Retirement Provision
Retirement Provision: 9 technical terms explained – definition, synonyms and legal basis.
Old-Age Pension
Synonyms: Altersrente
The old-age pension is the recurring benefit paid by the statutory pension scheme, or by a private or occupational pension arrangement, once the standard retirement age is reached.
Concept
The old-age pension is the recurring benefit paid under Germany’s statutory pension scheme (§ 35 SGB VI) once the standard retirement age is reached and the general qualifying period has been met. The term is used analogously for ongoing pension payments from private or occupational pension arrangements.
Types of Pension
The German statutory pension scheme recognizes various forms of old-age pension, including the standard old-age pension, the pension for long-term insured persons, and the pension for severely disabled persons, which differ in their eligibility requirements and in any reductions applicable for early retirement.
Interaction of the Pillars
The statutory old-age pension forms the first pillar of retirement provision in Germany and is supplemented by the second pillar (occupational pensions) and the third pillar (private retirement provision, e.g., Riester or Basisrente plans) to secure living standards in retirement.
Legal basis: DE: § 35 SGB VI
Partial Retirement (Altersteilzeit)
Synonyms: Altersteilzeit
Partial retirement allows older employees a gradual transition into retirement by reducing working hours in exchange for partial wage compensation.
Concept
Partial retirement allows employees above a certain age to reduce their working hours before actual retirement, with the employer typically topping up the reduced salary and making additional contributions to the pension scheme.
Models
Two models have become established in practice: under the continuous model, the employee works reduced hours throughout the arrangement; under the block model, the employee first continues working full-time during a working phase and then transitions into a fully released, non-working phase, during which compensation is drawn from the value credit built up during the working phase.
Relevance for Retirement Provision
Partial retirement facilitates a gradual transition from working life into retirement and is frequently combined with occupational pension instruments, in particular to protect the value credit accumulated during the release phase against the employer’s insolvency.
Legal basis: DE: Altersteilzeitgesetz (AltTZG)
Capital Funding Method
Synonyms: Anwartschaftsdeckungsverfahren
The capital funding method is a funded financing approach for retirement systems in which sufficient capital is accumulated from the outset for each accrued pension entitlement.
Concept
The capital funding method is a financing approach for retirement systems in which, for each pension entitlement accrued over time, the actuarially required funded reserve is accumulated from the outset, so that the obligation is fully backed by capital at all times.
Distinction from the Pay-As-You-Go Method
The capital funding method contrasts with the pay-as-you-go method, under which current pension payments are financed directly from current contribution income, without building an individual funded reserve. While Germany’s statutory pension scheme is financed on a pay-as-you-go basis, life insurers, Pensionskassen, and Pensionsfonds operate on the capital funding method.
Significance
The capital funding method makes retirement systems largely independent of the demographic development of subsequent generations, but exposes them more strongly to capital market risks, particularly interest rate risk affecting the return earned on accumulated capital.
Deferment Period
Synonyms: Aufschubzeit, Accumulation Phase
The deferment period is the time between conclusion of a deferred annuity contract and the start of pension payments, during which capital is accumulated.
Concept
For a deferred annuity, the deferment period refers to the time between conclusion of the contract and the agreed start of pension payments. During the deferment period, premiums are paid and capital is accumulated, without any pension benefit yet being paid.
Distinction from the Payout Phase
The deferment period contrasts with the subsequent payout phase, during which the accumulated funds are paid out to the policyholder as regular pension payments. The longer the deferment period, the larger the accumulated capital typically is, and thus the higher the resulting pension.
Death Benefit During Deferment
Many annuity policies provide for a return of premiums paid or a survivor’s pension if the insured person dies during the deferment period, in order to secure capital for the survivors.
Drawdown Payout Plan
Synonyms: Auszahlungsplan, Payout Plan
A drawdown payout plan is a form of decumulating accumulated capital at retirement through regular installments plus interest, until the capital is exhausted.
Concept
A drawdown payout plan is a way of receiving capital accumulated by retirement — for example from a unit-linked annuity, a Riester pension, or a dedicated drawdown contract — not as a lifelong annuity, but as regular, usually monthly, partial payments plus interest and investment performance.
