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.
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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.
Calculation
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.
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) |
50.000€ | 33% | 1650€ |
60.000€ | 36% | 1800€ |
70.000€ | 39% | 1950€ |
>80.000€ | 42% | 2100€ |
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.
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.
Summary
- Put your monthly contribution in a Base pension to get a stable pension when you retire
- Get the tax refund from the government
- Invest the refund in a flexible pension plan
- 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.
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