Which German Pension Is Best for You?

Introduction: Is There A Perfect German Pension?

The pension system in Germany explained as easily as possible: The German pension system is one of the most diverse pension schemes in the entire world. There are a lot of different pensions. So it is easy to get lost when trying to secure your retirement – especially as an expat living in Germany with limited German language skills. So let us see in this article which German pension makes the most sense for your personal situation and answer the following questions:

What kind of different pensions are available in Germany (the land of pensions and insurances, am I right?)?

What are the advantages and disadvantages of different German pensions depending on where you want to retire?

How are pensions in Germany taxed (while you contribute and while you receive your monthly pension or lump sum?

The question we get asked the most when it comes to pensions is: Which German pension is the best? 🤔

As expat life looks typically a little different than standard German life (e.g. in terms of flexibility, countries you lived in or will move to, etc), we are a big believer that there is no universally best pension for everyone. Your pension planning should rather reflect how you see your life going forward in general.

So there can only be a German pension that is best for your individual situation. And that’s why we will go through 9 different scenarios of typical expats (3 scenarios each in pensions level 1, pensions level 2, and pensions level 3). This is an orientation for you to see which German pension could be the best for you.

Only one thing is for sure: The German state pension is the worst German pension. But unfortunately, there is no way for employees to quit from paying into social security (and therefore the German public pension). Only self-employed people and business owners might have the freedom (under certain conditions) to quit paying for the German public pension. 🫠

German Pension System In 3 Levels

The market for pensions in Germany is pretty large and seems confusing at first with +30 different pension providers and +200 pension schemes out there. So it is unfortunately very easy to get lost, get the wrong German pension for your situation, or fall victim to a sleazy pension salesman that doesn’t even know what he is talking about and is just selling you the latest pension.

Here is an easy structure to understand the German pension system in 3 different levels:

German Pension Level 1

German pensions level 1 are all kinds of basic pension schemes that pay you a life-long pension every single month from the moment you retire until the moment you pass away.

This pension level consists mainly of two different types of pensions which are the German public pension (Deutsche Rentenversicherung) as well as the base pension (Rürup Rente).

Advantages of pensions level 1:

Contributions are tax-deductible
Life-long pension payments

Disadvantages of pensions level 1:

No lump sum payment possible
No access before retirement

Who should get a pension level 1?

German Pension Level 2

German pensions level 2 are the workplace pensions that were introduced by the German government when they realized that pensions level 1 will not be enough to fund people’s retirements.

This German pension level is probably best known among the German expat community with the Riester pension and the company pension in germany (betriebliche Altersvorsorge).

Advantages of pensions level 2:

Benefits like government bonuses
Fewer social security payments

Disadvantages of pensions level 2:

Not good, if you want to change employers soon or leave Germany/EU

Who should get a pension level 2?

German Pension Level 3

German pensions level 3 are all kinds of private pensions that do not fit into the criteria of pensions level 1 or pensions level 2. Therefore, they are automatically categorized as level 3 pensions.

This is by far the most flexible German pension level and therefore also the most liked pension level by expats living in Germany that haven’t figured out their exact life planning just yet.

Advantages of pensions level 3:

Lump sum payment possible
Full flexibility to access your money

Disadvantages of pensions level 3:

No tax benefits while contributing, only when receiving your pension

Who should get a pension level 3?

Given that there is no universally best German pension and that there can only be a best pension for you, we thought of different scenarios of typical expats living in Germany and what type of pension they might want to get. Therefore we describe 3 different scenarios in level 1, level 2, and level 3. This is of course very generic information and no personal financial advice is tailored to your individual situation.

There is no single best pension for everybody in Germany. Let’s find out together which pension is the best one for your personal situation.

3 Different Expats Scenarios for the German pension: Pension Level 1

Pensions level 1 can be the German pension level in the following scenarios:

Expats with a high income above 60.000€/year for singles or 120.000€/year for married couples. As these people are in the highest income tax bracket in Germany, they also receive the most benefits from tax-deductible contributions in pensions level 1.
1 of the 3 must-have insurances in Germany is the disability income insurance (others are health insurance in Germany and private liability insurance). If you would like to get disability income insurance and make the insurance premium tax-deductible, you can combine your disability income insurance with a base pension level 1.
Self-employed people or business owners have the freedom to not pay into the German public pension. These people can of course pay voluntarily into the German public pension if they want to. Then you can also burn your money or flush it down the toilet. A base German pension level 1 that allows you to use your money for investing in Germany in ETFs and mutual funds is a lot better.

3 Different Expats Scenarios for the German Pension: Pension Level 2

Pensions level 2 can be the German pension level in the following scenarios:

If you found your dream employer and want to work for this company for the rest of your life, you can get a company pension that is also in level 2 of the German pension system. This is only worth it if you don’t want to switch employers any time soon. Otherwise, you might end up with a lot of different company pensions throughout your working career.
Families with kids might want to get a Riester pension level 2. The government is giving bonuses to everyone with a Riester pension. Adults will get 175€/year and every child will get you another 300€/year as long as you are contributing to your Riester pension. All your contributions are also tax-deductible.
If you want to buy a home in Germany for yourself and your family to live in, a pension level 2 will help you save equity for that (e.g. Wohn-Riester). A German pension level 2 can work as collateral for your home, not for a property that you buy as an investment (for investment properties you have to get a German pension level 3).

3 Different Expats Scenarios for the German pension: Pension Level 3

Pensions level 3 can be the German pension level in the following scenarios:

If you are an expat living the typical expat lifestyle the main requirement for you is flexibility. As you might not be sure where you will end up in this world (when you retire), you do not want to commit to a pension that bounds you to Germany forever. A pension level 3 is as flexible as it gets because you can cancel it basically any time when you leave Germany.
Do you want to work in Germany but retire in your home country? Then pensions in level 3 might be right for you. This is the only pension level that offers a 100% lump sum option at payout. You can just get all your investments paid out at once and enjoy your retirement back in your home country.
While pensions level 2 help you as collateral for your home only, pensions level 3 work as collateral either for real estate in Germany or rental properties. You can save money in your pension level 3 on a regular basis, and invest your contributions in ETFs & mutual funds. When it is time to pay off your real estate loans, you take the lump sum payment and are debt-free.

Conclusion: Which Pension In Germany Is Best For You?

As you can see from the 9 typical expat scenarios above, there is no pension in Germany that is universally the best. The right pension strategy depends on how your life is right now and especially how it will develop going forward. That is why this article was designed to help you figure out which German pension may be the best for your individual situation.

Just in case non of the expat scenarios fit your life, you can read more in the respective articles for pensions level 1, pensions level 2, and pensions level 3. And if you need help in finding the right pension level, pension company, and exact pension plan, feel free to secure a free meeting with us. We will help you select the plan for your German pension that is best for you.

German Pension – Which One Is Best For You?

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