German Pensions Level 2

Pensions Inside Level 2 Of The German Pension System

German pensions level 2 can be a great way to save money for your retirement while securing some tax benefits, fewer social security contributions, as well as government bonuses. As the German government wants all citizens to save for retirement anyway as the German public pension will not be enough to fund your living costs, why not do it with some free money that you get along the way? 🤑

Pensions level 2 are probably best known among the expat community living in Germany: The Riester pension & the company pension. Both pensions inside pension level 2 are probably also the most complex pensions on the German pension market. That is why we better take a look at the advantages and disadvantages together so you know what you are getting yourself into before deciding to get a pension level 2.

The riester Pension

The Riester pension level 2 is mainly a pension for families living in Germany as they get the most subsidies and bonuses from the German government. Every adult contributing to his Riester pension will earn 175€ per year in government bonuses. Additionally, every child will earn you another government bonus of 300€ per year that you pay into your Riester pension.

That is a lot of government bonuses considering the fact that you have to contribute 175€ per month only to secure all the bonuses mentioned above. You can also use your Riester pension as collateral when buying a home for yourself in Germany. Find out, if buying a home is the right decision for you in our buying or renting comparison.

The Company Pension

The company pension level 2 is another way to save for your retirement while saving some tax and social security as well as getting a bonus from your employer (employer bonuses vary based on the type of company pension you have). There are 5 different types of company pensions in Germany and your employer is deciding which option he offers.

No matter which way your company chooses, you have a legal right to a company pension if you ask for it. So talk to your boss, your HR department, or us if you don’t know what to ask your employer. With a company pension, your employer has to give you a match of at least 15% of your company pension contributions (because your employer will save money if you get a company pension).

5 Advantages Of German Pensions Level 2

Like the base pension level 1, most Riester pension level 2 plans (at least the good ones) will allow you to invest your pension contributions in ETFs & mutual funds. Inside pension schemes, you can also switch your investments free of charge and without paying any form of tax. While ETFs, stocks, bonds, and mutual funds in an investment account are taxed either every year or at the moment you sell, pensions are only taxed once you take money out of the pension (tax-deferred growth).

When going into retirement at the earliest 62 years of age, you can choose almost free if you would like to receive a monthly pension or lump sum from your German pension level 2. In the company pension, the exact payout options depend on your pension scheme, in the Riester pension you can get 30% of your savings paid out as a lump sum when you retire. The other 70% will be paid out as a life-long monthly pension until you pass away. The 30% lump sum is an option, you can also choose to get all your savings paid out in form of a life-long pension.

German pensions level 2 will also help you to increase your net income by providing tax benefits. Your contributions to either the Riester pension level 2 or the company pension level 2 will be tax-deductible up to a certain amount. The maximum tax-deductible contributions for the Riester pension is 2.100€/year. The company pension that is deducted from your payslip will help you save up to 7.008€/year in taxes as well as up to 3.504€/year in social security contributions (both 2023 numbers).

On top of the facilitations for tax and social security, the Riester pension will reward you with annual government bonuses. Every adult contributing to a Riester pension will earn a government bonus of up to 175€/year to increase his future pension. On top of that, every child will earn another government bonus of up to 300€/year. An adult with 2 kids will therefore receive 175€ + 300€ + 300€ = 775€ in government bonuses every single year.

The last advantage of Riester pensions level 2 might also be a disadvantage for some people. As the German government decided that nobody is allowed to lose money with a Riester pension, all your contributions are guaranteed. While guarantees always seem beneficial at first, they come at a cost. You don’t have to pay for guarantees with real money, but rather with opportunity cost.

While the historic return of the stock market is about 7%/year, the guaranteed interest of German pensions stands on average at 2,5% over the last years. In 2022, the Federal Ministry of Finance also decided to decrease the minimum guaranteed interest of pensions to 0,9%. Given that this return is guaranteed, it is a lot better than 0% interest on German bank accounts, but it could also be a lot higher when investing in the stock market.

