A recent study by the fund company Union Investment shows that 84% of Germans are unaware that they will one day have to pay tax on their pension. According to the study, only 38% have any idea of how much pension they will eventually receive. Since January 2005, the so-called "deferred taxation" rule has been in place. The contributions you make to your retirement provision are increasingly tax-free. However, it is important to know that, in return, pension income must be taxed later on; the transition period is 35 years. Incidentally, this taxation generally also applies to pensions for reduced earning capacity and to survivors' pensions. While the taxation of retirement pensions is often advantageous, since income after entering retirement is usually lower and therefore the tax rate is also lower, you should nevertheless inform yourself thoroughly about this topic and, if necessary, speak with your Steuerberater (German Certified Tax Advisor).
Frequently asked questions
Frequently asked questions
Are statutory pensions taxable in Germany?
Yes, statutory pensions are subject to income tax. Since January 2005, the deferred taxation system applies: contributions to retirement provision are progressively exempt from tax, while pension payments received later are taxed in return. A study found that 84% of Germans are unaware of this tax liability.
What does deferred taxation of pensions mean?
Under deferred taxation, contributions to retirement provision are tax-relieved during the savings phase, while the resulting pension must be taxed during the payout phase. This principle was introduced in Germany on 1 January 2005. The transitional period until full deferred taxation applies spans 35 years.
Are reduced earning capacity pensions and survivors' pensions also taxable?
Yes, taxation generally applies not only to old-age pensions but also to pensions due to reduced earning capacity and to survivors' pensions such as widows', widowers' and orphans' pensions. Here, too, the taxable portion is determined by the year in which the pension began.
Is the taxation of pensions always a disadvantage?
Not necessarily. In many cases, income in retirement is lower than during working life, so a lower personal tax rate applies. As a result, the tax burden on the pension can be moderate. An individual review, ideally with a Steuerberater (German Certified Tax Advisor), is nevertheless advisable.
How long is the transition period to full taxation of pensions?
The transition from partial to full downstream taxation lasts 35 years. It began in 2005, so the taxable portion of the pension gradually increases depending on the year of retirement.