🌈 A quick taster for you:
- Statutory pension insurance is mandatory for employees.
- Employees are legally entitled to join their company’s pension plan.
- Due to changes in demographics, it’s wise to have a private pension plan
🧐 Why do I care?
Have you ever asked yourself how big a pension you’ll need later in life? Even if your retirement is still a very long way off, it’s best to start thinking about it as soon as possible. Why? Because, after you stop working, you’ll probably still want to maintain a certain standard of living. So, by thinking about your pension now, you can thank yourself later! There are basically three pillars to providing for your old-age.... read on to find out more:
🔍 What exactly is happening here?
- Pillar I - The statutory pension insurance
The first pillar covers the basic state pension provision. Okay...cool, but what does this really mean? Essentially, it’s the cornerstone of your future pension. You may well have already received a pension statement in the post — which gives an estimate, based on your current income, as to how much pension you’ll be able to claim once you retire. It’s compulsory for all employees, as well as many self-employed people, to pay into the statutory pension insurance. If you’re an employee then your employer will pay half of the total contribution.
When it comes to certain freelance professions — such as architects, doctors, tax and consultants — so-called professional pension funds come into play. These freelancers need to join one of these funds as soon as they become a member of their relevant chamber (e.g. medical association). These professional pension funds will then pay the persons their pensions once they retire. Both of these forms of pension provision, which are grouped under Pillar I, are tax-subsidized.
- Pillar II - The company pension plan
As the title suggests, the second pillar deals with pension provision via the company you work for. The responsibility to set this up lies with the employer — they’ll generally choose the pension plan provider (bAV), and they’ll cover the contribution payments. However, if your employer doesn’t provide its own pension plan, then it has to agree to pay into whichever one you suggest. You can also take this pension with you if you change jobs.
In a nutshell, a company pension plan works like this: Your contribution will be deducted from your gross salary, i.e. before taxes and social benefits are deducted. This means that you pay a higher monthly contribution into your pension plan than the net amount deducted from your salary. This is particularly attractive if your employer adds a contribution — and if you have a new contract, they are obliged to do so. If you’re on an older contract then they’ll be obliged to from next year.
- Pillar III - The private pension plan
The third pillar is pretty broad, as it includes all the various options for providing income during retirement. This can range from shares, funds, and savings accounts... to real estate, private pension insurance, and money under your mattress! In Germany, some of these things are supported by the state — such as the Riester or Rürup pension. It’s a good idea to know about the Riester and Rürup pension, so we’ll cover these, in more detail, in a separate The Surfer!
🤓 What does this mean for me?
Have you heard about the concept of ‘intergenerational contract’? It’s the principle that different generations support each other across different stages of their lives. In terms of pensions, this means that people who are currently working are providing the funds for people who are retired. Basically, any state pension contributions that you’re paying now are going directly into the pockets of the people who are retired and claiming their state pension. Sounds good? Yes, but demographics are changing — people are living longer, and fewer babies are being born — so once you’re ready to retire, it’s very likely that the state pension pot won’t be as full as it is at the moment. Therefore it’s important to start thinking about Pillar III, so that you can ensure that you’ll be able to maintain a good standard of living once you retire.