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The perfect pension plan

The perfect pension plan, that is a great name, right? Here is how it works: This system not only allows you to be well off when you retire, it also uses the German tax system to your advantage to achieve that goal in the most effective way. In this system, you have the com­bi­na­ti­on of a stable pension combined with financial fle­xi­bi­li­ty when you retire. But the best part is: You get multiple hundreds of thousands of euros by using the German tax system to your advantage. 

Table of Contents 

Stabile pension + flexible savings

For your re­ti­re­ment you usually want two aspects: First a stable monthly pension, that can not decrease or run out, which pays your living cost, so you have financial safety. Second, you want savings that you can access anytime to do whatever you want with, travel, support your family, and realize projects that are important to you. The perfect pension system is struc­tu­red in a way that the go­vern­ment pays for the second part. 

Here is how it works: You start by defining the amount you want to invest for your re­ti­re­ment. A good rule of thumb is to con­tri­bu­te 10% of your salary, when you start younger than 35. 


So let’s say you have an 80k salary, so you want to put aside 8k a year, that’s 665€ a month. This 665€ you con­tri­bu­te towards a Base Pension plan, which provides a stable lifelong pension for you when you retire. If you don’t know how the Base pension works, here is our article about the Ba­sepen­si­on.  When you start the perfect pension plan at the age of 30, you will have around 4k monthly pension at 67, after tax that’s around 3k, that is when you calculate with a con­ser­va­ti­ve return, with the average return over 35 years the pension will be 6400€, after tax 4500€. That is the first part, your stable life-long pension. 

Das Bild zeigt einen Ausschnitt aus einem Versicherungsangebot mit möglichen Renten in Abhängigkeit der Wertentwicklungen

Save income tax

Now for the second part, we use the German tax system to our advantage, because you can deduct the con­tri­bu­ti­ons from the base pension from your income tax. So when you do your next tax de­cla­ra­ti­on, you write one extra number in it and will get a refund from the go­vern­ment. How big? That depends on your income, generally you can say when you make over 60k you get around 40% to 45% back.

You can calculate how much tax you save with the income tax Calculator from the German De­part­ment of Finance. The tax system works pro­gres­si­ve, that means, that the more income you have, the more tax you have to pay, not just in absolute numbers, but also per­cen­ta­ge wise. When you have put in your Gross income, the cal­cu­la­tor shows you how much income tax you pay in absolute numbers, as a per­cen­ta­ge of your overall salary and your marginal tax rate. The marginal tax rate ist the tax rate, you pay for the highest part of your salary. While you pay 0 income tax for the first 10k you make, you pay 42% taxes for for every euro you make above 62k. On the one hand it is not pleasant to pay that much tax on higher incomes, on the other hand that means, ever­y­thing you are able to deduct you get a tax refund with the same percentage. 

How big is my tax refund?

Tax refund for employees 

Gross Income

Tax refund in %

Tax refund in € (5k contribution)













In a flexible Pension plan you get to choose between a pension and the capital payout. While you have to pay taxes on the pension you get out of the Ba­sepen­si­on the payout out of the flexible plan is different. First of all, only the profit is taxed, not the con­tri­bu­ti­on, you get the con­tri­bu­ti­on back tax free. Also in the flexible plan there is a tax advantage. When you hold the plan until you are at least 62 years old and con­tri­bu­ted for at least 12 years, you get a massive tax break on the payout. If these con­di­ti­ons are met, half of the profit is com­ple­te­ly tax-free. The inter half then is taxable income. In addition, while the money is in the plan, it is com­ple­te­ly tax-free. 

Let the go­vern­ment pay for your re­ti­re­ment savings

So let’s stick to our example: For the 8k you have con­tri­bu­ted you get 3500€ back from the go­vern­ment. So of the 665€ you invest monthly you get 290 back. Now you could just use this money for con­sump­ti­on OR you apply the perfect pension plan in which you invest the tax refund back into a flexible pension plan and let the money work for you there. In our example, when you invest your tax refund of 293€ a month into a flexible pension plan, you will have con­ser­va­tively cal­cu­la­ted at 7% 494.000€ at 67 when you retire. 

Das Bild zeigt einen Ausschnitt aus einem Versicherungsangebot mit möglichen Kapitalabfindungen in Abhängigkeit der Wertentwicklungen

Because you also have a huge tax break in the flexible pension plan and when you do the taxes smartly, you will pay around 50k tax on that, so 440k in your pocket, that you can do whatever you want with. That is almost half a Million euros for your re­ti­re­ment just from using the German tax system to your advantage. I have im­ple­men­ted this strategy for so many clients now, because they love this system. 


  1. Put your monthly con­tri­bu­ti­on in a Base pension to get a stable pension when you retire
  2. Get the tax refund from the government
  3. Invest the refund in a flexible pension plan
  4. Enjoy your re­ti­re­ment with a stable pension and a lot of savings you can do whatever you want with, and believe me: Having this money, knowing that it solely comes from tax refunds just feels great!

If you want to see how the numbers for the perfect pension plan are for your in­di­vi­du­al situation, feel free to book yourself a free initial con­sul­ta­ti­on with us.

About the Author

David Reinhard Profilbild

David Reinhard

Senior Consultant 
David is our expert for English-speaking customers as well as US citizens. He helps customers un­der­stand and make the best use of the German system. 

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