Retirement savings and tax: what is actually deductible
With German retirement provision, how much reaches you in the end is decided less by returns than by the tax framework you save within. It is the most underestimated lever there is — and it costs nothing but the right decision at the start.
Three layers, three tax logics
Since 2005 German provision has been built in three layers, differing mainly in one question: when does tax fall due — on the way in or on the way out?
| Layer | Examples | Paying in | Paying out |
|---|---|---|---|
| 1 — Base | Statutory pension, Basisrente (Rürup) | Largely deductible | Fully taxable |
| 2 — Subsidised | Company pension, Riester | From gross pay or with allowances | Fully taxable; bAV also health/care |
| 3 — Private | Private annuity and unit-linked policies | From net pay, no relief | Markedly favoured |
Layer 1: base provision
Alongside the statutory pension this holds the Basisrente, better known as Rürup. Since 2023 contributions can be claimed at 100 % as special expenses, capped at an annual maximum. For 2026 that is €30,825.60 for single assessment and €61,651.20 for joint assessment; the figure is adjusted every year.
At a 42 % marginal rate, almost half of every euro paid in comes back as a tax refund. That is the strongest immediate lever German tax law offers in provision. The price is considerable:
- Cannot be cancelled — no access before retirement
- No lump sum — lifelong annuity only
- Cannot be borrowed against or transferred
- Only limited inheritance — survivor cover must be included explicitly and costs pension
In exchange the balance is largely protected from seizure while saving and is not counted as assets when claiming basic income support — an often overlooked advantage for the self-employed.
Layer 2: subsidised provision
This holds the company pension and Riester. Both are supported on the way in and fully taxed on the way out.
The company pension has a particular feature many only discover in retirement: people in the statutory health system pay health and care contributions on company pensions — at the full rate, not half. The salary conversion article covers the effect in detail.
Riester pays off mainly through its allowances — particularly for families with children and lower incomes. At higher incomes the special expenses deduction does the work instead. The contracts are rightly criticised for cost and complexity, but in allowance-driven situations they should not be dismissed outright.
Layer 3: private provision
Private annuity and unit-linked policies are funded from net pay. There is no relief on the way in — in exchange, taxation on payout is considerably gentler:
- As a lifelong annuity: only the income portion (Ertragsanteil) is taxed, based on your age at the start; from 65 it is comparatively small.
- As a lump sum: if the contract ran at least twelve years and payout occurs at 62 or later, only half the gain is taxed at your personal rate (§ 20(1) no. 6 EStG).
- Unit-linked policies additionally benefit from partial exemption on equity fund gains.
Plus full flexibility: cancellable, borrowable, inheritable, lump sum or annuity as you choose.
Which framework fits which income
| Situation | Usually the sensible emphasis |
|---|---|
| Self-employed, high income, outside the statutory pension | Basisrente — the deduction works hardest here |
| Employed with a good employer subsidy | Company pension up to the subsidy, privately above it |
| Middle income, flexibility matters | Private provision in layer 3 |
| Family with children, middle income | Check Riester allowances, supplement privately |
| Property purchase planned soon | Nothing long-term locked — liquidity first |
| Possible move abroad | Prefer flexible layer 3; check treaties before committing |
Why the biggest break is not the best choice
The Basisrente offers the highest immediate deduction. It is still the wrong choice for many — because the tax benefit is bought with a total loss of availability.
Someone who puts their entire pension budget into a Basisrente at 30 has a problem buying a house at 45. The money exists but cannot be reached. I see this regularly, usually the result of advice that looked only at the tax saving.
Four common mistakes
- Putting everything in one layer. A sensible split uses several layers and keeps part of the money available.
- Leaving the employer subsidy unused. Where an employer pays well above 15 %, that is the highest guaranteed “return” available to you.
- Cancelling old contracts blindly. Policies from the nineties and early 2000s often carry guarantees no longer available. Check first, decide second.
- Looking only at cost — or only at returns. Either alone misleads. What counts is what arrives after tax, cost and contributions.
Conclusion
The tax framework decides a substantial part of the outcome — but it is not the only criterion. Good provision combines the tax advantage with enough availability and fits what the next ten to fifteen years of your life hold.
The short version is on the retirement planning page.
Which framework fits you?
That can be settled in 30 minutes — with your income, your employment status and what you have planned for the coming years.