Private pensions in Germany

The government is increasingly encouraging the adoption of private pensions.

They are offering tax breaks and subsidies to encourage taking out private pensions.

They plan to cut state pension benefits from the current levels of about 70% of net pay to about 67% within the next couple of years, i.e. around 2006.

Out of the three types of pension schemes (state, company, and private) a private scheme offers you the most control, flexibility, and if desired, the lowest risk.

A problem commonly faced by international workers is that they can not transfer their company pensions when they change their employers or they move to a different country. With an international private pension you can take your scheme with you wherever you go.

The problem with German state pensions is that there is very little certainty what policies the government will have decided by the time you reach retirement age. Maybe the state pension scheme will have been dropped altogether. Or maybe the benefits paid out will be so small as to be useless. Even today the outlook is pretty bleak. With a private pension you can decide exactly how much you can afford to save away each month, plus you have more guarantees about where your money will be in 20 to 25 years time.

Remember that the aim of a proper pension plan is to build up sufficient savings that by the time you retire the interest generated by these savings will pay your salary every year until you die. The idea is that it shouldn't matter how long you live. Whether you spend 20 years in retirement or 40, the savings you have should sustanably generate income. And most people like to retire with an income equal to what they had when they were working.

As an example, say in 2005 you are earning €40k per year. In order to sustain this income after retirement you will need total savings worth €1.5 million. This means putting aside about €1,000 every month for 20 years. Employees often underestimate the amount they need to save.

For professional help and advice on all pension related matters, contact:

Martin Brown at First Financial Direct - he is English speaking and based in Munich.
Antonia Kovatchka of compexx Finanz AG - also English and based in Munich.