Retirement in Germany: statutory pension, company pension and private provision (three pillars)

What you will learn

• How the three pillars (and the official three-layer model) of German retirement provision fit together.
• How the statutory pension is calculated from pension points.
• The main features of company pensions and state-supported private provision.
• How to estimate your monthly retirement gap from your pension statement.

Explanation

This lesson is general orientation for Germany, not individual advice. Pension rules change often; check the current rules with the Deutsche Rentenversicherung and, for tax questions, a Steuerberater.

The three pillars

• Pillar 1, statutory pension (gesetzliche Rentenversicherung): compulsory for most employees. It works on a pay-as-you-go basis: today's contributions pay today's pensions, they are not saved in a personal account.
• Pillar 2, company pension (betriebliche Altersversorgung, bAV): organised through your employer.
• Pillar 3, private provision: your own savings and investments, with or without state support.

German tax law uses a slightly different three-layer model: layer 1 includes the statutory pension and the Basisrente (often called Rürup); layer 2 includes company pensions and state-subsidised private contracts such as Riester; layer 3 covers other private products and investments.

Pillar 1: how the statutory pension is calculated

Employees pay a contribution on their gross salary up to an annual ceiling (Beitragsbemessungsgrenze). In 2026 the contribution rate is 18.6%, split equally: 9.3% employee, 9.3% employer.

For each year, you earn pension points (Entgeltpunkte): your gross earnings divided by the average earnings of all insured people that year. Earning exactly the average gives 1.0 point; earning half gives 0.5. The monthly gross pension is roughly:

Monthly gross pension = pension points × current pension value (aktueller Rentenwert)

(The full formula also includes an access factor that reduces the pension for early retirement, and a pension type factor; both are 1.0 for a standard old-age pension at regular age.) The current pension value is the euro amount of one point per month; it is adjusted every July. The regular retirement age is rising step by step to 67 for people born in 1964 or later. A law passed in 2025 holds a minimum pension level of 48% (a standard pension relative to average earnings, before tax) into the early 2030s; what happens after that is open.

Retirees normally pay health and care contributions from the gross pension, and pensions are increasingly subject to income tax.

Your best data source: insured people from age 27 with at least five years of contributions receive a yearly Renteninformation. The headline projection does not include future pension increases, and it is shown before taxes and contributions.

Pillar 2: company pension

With deferred compensation (Entgeltumwandlung), part of your gross salary goes into a company pension. Within legal limits it is free of tax and social contributions now; the pension is taxed later. Employees have a legal right to deferred compensation, and employers must generally add a subsidy of 15% of the converted amount where they save social contributions. Check the contract costs and what happens if you change employer.

Pillar 3: private provision

State-subsidised private contracts are changing. The Altersvorsorgereformgesetz, approved by the Bundesrat in May 2026, reforms subsidised private pensions from 1 January 2027, including a new investment-based Altersvorsorgedepot as an alternative to classic Riester products. Details and transition rules for existing contracts are still being implemented, so check the current official information before signing anything. Unsubsidised ETF savings plans are covered in the ETF course.

Worked example

Hypothetical example: Lena, 29, wants to estimate her monthly gap. Assumptions: she will reach 42 pension points by retirement; the current pension value is a round hypothetical €40 (check the real value); health and care contributions take about 11% of the gross pension (assumption); income tax is ignored; all amounts are in today's money.

Step 1: Gross statutory pension = 42 × €40 = €1,680 per month.

Step 2: After contributions ≈ €1,680 × (1 − 0.11) = €1,680 × 0.89 = €1,495.20.

Step 3: Target spending in retirement (from her budget, without rent increase or debt): €2,300 per month.

Step 4: Gap before other pillars = €2,300 − €1,495.20 = €804.80.

Step 5: Her company pension statement projects €200 per month (assumed net). Remaining gap = €804.80 − €200 = €604.80, about €605.

Step 6: Rough capital need: €605 × 12 = €7,260 per year. For 25 years of retirement and ignoring returns and inflation: €7,260 × 25 = €181,500. This shows only the order of magnitude: returns would reduce it, inflation and a longer life increase it.

Common mistake

Practice activity

Hypothetical case: Can expects 38 working years at 0.9 points per year. Use a hypothetical pension value of €40 and 11% contributions. His target is €1,900 net per month, and he expects a company pension of €150 net. Calculate (a) total points, (b) gross and net statutory pension, (c) remaining gap.

Key takeaways

• Statutory pension ≈ pension points × current pension value, paid gross.
• Company pensions via deferred compensation save tax and contributions now; check costs and employer subsidy.
• Subsidised private provision is being reformed from 2027; check current rules.
• Estimate your net gap in today's money and update it every year.

Next step

In the next lesson you will turn goals such as closing your pension gap into monthly amounts with sinking funds.