There is no general right or wrong when it comes to retirement planning. Only appropriate and inappropriate for your personal financial situation. Let’s find out together what is appropriate for you.

5 Disadvantages Of German Pensions Level 2

Depending on your personal investing strategy you can view the guaranteed interest of the Riester pension level 2 as an advantage or a disadvantage. Some people like safe and guaranteed returns and other people like to take risks when investing. As ever so often in personal finance, there is no right or wrong. Only appropriate for your individual financial strategy and inappropriate for your individual financial strategy.

As pensions level 2 are tax-deductible while contributing (and maybe even free of social security), the payout will be taxed. The idea behind a tax-deferred pension strategy is that your tax rate in retirement will most likely be lower than your tax rate while you are working. Financially speaking, it is highly beneficial to pay taxes as late as possible, but Finanzamt will tax you at some point in your life. You probably have heard the saying before, that there are only two things in life guaranteed: death and taxes. 😉

When planning to retire outside of the European Union, a Riester pension level 2 might not be the best pension for you as you are required to pay back all government bonuses when you move permanently outside of the EU. You can still keep the capital gains the government bonuses generated for you, but this might still be an important disadvantage for you if you plan to retire back in your home country outside the EU.

Thanks to the 30% lump sum option you can use your Riester pension level 2 as collateral when buying a home in Germany. It is not possible to use your Riester pension as collateral for an investment property, you would need a private pension level 3 for that. The Riester pension is designed by the government to help families in terms of retirement and buying a home for themselves, not for real estate investors. Your company pension cannot be used at all in terms of collateral, as you are only the insured person and not the policy owner of your company pension (your employer is the legal owner of your company pension).

The last disadvantage is simply that there are really bad pension companies on the German market that offer bad pension schemes. Especially company pension schemes stay often below their potential because companies do not put any effort into providing their employees with the best pension possible. Here are some examples that separate a bad pension German level 2 from a good pension plan:

Size of the possible investment portfolio (ETFs and mutual funds), especially important for the company pension
The historic rate of return on the guaranteed part of the pension is lower than the market average
Fees to set up and manage the German pension level 2 are higher than 1% or 1,5% maximum

When you have a Riester pension or company pension already and would like us to evaluate if there are any ways to improve your pension plan, feel free to book a free meeting right here or text us on WhatsApp. And if you would like to secure a pension for yourself, we can help you to select the best pension scheme available on the German market based on your personal financial situation.

Conclusion: Who Should Get German Pensions level 2?

Based on the advantages and disadvantages of the Riester pension level 2 or the company pension level 2, there are different scenarios in which a German pension level 2 can make sense. You can still get a pension level 2 if none of the scenarios below apply to you, but if that is the case it might also be worth it to consider German pensions in level 1 or in level 3.

Single people earning average incomes in Germany below 60.000€ gross salary per year or married couples earning below 120.000€ gross salary per year might want to consider a pension level 2 as they are not in the highest income tax bracket yet. High earners are better off with pensions level 1 in terms of tax savings as the tax-deductible contributions for pensions level 1 are a lot higher than for pensions level 2.
Thanks to the high government bonus of 300€/year for every child, families with kids are benefitting a lot more from the Riester pension 2 than single people or married couples without children. If both parents get a Riester pension, also both adults will receive their 175€ government bonus every single year. And if only one adult is working, the non-working spouse has to contribute only 5€/month for their Riester pension in order to receive a 175€/year government bonus.
If you plan to buy a home in Germany, a Riester pension might just be right for you. With a “Wohn-Riester” you can secure one of the very few benefits homeowners receive in Germany by using your government bonuses and tax deductions to pay off your home faster. Attention: a Wohn-Riester only works for a property inside the EU in which you live yourself.

If none of the 3 scenarios mentioned above is suiting your life (right now), you can still get a pension level 2 in order to enjoy tax benefits, government bonuses, or fewer social security contributions. Just remember that no pension is perfect and that there are other pensions in level 1 and level 3 on the German market, before committing yourself to anything.