

The three pillars of Germany’s pension system include:

1. German state pension and Basisrente (Rürup Rente)

The first pillar of Germany’s pension system comprises the Deutsche Rentenversicherung (German Pension Insurance) and the Basisrente, also known as the Rürup Rente.

The German state pension is a kind of statutory insurance that provides financial support during retirement. Contributions are mandatory for salaried employees in Germany, with amounts deducted directly from salaries and matched by employers. This system operates on a "pay-as-you-go" basis, where current workers' contributions fund the pensions of current retirees. As of 2025, the retirement age is set at 66, but this will gradually increase to 67 by 2031.

The state pension aims to provide a basic level of income in retirement, with the amount dependent on the contributions made throughout one's working life. This system may present challenges for expats who move to Germany later in life, particularly if their home country lacks a bilateral agreement with Germany that recognises previous pension contributions.

Additionally, there are growing concerns about the long-term sustainability of the Deutsche Rentenversicherung due to an ageing population and increasing numbers of retirees. For most people, the state pension alone will not provide an adequate income in retirement. To address these challenges, individuals can also opt for the Basisrente, which is particularly suited for self-employed individuals and higher earners. It offers tax benefits and a stable, guaranteed pension, but cannot be accessed until age 62.

2. Company pension schemes (bAV) and Riester-Rente

The second pillar is built on employer-sponsored pensions, known as the betriebliche Altersvorsorge (bAV), and the Riester-Rente.

Occupational pensions are offered by German employers to supplement the state pension. These schemes can significantly enhance an individual’s retirement income and may be familiar to those accustomed to employer-sponsored retirement plans in other countries. In Germany, occupational pensions often involve contributions from both the employer and employee, similar to systems like the 401(k) plan in the United States. Matching contributions are a common feature and can be an attractive part of an employer’s benefits package.

There are various forms of occupational pensions, including direct pension commitments and employer-sponsored insurance policies, with the specifics varying based on the employer and industry.

The Riester-Rente, another component of this pillar, is a state-subsidised private pension scheme targeted at employees and those paying into the state pension system. It offers incentives like government bonuses and tax benefits, making it an appealing option for those seeking additional retirement income beyond their occupational and state pensions.

3. Private pension plans and capital life insurance policies

The third pillar consists of private pension plans (Privatrente), and unit-linked capital life insurance policies.

This pillar represents the individual’s personal efforts in securing their retirement (and preserving wealth) through private savings and investments that are neither supported by the state nor their employer. It includes various private pensions and capital life insurance policies, which allow for flexible wealth planning based on personal financial goals and risk tolerance.

While participation in the third pillar is voluntary, it is becoming increasingly crucial as the state pension system faces pressures from inflation and rising retirement costs. Private pension plans offer a variety of choices, from conservative guaranteed products to more dynamic investment-linked policies, catering to a range of needs and preferences.

Talk to LeX-Wealth to discuss starting your own private pension. They can work with you to ensure you get a pension that works for you and your goals.

What is a private pension and how does it work? 

Private pension insurance (also known as Privatrente or private Rentenversicherung) is a form of retirement savings designed to supplement the first two pillars of Germany’s pension system.

It works like this: You sign up for a plan, make a lump-sum or regular contribution to that plan, and then receive a regular pension or lump sum payment when you retire. How much money is paid out at retirement - and, to a certain extent, how it is taxed - depends on several factors, including your age at retirement and the amount you contributed over the course of the plan. This makes sense, as the pension is tied to the capital you accumulated from all those years of paying premiums.

A key advantage of private pension policies is their potential to grow your wealth more effectively, thanks to the ability to link your contributions to global market performance. Many pension plans allow you to invest in high-quality funds, which are designed to capture growth from leading companies worldwide. This provides the opportunity to see returns of 8 percent per annum (or higher) on your investment as the global economy expands.

While investing in the stock market carries some risk compared to plans with guaranteed payouts, this approach offers the opportunity for higher returns over the long term. Historically, diversified investments in the stock market have proven to be a wise choice, especially when given ample time to grow.

Choosing the right private pension plan will depend on your retirement goals and risk tolerance, but many plans offer features to provide additional security for you and your loved ones. For instance, if you pass away before reaching the age for retirement payouts, your beneficiaries can receive an agreed-upon amount.

The specifics of how a private pension works will vary by plan, but Germany offers a range of options that allow you to invest in top-quality ETFs and mutual funds in a tax-efficient way. Your personal circumstances will guide which structures are best suited to your needs. To find the specific plan that’s best for you, contact one of LeX-Wealth’s qualified advisers today.

The main benefits of a German private pension

A German private pension comes with a number of key advantages that set it apart from other retirement-planning options. These include:

Flexibility and early access

A private pension offers flexible access to your funds, allowing partial withdrawals at any time. This is ideal for expats who may face changing circumstances or need financial liquidity without being tied into a lifetime annuity. You have the freedom to draw down on your capital, live off the interest, or leave a legacy for your beneficiaries.

Significant tax advantages

Private pensions offer tax-deferred growth, exempting dividends, interest, and gains from the 26,375 percent withholding tax during the investment period. Moreover, when held for at least 12 years and accessed after age 62, only half of the profits are taxed, significantly lowering your overall tax burden in retirement.

Inheritance and beneficiary benefits

Private pension assets in Germany bypass the probate process, enabling a direct and immediate transfer to your beneficiaries upon your passing. Additionally, profits from these assets are exempt from withholding tax, offering substantial savings compared to other investment options and ensuring that more of your wealth is preserved for your loved ones.

Diverse investment options

With a wide range of investment choices, including global equities, real estate, and specialised funds, private pensions enable you to tailor your investment strategy according to your risk tolerance and financial goals. This flexibility helps optimise your retirement savings and target your desired level of returns.

Protection and security

Private pensions offer enhanced protection under the statutory guarantee scheme, covering at least 95 percent of the policy’s value, which far surpasses the protection provided for bank deposits (up to 100.000 euros) and trading platforms (up to 20.000 euros). This ensures your investments are securely managed and safeguarded.

Flexible retirement income options

At retirement, private pensions offer various income options, such as full capital withdrawal, an income for life with reduced taxable portions based on age, or partial capital withdrawals. This allows you to customise your retirement income strategy to best suit your financial needs and goals.

Of course, as with any investment decision, it’s important for expats to consider their own personal circumstances and consult with a pension advisor before committing to a private pension plan. 

As an expat, you may have unique needs, such as language barriers and difficulty navigating through the German pension system. In this case, it could be beneficial to consult with an advisor who has experience helping expats in Germany to ensure that a private pension is the right type of investment for your individual needs and goals.

Give your retirement a boost with LeX-Wealth

With the flexibility and control it offers, as well as the tax benefits and wide range of investment options, a private pension can be a great way for expats to save for their retirement while living in Germany. 

To determine if a private pension is the best option for your situation, you should consult with a pension advisor focused on helping expats in Germany. LeX-Wealth specialises in financial and wealth-planning services, including retirement planning. Their English-speaking specialists offer continuous support, no matter how diverse your goals are. Contact them today to learn more.