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How does German pension insurance work (and how is it relevant to freelancers)?

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As a freelancer, it’s up to you to ensure you have the funds and savings in place to cover yourself in case of loss of work, or to factor in holiday and sick leave. The same applies to ensuring that you have something in place to support yourself when you eventually reach the stage in life where you’re no longer generating income through work. You may not like to dwell too much on old age, but if you get your ducks in a row early, you can avoid headaches later in life.

The topic of retirement and pension is just as nuanced and difficult to wrap your head around as any of the other tax or bureaucratic systems in Germany. And, just like many other areas of tax and accounting, it’s much more complex to navigate for freelancers than it is for employees. This guide takes you through how German pension works and how it’s relevant to the self-employed.

What is pension (Rente)?

Depending on where you’re from, you may be familiar with the terms pension scheme, retirement plan, superannuation, or even 401(k). These are all terms that generally refer to a sum of money that’s funded or invested over a person’s working lifetime through employer, government, insurance, or individual contributions, and made available to the individual once they’ve reached retirement age, for the purpose of providing a regular basic income once they are no longer working. 

Each country has a different way of ensuring people have access to some kind of income in their retirement. The German system is based on a system of three pillars. Let’s go through each of them and how they apply to freelancers.

Pillar one: Mandatory state pension insurance (gesetzliche Rentenversicherung)

Mandatory state pension insurance is a pay-as-you-go system, into which all employees and employers pay a percentage of salaries. The contributions made during your own working years go towards funding current pensions (rather than being saved or invested). The amount paid to retirees is based on average salaries.

How is this relevant to freelancers?

Pillar one is particularly relevant to freelancers who are also employed full-time or who have certain freelance occupations. 

Freelancers with full time employment

If you have started a side hustle in addition to your full-time job, you will already be paying into the mandatory state pension insurance system, and are eligible to receive it once you hit retirement age (currently 65, retirement age in Germany is set to increase to 66 by the year 2023 and 67 by 2029).

Freelance occupations obliged to pay state pension

Certain freelance occupations are obliged by law to contribute to the state pension system. These include but are not limited to teachers, carers, midwives, artists, and publicists.

Voluntary state pension for freelancers

People who have permanent residency in Germany and who are generating income exclusively through freelancing but are not undertaking one of the occupations listed above may still voluntarily pay into the state pension system. However, they must make consistent contributions of a minimum amount, never missing a payment, in order to retain future entitlements. 

Pillar two: Voluntary occupational pension (Betriebliche Altersvorsorge)

Voluntary occupational pension schemes are granted by companies to their employees, if, as the name implies, they decide to do so. They can be structured in a number of ways and provide different benefits depending on how a company chooses to set it up.

How is this relevant to freelancers?

Voluntary occupational pension schemes are only relevant to freelancers if they are also employed by a company. If you’re freelancing for a company, even for an extended period of time, you’re not eligible for the company’s associated voluntary pension scheme.

Pillar three: Private pension plans

The third pillar, private pension plans, are retirement funds that are contributed to by the individual, through their earnings. People have the option to set up a private pension plan directly through an insurance provider, or to opt for the government sponsored Riester (Riester Rente) or Rürup (Rürup Rente) pension schemes. The paperwork and authorisation of Riester and Rürup pensions are handled by individual providers. Unlike the state pension insurance scheme, the money that’s contributed towards private pension plans is saved or invested for use during your own retirement. 

How is this relevant to freelancers?

Riester

The Riester pension is an attractive option, as there are a number of associated benefits. However, self-employed people are only eligible to partake in the Riester pension if they also participate in the state pension insurance scheme, mentioned above. There are minimum contributions, which must be made regularly until retirement. One advantage however, is that contributions can be considered special expenses in your income tax return.

Rürup

The Rürup pension, on the other hand, was established with the self-employed in mind, and provides another option for freelancers to consider. The Rürup pension allows for flexibility of contribution amounts and frequency, which suits the often fluctuating income of the self-employed. You do not have to be paying into the state pension insurance scheme in order to participate in the Rürup pension. It’s also protected by law, and comes with an associated tax credit each year.

💡 Tip from Accountable: In addition to state-subsidised private pension scheme payments, you can claim a range of business expenses as deductions on your taxable income. Use our search tool to see what other expenses you can claim!

Do I have to have a pension plan?

Self-employed people are not strictly obliged to pay contributions to a pension scheme, unless they fall under one of the occupation categories mentioned above, who are liable to pay mandatory state pension insurance. 

However, that doesn’t mean you shouldn’t consider it. It certainly doesn’t hurt to think about and prepare yourself for your future and make sure you’ll be able to afford to maintain a lifestyle in retirement.

Another thing to consider is how invested you are in living and staying in Germany in the long term. If you know you intend to live the rest of your life in Germany, it’s definitely worth thinking about setting up a pension scheme here. However, if you’re not planning to stay in Germany beyond a few years, you may want to consider alternative investments, such as index funds, ETFs, or other private retirement funds that you’ll be able to access from wherever you’re living.

How do I decide what to do?

It’s certainly not a simple decision, and with most private pension plans in Germany operating on a commission basis – that is, your bank or financial adviser makes commission on selling certain pension schemes – it can be expensive. Another option would be to seek advice from a financial adviser who doesn’t work on commission but rather charges a fee for their unbiased advice and services.

💡 Tip from Accountable: Freelancing in Germany in 2021? Check out what rules and regulations have changed this year.

Conclusion

This guide is a general overview only, and does not cover all the details and nuances of pension schemes in Germany. For more information and any specific questions, check out the homepage of the Deutsche Rentenversicherung

While your pension decisions are something you must make for yourself, there are other ways to make life easier as a freelancer in Germany. The Accountable app is an easy and free tool to help you organise and manage your bookkeeping and taxes. Sign up now and get on top of your finances.

Tino Keller, Managing Director & Founder of Accountable Germany
Tino Keller, Managing Director & Founder of Accountable Germany

Tino already built two companies and therefore knows the challenges freelancers face first hand. With Accountable he wants to solve all those challenges related to taxes.
When not working, Tino enjoys a nice Asado with a glass of Malbec as well as celebrating one of the occasional wins of favourite soccer team 1. FC Köln.

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