In short, here are where retirement plan that most people use or “pillars.”
- The first pillar deals with basic needs: This includes the statutory pension scheme and occupational pension schemes.
- The subsidized pension plan, which includes occupational pension contracts and Riester contracts, is part of the second pillar. It is mostly for people who work there.
- The third pillar means unpromoted prevention, like private life or renning achievements. Fund savings plans can also be used to give money to people privately.
- The first pillar takes care of almost all of the employees. On the other hand, everyone is responsible for saving more in pillars two and three.
- Which retirement plan is best for you depends on whether you have a job or are self-employed, whether you want to get help from the government or save your own money, and how long you have left until you retire.
Pension from the government, from a company? Or the old standbys, equity funds or real estate? There are many ways to save for retirement. It’s hard to keep track of everything. Still, it’s important to talk about the subject. Because, in the end, there is always the question of whether or not the pension is enough to live a certain way in old age.
The right way to plan for retirement
You can get a better idea of the different kinds of pensions and find your way to the right one with the help of Finanztip. We’ve made five decision trees, with each one based on the person’s job and how long until retirement.
If you know what your pension rights are and the three pillars of retirement provision know what their own pension options are, you can use the abbreviation and go straight to the decision trees. If not, first find out how much of a pension you can expect.
Step 1: Take stock
Taking stock is the only way to know if the later pension is enough to live on. It’s important to find out how much of a pension you can expect from your mandatory insurance, such as the statutory pension or the occupational pension fund, depending on your job group. Take a look at the information about your annual pension and then try to figure out what is missing. This is known as the “pension gap.”
In the private pension scheme guide, the pension gap for a model average earner has been calculated. Look at the illustration.
Most workers are required to pay into the state pension system. Also, some self-employed jobs that are thought to need protection, like many craft jobs, driving instructors, fitness trainers, but also educators, independent teachers, midwives, or physiotherapists, are required to have insurance. The German Reneent Insurance has a full list of everyone who is required to be insured.
In old age, the statutory pension will likely bring in less and less money. Because people are getting older, which means that in the future, fewer and fewer workers will have to pay for more and more pensions. As a result, the amount of the pension is going down.
Professional pension funds:
Freelancers who work in so-called “chamber professions” are required to join . In general, the group is made up of general practitioners, pharmacists, architects, lawyers, auditors, and a few other types of professionals. Unlike mandatory pension funds, which put their members’ contributions into the stock market, each insured person pays for his own pension.
But freelancers should also expect that their pensions from pension funds will be less in the future. Low interest rates are making it harder for people to make money. From a provider’s point of view, it’s getting harder and harder to keep the pension level for their members. So, freelancers should also think about the other pension options.
Non-compulsory basic insurance:
People who work for themselves and are not required to be insured in the statutory pension scheme or a pension fund must take care of their pensions on their own. In any case, you should look at the other options.
This is the traditional pension for people who work in the public sector, like civil servants, judges, professional soldiers, or pastors. Most of the time, the pensions paid by the federal or state government are higher than the pension rights. But civil servants can also save money on their own, for example by getting a Riester pension.
Step 2: Find out what kinds of retirement plans are available. Where retirement plan.
It’s easier to get an idea of all the different kinds of retirement plans if each one is put into a certain category. In Germany, experts talk about the three pillars, or strata, of planning for retirement. The way these pillars are set up is mostly based on how they are taxed. On the right side of the overview, we have added a new, unofficial pillar 0 that talks about flexible provision. Since the state pays for civil servant pensions, they are not included in this overview.
This is where you’ll find all the pension plans that should give future retirees a basic income. On the one hand, this includes the legal renning, which is required for all employees and some self-employed people. On the other hand, this includes the professional utilities, which make certain liberal professions, like doctors, pharmacists, lawyers, architects, tax consultants, and others, mandatory.
Basic pensions, are also part of the first pillar. They were mostly made for self-employed people who make a lot of money, but anyone can read them. Savers can choose between the standard Rürup pension insurance and a version with a higher shareholding share.
All of these types of pensions are backed by tax money: All contributions are part of the basic provision’s extra costs. Savers can deduct the full amount of their payments to statutory pensions and utilities.
The second pillar includes subsidized pension contracts, such as Riester contracts and occupational retirement provision. They are great for employees in particular. Riester contracts are usually private (fund-linked) Rentens or savings plans for funds, but they are backed by the government. On the one hand, the government gives out allowances, and on the other, tax deductions can be made for contributions.
Even if an employer offers an occupational retirement plan, employees often save in traditional retirement plans chosen by the employer (direct insurance). In this case, though, employees get a benefit from not having to pay taxes and social security on their contributions. The most that will be paid out is 4% of the Rententens’ contribution assessment limit. Most of the time, these contracts are worth it if the boss adds something to them. A good rule of thumb is that social contributions are saved by about 20%.
Savers must pay taxes on later pensions from the second pillar at their personal tax rate when they are older. For occupational pensions, you also pay full health and care insurance contributions in your later years. So it’s even more important for the employer to bring something to the table.
All non-funded retirement contracts, such as traditional or unit-linked private life insurance or retentions, are part of the third pillar. The contributions to these types of savings come out of a person’s net salary, which means that the contributions have already been taxed.
As a result, savers don’t have to pay taxes on dividends or interest income while they are in the savings phase. And the so-called “income share” only takes a small amount from later pensions. How much this is depends on how old a person is when they get the pension.
Anyone who starts getting a pension at age 65 must pay tax of the pension they get. If you want the money you saved right away, you pay the personal income tax rate on half of the amount.
Aside from the official three pillars, savers can also think about saving in a flexible way, without life or renning. One way to do this is with an exchange-traded equity index fund savings plan (ETF savings plan). A low-cost equity index fund gets payments of 50 or 100 USD per month (Exchange Traded Funds, ETF for short). Savers can also put more money into an equity fund or exchange-traded fund (ETF) at once.
It’s important to stay with it over the long term and choose a fund with stocks from many different countries, industries, and currencies. Then, changes on the stock market are more likely to make up for it, and the chance of making a good profit for the year goes up.
If you invest your money in a flexible way, you won’t get any special tax breaks. In ETFs, for example, the saver pays for contributions out of their after-tax net income. Then, he has to pay taxes on any interest or dividend income and sales proceeds at the same rate as the tax that was taken out.
Even though they aren’t always mentioned with the other ways to save for retirement: Of course, real estate is also suitable for retirement provision. This is even more important if you live in the house or apartment. Since 2010, however, real estate prices have gone up every year, especially in bigger cities and towns. Low financing costs can’t always make up for a purchase price that is too high.
So, if you want to buy, you should think about it carefully. Also important: there are tax benefits for properties that are used by the owner. Both the value increase and the monthly income from the saved rent are not taxed.