Voluntary contributions for retirement can pay off
Martin Klotz is responsible for the topics of old-age provision and income protection at Finanztip. Even during his time as a self-employed financial planner, he kept a close eye on insurers and knows the pitfalls of contracts. In addition to business topics, Martin is particularly passionate about sports. In this department, he also started his career in radio in 2007, parallel to studying economics and journalism.
- If you want to retire early, you will have to expect a smaller pension – unless you make additional voluntary contributions beforehand.
- As a self-employed person, you can earn an entitlement to a statutory pension in old age through voluntary contributions.
- If you have not fulfilled the statutory minimum insurance period, you can secure a lifelong pension with voluntary contributions.
Get free advice from the Deutsche Ren-ten-ver-si-che-rung if you want to compensate for future pension deductions or top up your minimum insurance period.
In this guide
When it comes to the statutory pension insurance (GRV), many people only think of the minimum insurance period Compulsory contributionsThose who are employed or work in self-employed professions requiring special protection pay these contributions into the pension insurance anyway. Only very few people know, however, that they are also voluntary contributions and thus pay your Improve your pension can.
When should you think about voluntary pension contributions??
After a long working life, no one wants to turn over every penny. After all, life in retirement wants to be enjoyed a bit. That’s why a sensible pension plan is so important. Voluntary pension payments can be a building block – in three cases they are particularly worthwhile:
- You are employed, over 50, and thinking about retiring early. However, you want to avoid a lower pension.
- You are self-employed and do not currently provide for your old age. Then you should take care of a basic insurance: either by contributions to the statutory pension insurance (GRV) or by a Rurup pension.
- You are not currently covered by a statutory pension, but you have paid into it for several years, studied, raised children or cared for relatives, and thus already collected pension points. You lack contribution years to be entitled to a statutory pension. To make sure that you get the pension you need, there are usually a few things you need to keep in mind.
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How does the early retirement without deductions work?
If you retire earlier than the standard retirement age, you will receive less pension. Only those who are at least 63 years old and can prove 45 years of minimum insurance period (so-called waiting period) are exempt. All others can retire earlier from the age of 63 and at least 35 years of waiting period only with deductions. Every month that you want to retire early costs a deduction of 0.3 percent on your monthly pension. To avoid this, you can make special payments before the official start of your pension. Due to the entry into force of the Flexi-Rentengesetz on 1. July 2017 are compensatory payments from the age of 50. Possible for the first year of life.
The exact amount of the payment is specified in a special pension report, which differs from the annual pension report. The following applies: The earlier you want to retire and the higher your pension is, the more expensive it will be to compensate for your reductions. Sums in high five-digit range can be due.
Example: If you have a monthly pension of 1.200 and want to retire two years earlier, you will have to accept a reduction of 7.2 percent (24 x 0.3 percent). Your monthly pension is reduced by approx. 86 euros. In order to compensate for this, you would have to pay around 21.Pay in an additional amount of 000 euros (as of 16 December 2009). April 2021).
For whom special payments are suitable
Voluntary contributions make sense if you inherit or receive a large amount from a pension plan severance pay or a Life insurance get. When you pay in and whether you pay the sum all at once or in parts, you should weigh up well.
If you make the special payment a few years before you retire early, you will secure pension points according to the pension rules calculation bases valid today for the pension. This can be worthwhile, because: If the economy continues to develop positively over the next few years, pensions will probably continue to rise. You would then have to put more money on the table to finance your pension compensation.
However, it can also make sense to spread the special payments over several years. Because the contributions to the pension insurance you can only pay within certain limits from your taxes: The maximum amount for 2020 is 25.046 Euro, for the year 2021 it is 25.787 euros. The tax office will apply a fixed percentage of this (2020: 90 percent, 2021: 92 percent). If in doubt, get advice from the Deutsche Ren-ten-ver-si-che-rung (German pension insurance).
At what point in time your (net) one-time contribution in the form of (net) pension payments has paid off for you – i.e. actually paid out – depends on your tax rate. And during the employment and later as a pensioner.
Example: Let’s assume you pay about 35 percent income tax while working and still pay 20 percent during retirement, then your co-payment of 21.000 euros after well 17 years paid. In case of an early death, at least one survivor would have a higher pension, if he or she is entitled to a widow’s or widower’s pension.
You can still work longer
Paying in does not oblige you to actually retire earlier. You can decide to continue working until the retirement age after all. If this is the case, the sum initially intended as a compensatory payment will have the same effect as a contribution Increase in the statutory pension. In the above example, your pension will increase by 86 euros per month.
If you take advantage of this arrangement, you should bear in mind that your pension entitlements, which arise from such special payments, will be borne by fewer and fewer contributors in the future. The burden of financing this pension is therefore borne by the younger generation. It is not possible to predict today whether the intergenerational contract on which the statutory pension system is based will hold in the future.
How does the statutory pension for the self-employed work??
If you are self-employed, you have various options for acquiring a right to payments from the German Pension Insurance Fund.
Compulsorily insured by law
Some self-employed persons are subject to compulsory insurance. This means that these professions are covered by the general rules of the statutory pension scheme. This includes among other things:
- Freelance teachers and educators
- Care professions, such as occupational therapists, podiatrists, nurses or physiotherapists
- Midwives
- Sea pilots, coastal skippers and coastal fishermen
Craftsmen are also compulsorily insured if they are registered in the craftsmen’s register and are self-employed. The compulsory insurance is only valid for 18 years. After that, craftsmen can be exempted.
However, if you earn less than 450 euros per month with your self-employment or several self-employed activities in the above-mentioned sectors, you are not subject to compulsory insurance.