Distinction from Classic Annuitization
Unlike a classic lifelong annuity, a drawdown plan generally carries the risk that the capital is exhausted before the beneficiary’s death (longevity risk), unless the plan is combined with a residual annuitization feature or a capital guarantee.
Practical Relevance
Drawdown payout plans offer greater flexibility than a classic annuity, for example regarding the size of monthly payments or the inheritability of remaining capital, and are commonly offered as a payout form under Riester subsidies and occupational pension arrangements.
Basisrente (Rürup Pension)
Synonyms: Rürup-Rente, Basic Pension Plan
The Basisrente is a state-subsidized German private pension plan providing lifelong annuity payments that cannot be inherited, pledged, or transferred.
Concept
The Basisrente, also known as the Rürup pension, is a state-subsidized form of private retirement provision in Germany that provides lifelong annuity payments starting no earlier than age 62 to 67.
Features
The Basisrente cannot be inherited, pledged, sold, or transferred; a lump-sum payout is excluded, so the benefit is paid exclusively as a lifelong annuity. These restrictions are a precondition for the tax deductibility of contributions as special expenses.
Target Group and Relevance
The Basisrente is aimed primarily at self-employed individuals and freelancers who lack access to the statutory pension system or professional pension schemes, as well as at high-earning employees seeking to use the tax deductibility of contributions to reduce their tax burden.
Riester Pension Allowance
Synonyms: Altersvorsorgezulage
The Riester allowance is Germany's state subsidy for private funded retirement provision, consisting of a basic allowance and a child allowance under sections 79 et seq. of the Income Tax Act (EStG).
Subsidy structure
Every eligible person receives a basic allowance of EUR 154 per year, plus a child allowance for each child entitled to child benefit of EUR 185 per year (children born up to 2007) or EUR 300 per year (born from 2008 onward). Receiving the full allowance requires a minimum own contribution of 4 percent of the previous year’s income less the allowance entitlement, subject to a minimum base contribution of EUR 60 per year.
Effect of the minimum own contribution
Having children entitled to the allowance reduces the required minimum own contribution, since the allowance entitlement is credited when calculating it. If only a partial own contribution is made, the allowance is reduced proportionally.
Practical relevance
Riester allowances can be claimed both through private Riester contracts and through occupational pension schemes via salary conversion. For lower-income households with several children, the subsidy rate can represent a very high share of the amount actually contributed.
Supplementary Pension Provision
Synonyms: Second-pillar pension provision
Supplementary pension provision forms the second pillar of retirement provision in Germany, mainly comprising the Riester pension and occupational pension schemes.
Position in the three-pillar model
The German retirement provision system is structured in three pillars: basic provision (statutory pension insurance, professional pension schemes, basic pension), supplementary provision as the second pillar, and private capital investment as the third pillar. Supplementary provision adds funded elements on top of basic provision.
Common principle
Since the introduction of the Retirement Income Act in 2005, both the Riester pension and occupational pension schemes follow the principle of deferred taxation: contributions are tax-favoured or paid from untaxed income, while the later pension payments are fully taxed.
Practical relevance
Supplementary pension provision is gaining importance as the statutory pension level declines. For employers, occupational pension schemes are also a tool for staff retention; for employees, they offer a funded way to close provision gaps.
Supplementary Pension Scheme for Public Sector Employees
Synonyms: Zusatzversorgung im öffentlichen Dienst
The supplementary pension scheme for public sector employees is a collectively agreed occupational pension system for employees in the German public sector.
Providers
Scheme providers are public-law pension funds: supplementary pension funds (Zusatzversorgungskassen) for municipal employees, and the Federal and State Pension Institution (VBL) for federal and state government employees. The scheme is established on a collective-bargaining basis and supplements statutory pension insurance with an additional occupational component.
Legal basis
The German Occupational Pensions Act (BetrAVG) provides special rules for the public sector in sections 18 and 30d, which deviate from the general provisions for occupational pensions in the private sector, particularly regarding funding and vesting.
Practical relevance
The public sector supplementary scheme was historically financed mainly on a pay-as-you-go basis and has, over recent decades, been gradually supplemented with funded elements to make the system more resilient to demographic change and to secure employees’ pension entitlements in the long term.