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German Pension Plan

Updated: Sep 8

US expats living in Germany have a hard time as it is when it come to investing, however, there are a number of hurdles that they have to overcome. US Expats should try to avoid investment funds that will be classified as Passive Foreign Income Companies (PFICs) as this can create a tax burden when filing IRS returns.


The pension plans are set up as three separate pillars depending on who the contributors are. The first covers the basic provisions, the second the subsidized, or sponsored provisions, and the third the private provisions. Generally, as a US person you can participate in the three options open to you, however, occupational and private pension plans will offer plan styles that may be more suitable.



The first pillar includes the basic provision with the statutory pension insurance, professional pension funds, and the Rürup pension.


The statutory pension plan Gesetzliche Rentenversicherung is covered automatically for employees and certain freelance jobs, such as physiotherapist, independent teachers, and midwives.

  • Employers and employees pay an equal 50/50 contribution of up to 19.5% of their salary.

  • Benefit: contributions are tax-free, with withdrawals being taxed once people retire and usually find themselves in a lower income bracket. This allows one to pay a lower amount overall in taxes.

The three other plans in the basic provisions include the Berufsständische Versorgungswerke, which is for certified professionals such as doctors and lawyers, the statutory pension for civil servants, and the Rürup pension for freelancers and high income individuals.

  • The Rürup pension has a maximum contribution limit of €25,046 (in 2020) of which 90% can be offset against taxes, and payouts will be annuitized in retirement.

The second pillar is the sponsored (subsidized) provision.


The first plan in this pillar is the Betriebliche Altersvorsorge, which are private schemes offered by employers.

  • There is a limit for annual contribution assessment of 4%, and employee contributions are pre-taxed.

The second plan in the pillar is the Riester Pension Plan, a state-subsidized private pension insurance

  • There is a minimum contribution requirement of 4% of one’s annual gross income, and a maximum limit of €2,400.

  • This plan is aimed towards low-income individuals, and only allowed if individuals are required to contribute to a statutory pension fund.

  • Benefits are 100% taxable and contribution are partially deductible from taxes (up to €2,100 annually). In addition, those who use this plan receive a small incentive of €175 from the government each year.

The last pillar is the private provision.

  • Includes private plans and life insurance.

  • Contributions within this pillar are paid post-tax and taxes are due on capital gains and interest received through the investments.

Generally, as a US person you can participate in all of the above options, however, pillar two and three provide different plan styles, such as investments or cash plans.


Get a complimentary copy of the American expat guide at https://www.dunhillfinancial.com/american-expat-financial-guide for more information about the financial planning process as an American expat. You can also visit www.dunhillfinancial.com.


DUNHILL FINANCIAL, LLC IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT INTEND TO MAKE AN OFFER OR SOLICITATION FOR THE SALE OR PURCHASE OF ANY SPECIFIC SECURITIES, INVESTMENTS, OR INVESTMENT STRATEGIES. INVESTMENTS INVOLVE RISK AND UNLESS OTHERWISE STATED, ARE NOT GUARANTEED. BE SURE TO FIRST CONSULT WITH A QUALIFIED FINANCIAL ADVISER AND/OR TAX PROFESSIONAL BEFORE IMPLEMENTING ANY STRATEGY DISCUSSED HEREIN.


Sources

https://www.expatica.com/de/finance/retirement/german-pension-guide-understanding-your-pension-in-germany-831124/

https://www.rente.com/

https://www.finanztip.de/altersvorsorge/

https://www.riester-rente.net/


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