If you, as a self-employed person with only one client, are subject to compulsory insurance for the first time, you can be exempted from compulsory pension insurance for a maximum of three years during the start-up phase. You must submit this application within three months after starting a business place. A temporary exemption is also possible for a second start-up for another three years.
Apply for compulsory insurance as a self-employed person
If you are self-employed but do not meet the criteria for compulsory insurance, you can still apply for compulsory insurance. This is called Compulsory insurance upon application. You must apply for it within five years of becoming self-employed. If you want to be compulsorily insured right from the start of your self-employment, however, you only have three months for the application. The standard contribution is uniform and amounts to 611.94 euros (West) or 579.39 euros (East) per month in 2021. As a founder of a new business, you can also pay half the standard contribution for the first three years of your self-employment.
It is also possible, instead of the regular contribution Income-dependent contributions to pay. You have to prove your income with an income tax assessment. The contribution amounts to 18.6 percent of your monthly income. The minimum limit is 83.70 euros, the maximum limit is 1 euro.320,60 Euro (as of 2021).
But be careful: You cannot cancel the compulsory insurance you have applied for. It runs as long as you are self-employed. It is therefore essential that you seek advice from the Deutsche Ren-ten-ver-si-che-rung as to whether compulsory insurance makes sense. The advantage over voluntary contributions is that after five years of insurance, in addition to survivor protection, there is also an entitlement to an Er-werbs-min-de-rungs-rente. If you apply for compulsory insurance, you are also eligible for a Riester pension.
Voluntarily insured as self-employed
As a self-employed person, you are quite flexible if you take out voluntary pension insurance. Then you can determine the amount of your contribution determine yourself. In addition, you can interrupt the payments or terminate the voluntary insurance at any time. The same limits apply as for compulsorily insured persons on application: the monthly contribution may not exceed 1.320.60 euros and must be at least 83.70 euros (as of 2021).
Up to twelve payments per year are possible – the number and amount may vary. Until 31. March of the following year, it is possible to pay contributions in arrears.
The amount of the old-age pension depends on the amount and number of contributions paid. If you want to take out voluntary insurance, you only have to fill in the corresponding form of the pension insurance. All those who are at least 16 years old and live in Germany are eligible. In addition, all German citizens who live abroad may take out voluntary insurance.
If you make contributions for at least five years If you pay into the scheme voluntarily, you will be entitled to an old-age pension and survivors’ benefits. Older cohorts also have the advantage of being insured against reduced earning capacity, provided they meet two conditions: They must have been insured for at least five years before 1984 and must have either paid into the German pension scheme every month since 1984 or have been insured in some other way, for example through child-raising periods.
This is how much the pension increases
The amount of your pension depends largely on how often and how much you pay in. If you pay the current pension amount every month for a year minimum contribution of 83.70 euros to the pension insurance every month for a year, you will receive 4.44 euros more pension per month. The Maximum contribution of 1.320,60 Euro brings in old age about 70.12 Euro (as of 2021).
How can non-insured persons secure a pension??
If you have only paid into the pension insurance scheme for a short time or not at all, you can secure a pension in old age by making voluntary contributions. Because for payments from the statutory pension, you need to have a Minimum insurance period of five years.
If you bring up children or take care of relatives, you will be credited with insurance time for this. For children born before 1992, the pension insurance will credit you with a lump sum of two years, for which you have to pay the contributions Children from 1992 are credited with three years. You can also Care time of dependents counts as insurance period.
If, for example, you had two children after 1992 and raised them, this alone gives you six years of insurance on your pension account and fulfills the minimum insurance period. Accordingly, you will receive a lifelong pension from the German Pension Insurance. These six years correspond to about 200 Euro pension per month.
However, if you have only three years of insurance on your pension account (for example, because you raised a child after 1992), you are still two years short of the minimum insurance period. You can fill this gap with voluntary contributions so that you can receive a pension.
Attention: Insurance years for bringing up a child are only ever granted to One parent credited – namely the one who predominantly brings up or has brought up the child. If both parents are bringing up children, the mother is generally entitled to the child-raising period of at least. If the father would like to have the insurance period credited, the pension insurance company requires a joint declaration.
Tip: If you are raising a child, the German Pension Insurance does not usually take this into account. It is therefore advisable to self-reporting. With a so-called account clarification you can also make sure that all your insurance periods have been correctly recorded.
Statutory versus private pension: Which is better?
Basically, the following applies: Whether you pay into the German pension scheme or prefer to make private pension contributions depends above all on your personal convictions. What is financially more worthwhile for you, is not predictable. Especially the development of the statutory pensions can hardly be predicted. So ask yourself first and foremost: which system do you trust more??
The statutory pension works via a so-called pay-as-you-go system. This means that pension levels depend on how much contributors pay into the system. The German pension scheme is more dependent on political decisions than a private pension scheme. For example, the retirement age is prescribed by law and may continue to rise in the coming years. In addition, the legal coverage depends on the demographic development. If fewer contributors pay for a pensioner, the pension automatically rises by less.
Those who are compulsorily insured in the statutory pension scheme, however, have the advantage of being entitled to an inheritance-minimum pension, as well as rehabilitation benefits and lifelong protection for surviving dependents through a widow’s pension or orphan’s pension.
For a private provision, for example a Riester or Rurup pension, on the other hand you pay in your own contributions; it is funded. The conditions are defined in the contract. Depending on which contract you choose, the provider (usually an insurance company) can invest your money in the stock market. With the right – cheap – contract you have the chance of slightly higher savings returns. However, you tie yourself to an insurance company for life.
Alternatively, you can also independently of insurance itself about cheap stock index funds (ETFs) provide for old age. More and more people are taking advantage of this opportunity to secure a supplementary pension to their state pension. Because the amount of the statutory pension will most likely not be enough to maintain your standard of living from your working life in old age.