Steadily subtracting amounts: The eventual pension balance left
If you expect a retirement income of 2000 Euros, be mindful that not the whole sum will be at your disposal. Certain deductions are made before the money reaches your account.
Yearly, anyone aged 27 or more receives a pension update from the pension office. This statement includes your earliest eligible pension date and the anticipated pension amount. Note that this indicated pension amount is a projection with some uncertainties, and becomes more reliable as retirement approaches. Aiming retirees can thus estimate their retirement income with relative accuracy.
However, beware! The concepts of "gross" and "net" apply to both salary and pensions alike. Let's take a closer look at the deductions that reduce a gross pension of 2000 Euros to the net amount you'll receive.
From Net to Gross Pension: What gets deducted?
Thomas Hentschel from Consumer Center NRW explains, the pension statement already lists the deductions to be made: contributions to health and long-term care insurance, as well as taxes (if applicable). Tax payments, though, are where it gets tricky. Not everyone receiving a pension is obligated to pay taxes on it. Whether you qualify for taxes depends on various factors, such as pension entry year, potential deductions, and tax-reducing expenses, all of which differ for each person.
Contributions to health and long-term care insurance are calculated proportionally. Pensioners pay half of the general contribution rate for health insurance, which currently amounts to 7.3 percent (14.6 percent total). In addition, each pension fund levies its own surcharge, with pensioners contributing half of that roughly 1 percent more.
For long-term care insurance, a 4 percent contribution is required for childless pensioners, while pensioners with children pay 3.4 percent. Approximately 12 percent of the stated pension amount goes monthly towards these insurance contributions. Retirement advisor Thomas Gasch cautions against underestimating this financial burden: "The combined amount of contributions can be the main problem with the pension," he says.
How is the pension taxed?
In 2024, a new retiree will pay taxes on 83 percent of their pension. The remaining 17 percent is tax-free. With a statutory annual pension of 24,000 Euros, 19,920 Euros must be taxed, while the remaining 4080 Euros are tax-exempt. This tax-exempt portion remains consistent throughout the pension payment period.
Since the taxable pension portion increases annually, those retiring earlier will keep more of their benefits untaxed. As of this year, the taxable share has increased by increments of 0.5 percent. In 2025, pensioners begin paying taxes on 83.5 percent of their pension, and 84 percent in 2026. From the pension entry year 2058, the entire pension is supposed to be taxed.
Are there deductions that reduce taxes?
Yes, there are. Carola Fischer from the Federal Tax Consultants' Chamber highlights the tax-exempt basic deduction of currently 11,604 Euro. In addition, deductible expenses help lower the tax burden, such as pension scheme contributions for health and long-term care insurance, and extraordinary expenses like new glasses, dental work, or maintenance payments.
People with a recognized disability (GdB) can also lower their tax burden. A GdB of 20 already gives taxpayers a supplementary deduction of currently 384 Euro per year, with the deduction increasing up to 11,900 Euro depending on the extent of the disability. The corresponding form should be submitted at the local social welfare office.
What is actually taxed?
To find out, the basic deduction, deductible expenses, extraordinary expenses, and other deductions are subtracted from the taxable pension income. The outcome is the taxable income. The tax office wants to collect something from this - usually between 7 and 14 percent, which is less than what's common during employment.
A tax calculation, as Fischer demonstrates using a single, unmarried person with a monthly gross pension of 2000 Euro starting in 2024, reveals that the taxable portion amounts to 83 percent. This yields an annual pension income of 24,000 Euro, of which 19,920 Euro is taxable. After deducting special expenses of up to 1,900 Euro and extraordinary expenses of 500 Euro, the taxable income becomes 17,520 Euro, with an average tax rate of approximately 6.5 percent, or approximately 1139 Euro per year, or 95 Euro per month.
Other than the 2000 Euro stated in the pension information, 240 Euro for health and long-term care insurance contributions and 95 Euro in taxes need to be deducted. In total, 335 Euro, about 16.8 percent, will be deducted. From a 2000 Euro pension, only about 1665 Euro remains available for you. If you'd like to build a safety buffer, consider accounting for a few percentage points more in deductions, as the burden won't significantly decrease over time, and inflation will eat away at your money.
Pensioners can brace themselves for an increase in their responsibilities, according to Gasch. He points out several factors contributing to this, such as elevated contributions to medical and long-term care insurance, a potential tax rate hike to 100%, and pension growth leading to greater tax strain.
Regarding private pension plans, the rules differ based on contract specifics. Income sources including rent, employment, supplemental earnings, and personal health insurance require distinct calculations. By the way, most pension recipients won't be liable for the solidarity surcharge. This obligation applies exclusively to beneficiaries who exceed 18,130 Euro in taxable income in 2024.
