Retirement Planning: The 3-Pillar Model

Understanding the Statutory Pension

For most employees, the statutory pension insurance is the first pillar of retirement provision. It works on a pay-as-you-go basis: today's contributors fund today's pensioners.

How is the pension calculated?

The pension formula: earnings points × access factor × pension type factor × pension value. Simplified: for every year at average income (2026: approx. €47,000), you earn one earnings point. An earnings point is currently worth around €39.32.

The pension level is falling

The pension level describes the ratio of the standard pension to average income. It currently stands at around 48% – and is trending downward. This means the pension is growing more slowly than wages. The gap will widen for younger generations.

Calculating Your Pension Gap

The pension gap is the difference between your desired income in retirement and your expected statutory pension. You need to close this gap with private provision.

Example calculation

• Desired net income in retirement: €2,500/month
• Expected statutory pension: €1,600 net
• Pension gap: €900/month

The Three-Pillar Model of Retirement Provision

German retirement provision is based on three pillars:

1. 1st pillar: statutory pension insurance (mandatory for employees)
2. 2nd pillar: company pension (bAV) – often with an employer top-up
3. 3rd pillar: private provision (Riester, Rürup, ETF savings plan, real estate)

A smart strategy combines all three pillars to benefit from their respective tax advantages and subsidies. Use our pension calculator to estimate your statutory pension.

Riester Pension: For Employees

The Riester pension is particularly attractive for employees and civil servants. The government subsidy consists of allowances and tax benefits.

The Riester allowances in 2026

• Base allowance: €175 per year
• Child allowance: €185 (born before 2008) / €300 (born from 2008)
• Career starter bonus: €200 one-off (under 25)

Who benefits most from Riester?

Riester is especially worthwhile for families with children (thanks to the generous child allowances) and for low earners (thanks to the base allowance relative to a low personal contribution). Well-paid singles without children often have better alternatives.

Rürup Pension: For the Self-Employed

The Rürup pension (basic pension) is the Riester alternative for the self-employed and freelancers. The big advantage: contributions are tax-deductible as special expenses.

Tax deductibility in 2026

You can deduct up to €29,344 (single) / €58,688 (married) per year as special expenses. At a marginal tax rate of 42%, that saves you over €12,300 in tax per year!

The catch

Your capital is tied up until you retire. You can't withdraw it early. The pension is taxed later (deferred taxation). From 2058, it will be 100% taxable.

Company Pension (bAV)

The company pension is the second pillar. You give up part of your gross salary (salary sacrifice), which is then paid tax-free and free of social security contributions into your retirement provision.

The employer top-up

Since 2019, employers have had to pay a top-up of at least 15% if they save on social security contributions through your salary sacrifice. Many employers pay even more – so ask!

Is a company pension worth it?

With an employer top-up of 15-20% or more: yes, definitely. Without a top-up, the benefit is smaller, since the future pension is fully taxed and subject to health insurance contributions.

Private Provision with ETFs

Alongside government-subsidized products, an ETF savings plan is a flexible, low-cost alternative. You're not tied down and can access your money at any time.

Advantages of an ETF savings plan

• Flexibility: no lock-in until retirement
• Low costs: TER often below 0.2% p.a.
• Returns: historically 7-8% p.a. (MSCI World)
• Transparency: you see exactly what's happening

Tax treatment

Capital gains are taxed with the flat-rate withholding tax (25% + solidarity surcharge + church tax if applicable). The tax-free allowance is €1,000 per person (€2,000 for married couples). Equity funds also benefit from a 30% partial exemption.

Frequently Asked Questions About Retirement Planning