Understanding German Pensions: How to Save Taxes and Invest in ETFs
#Want to save big on taxes AND grow your money with ETFs? German pension plans might be your golden ticket 🌟
Key Takeaways
- German pensions vary in flexibility, tax benefits, and ETF potential, helping you grow wealth and reduce taxes.
- The public pension is mandatory with low returns, making it essential to build additional retirement savings on top.
- Base pensions allow ETF investing with major tax deductions but require locking in your funds until retirement.
- Riester pensions are great for families, thanks to child bonuses, but limit full ETF investing due to safety requirements.
- Company pensions offer employer contributions but often limit ETF options and don’t transfer well when switching jobs.
- Private pensions offer maximum ETF freedom and tax-deferred growth—offering flexibility and long-term planning.
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More InformationWhy German Pensions Matter: Saving Smartly with ETFs
When it comes to saving for retirement in Germany, the options can feel overwhelming, especially for expats. But what if you could pay fewer taxes and grow your money through ETFs at the same time? That’s exactly what some pension plans offer. In this article, we’re walking through the three levels of the German pension system, showing you how to make the most of each one. Whether you’re planning to retire in Germany or elsewhere, understanding the structure of pensions here will help you decide how to combine tax advantages with investment flexibility.
The key is knowing which plans allow ETF investing and when your money is locked in. Some pensions offer generous tax deductions, others offer bonuses or employer contributions, and a few let you stay flexible and fully in control. We’ve personally explored these options, and now we’re breaking them down so you can choose the smartest strategy. Ready to build your retirement wealth the smart way? Let’s dive into Level 1.
Level 1: Public Pension - Mandatory, But Is It Worth It?
The first part of Level 1 is the German public pension, or Deutsche Rentenversicherung. If you’re employed in Germany, you’re already contributing 18.6% of your gross salary—half from you, half from your employer. For high earners, that’s almost 1,500€ per month! But what do you get in return? Pension points. In 2025, earning the national average salary of around 50,493€ gets you just one pension point, which is worth about 41€/month in retirement.
Let’s do the math: You’re paying nearly 783€ each month to receive only 41€ per point later. That’s not a great return. The system itself is under stress—Germany’s aging population means fewer workers and more retirees. The government has to inject billions in tax money annually just to keep the system afloat. It’s a pay-as-you-go model, not a true investment.
Still, you have no choice—participation is mandatory for most employees. So instead of relying on it, we should treat it as a baseline and look at what else we can add on top.
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More InformationLevel 1: Base Pension - Massive Tax Savings and ETF Potential
Next up in Level 1 is the base pension, which offers a much better deal. Though it doesn’t replace the public pension, it adds to it—and comes with massive tax benefits. In 2025, you can deduct up to 29,000€ (single) or 58,000€ (married) from your taxable income. That’s up to a 42% guaranteed tax return, just for saving for retirement.
The best part? You can invest your contributions in ETFs. Unlike with a broker, your ETF earnings—dividends and rebalancing—are completely tax-deferred until retirement. That means no Vorabpauschale and no tax drag while you grow your money. Over the years, that adds up to tens of thousands in savings.
The only downside? Your money is locked in until age 62. So while it’s great for long-term growth and tax optimization, it’s not a fit for short-term flexibility. Still, it’s one of the smartest options available to high earners and entrepreneurs who want to save on taxes now and build future wealth.
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More InformationLevel 2: Riester Pension - Ideal for Families, Not for ETF Purists
The Riester pension is a government-supported plan best suited for families. You can contribute up to 2,100€/year—and receive annual bonuses of 175€ per adult and 300€ per child. These bonuses are essentially free money, and your contributions are also tax-deductible.
But there’s a catch. Due to the government’s guaranteed minimum payout rules, only a portion of your investment can go into ETFs. The rest must be invested in lower-risk options like bonds. So while you get great benefits if you have kids, ETF growth is limited.
For those focused purely on long-term returns and ETF exposure, this plan may not be ideal. But for parents looking to maximize government support while still getting some tax and growth benefits, Riester is a solid choice.
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More InformationLevel 2: Company Pension - Free Employer Money, Limited Investment Options
Company pensions—or betriebliche Altersvorsorge—are another Level 2 option. The key advantage? Employer contributions. Companies must match at least 15% of your monthly contribution, and many offer more. You can invest up to 322€/month tax and social security-free from your gross income. Double that, and you still avoid income tax (though you’ll pay social security on the second half).
However, switching jobs can get messy. Your new employer may not accept your old plan, leading to several mini-pensions with small payouts later. Also, investment options are often controlled by your employer, and many limit ETF access due to minimum return guarantees.
Still, it’s hard to say no to free employer money. Just be sure to ask questions before enrolling and understand what happens if you change jobs.
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More InformationLevel 3: PEPP and Private Pensions - Flexibility and Full ETF Control
Finally, Level 3 gives you the most freedom. While the EU’s PEPP (Pan-European Personal Pension Product) isn’t available in Germany yet, you can already open private pensions with full ETF flexibility. No employer or government restrictions here—you control how much you invest, which ETFs you use, and when you withdraw.
Private pensions don’t offer upfront tax deductions like the base or Riester plans, but they offer something equally powerful: tax-free growth on ETFs. Just like with the base pension, no dividend or capital gains taxes until you start withdrawing. And if you wait until age 62 or later, you get huge tax benefits on withdrawals.
This is the best option for expats and self-employed professionals who value investment flexibility and long-term tax efficiency. Unlike with broker accounts, private pensions help you avoid Vorabpauschale, making them the most ETF-friendly vehicle out there.
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More InformationWhy the Right Pension Strategy in Germany Matters More Than Ever
Germany’s pension system is under more pressure than ever before—and simply relying on the public pension won’t be enough to maintain your lifestyle in retirement. The numbers don’t lie: a growing retired population, fewer contributors, and a pay-as-you-go system mean your monthly Rentenbescheid may fall short of what you need.
But the good news? You don’t have to be stuck with that outcome.
By understanding how the system works and taking action early—whether through ETFs, private pensions, or employer subsidies—you can close the pension gap and secure your financial future. The earlier you start, the more you benefit from compound growth and long-term tax advantages. And if you’re not sure where to begin, you’re not alone.
That’s why we offer free consultations: to help you build a smart, personalized retirement strategy that combines safety, growth, and flexibility. Because when it comes to your future, guessing isn’t a plan. Let’s get you the pension you actually want—not just the one the system gives you.
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