How is the statutory pension taxed?

In 2005, the legislature amended the taxation of state pensions by the Retirement Income Act (Alterseinkünftegesetz). Since then, a fixed portion of the pension has been taxable, the rest remains (yet) tax-free. You must pay tax on your income from the pension, which is what is known as downstream taxation. The amount of tax to be paid depends on the year in which you retire. For persons who retired in 2005 or previously, the tax-free portion was 50 percent. A (personal) exemption amount is formed from the non-taxable pension, so that these pensioners will be able to use a "pension allowance" of 50 percent from 2005. This pension allowance remains unchanged for life.

Since 2005, the so-called taxation rate has been increasing by two percentage points annually, and by one percentage point per year since 2021. Persons retiring after 2040 will have to pay full tax on their statutory pension income.

Example: Hans Müller retired on January 1, 2009 and received a total statutory pension of 12.000 Euro last year. For Hans Müller, 58 percent of his pension is taxable; the pension allowance is 42 percent. For example, Müller would have to declare 6.960 Euro as income at the tax office for the year. However, if he has no further income, he does not have to file a tax return, as the sum is less than the basic tax allowance of 8.354 Euro (from 2014 onwards). The life-long pension allowance for Hans Müller amounts to 5.040 Euro. However, he would only have to pay tax on income above this exemption amount if it were also higher than the basic exemption amount.

However, income from rentals and leases or capital gains must be attributed to income. If Hans Müller, on the other hand, retired in 2017, he would have to pay tax on 8.880 Euro (74 percent) of his pension and would therefore have to file a tax return, provided that the basic tax-free allowance would not change until then. Attention: Until the end of his life, Müller's pension allowance remains the same. Even though his income from pensions increases after pension adjustments, only 5.040 Euro remained tax-free each year. The exemption does not apply to a specific sum of money, but does not apply to a portion of the respective pension. Mr. Müller will therefore have to pay full tax on future pension adjustments.

Tip: The tax office automatically deducts a flat-rate amount of 102 Euro for income-related expenses without further proof. If you have higher expenditures, you should include them in the tax return to push your taxable income down. For example, you can specify tax consultancy costs (for Form R), pension advice or a lawyer, if he or she supports you in pension matters. However, you will have to prove this higher expenditure.

How is the statutory pension taxed?

What is the regulation of the income tax legislation (Alterseinkünftegesetz) of 2005?

The Retirement Income Act regulates the taxation of pensions. Everyone is affected, both pensioners who were already retired in 2005 and all future pensioners. The tax burden on new pensioners increases from year to year - but at the same time the benefits for employees are also growing.

Tax relief for old-age provision

In addition to the statutory pension insurance, private pension insurances are also recognised as old-age provision (so-called basic pension or Rürup pension). However, contributions to private pension insurance schemes are only tax-privileged if the insurance is aimed at a life-long pension of the taxpayer. In addition, the insured person must be at least 60 years of age at the time of commencement of the pension payment. If the contract is concluded from 2012, pension payments may not begin until the age of 62. This ensures that these are pension products for old-age provision. In addition, the pension entitlements may not be transferable, cannot be pledged as collateral, cannot be sold and cannot be capitalised. In addition, the sum insured must be paid out as a life annuity, one-off payments are generally prohibited. However, the tax-privileged provision products can be supplemented with supplementary insurance - for example, occupational disability insurance.

Investment products that do not necessarily serve retirement provision purposes are not tax-privileged. As a rule, these are freely available capital investments, which also include endowment insurance policies. An exception to this rule are endowment life insurance policies concluded prior to January 1,2005. They remain tax-free.

For pensioners, this means the following: Since 2005,50 percent of retirement income has been taxed. From 2006 to 2020, the taxable portion of pensions will increase by two percentage points per annum, and from 2021, the portion will only increase by one percentage point per annum. In 2040,100 percent of pensions will be taxable, whereas contributions by employees to old-age provision will be largely tax-free.

Also regulated in the Retirement Income Act: Temporary pensions, such as reduced earning capacity pensions, and non-term pensions, such as retirement pensions, have been treated in the same way for tax purposes since 2005. And pensions from insurance policies, which are tax-privileged in the savings phase, are taxable in the payout phase.

What is the regulation of the income tax legislation (Alterseinkünftegesetz) of 2005?

For which pensions do I have to pay taxes?

Most pensions are taxable. These include retirement pensions and disability pensions, widow's or widower's (large and small) pension, orphan's pension, company pension (from direct insurance) and life insurance pensions. Depending on the type of pension, different taxation applies.

However, you do not have to pay tax on a pension, which you receive from the statutory accident insurance (professional liability insurance), a war pension, the severely disabled person's pension and a compensation pension.

For which pensions do I have to pay taxes?

When do pensioners have to file a tax return?

Your working life is over - but that does not mean that the tax office no longer wants to know anything about you. If certain conditions are met, you must file a tax return even as a pensioner. Since 2005, the Retirement Income Act has been in force, which regulates the transition to deferred taxation.

It works on the principle that contributions to pension insurance can be claimed as special expenses in the tax return, but the fiscal authorities collect the money later when the pension is paid out. The law will not be fully implemented until 2040, when those who retire will have to pay tax on their pension in full. Until then, tax-free allowances apply, which decrease with each retirement year.

So far, only about one in four pensioners has filed a tax return, but many are now being asked to do so by the tax office. This is due to the improved networking of the authorities: State, private and professional pension insurance companies inform the tax offices to whom they pay pensions. With the help of the tax identification number, this data can now also be assigned.

If the tax office has reason to believe that your income exceeds the basic tax-free amount, it will ask you to file a tax return - in the worst case, even retroactively up to 2005. You should respond to the letter from the office in any case and, if necessary, ask for an extension of the deadline. Otherwise you may incur high interest for late payment. In addition, the officials can estimate your tax - and it is unlikely that you will come off well.

Exemption is possible

If your total income is below the tax-free subsistence level, you can be exempted from the obligation to file a tax return. Many tax offices handle this relatively non-bureaucratically: a list of income and the corresponding income-related expenses and tax-free amounts is often sufficient to convince the officials.

If it is likely that your income will not increase significantly in the next few years, you can also apply for a non-assessment certificate (Nichtveranlagungsbescheinigung). With this certificate, you will not have to file a tax return for up to three years - of course, only as long as you do not have to pay any taxes. You can also submit the certificate to the bank, which makes the exemption order for interest income unnecessary.

Obligation to file a tax return

However, you may also be generally obliged to file a tax return. This is the case if you

• have income from employment. However, mini-jobs are excluded from this.
• receive pension payments, such as a civil servant's pension or widow's pension.
• receive a company pension or a factory pension.
• have claimed losses in the last year.
• have not paid a final withholding tax on investment income.

Special rules for pensioners

Special rules apply to pensioners. They must file a tax return if

• the pension or a salary has already been taxed in tax classes V, IV or VI.
• an allowance was entered on the tax card and the income was above 10.200 Euro (19.400 Euro for married couples).
• there was income above 410 Euro from pensions, rentals and leases, wage replacement benefits (e.g. unemployment benefits or sick pay) or other sources of income.
• on investment income above the exemption amount has not yet been paid withholding tax.
• spouses have chosen separate assessment.
• in the income tax return of the previous year a loss has been determined.
• the pension allowance for a civil servant salary was higher than the deductible insurance premiums (applies only to pensions up to 10.200 Euro).
• a severance payment has been taxed according to the so-called one fifth regulation.

How much time do you have?

The deadline for submitting the tax return is 31 May of the following year, but can be extended upon request. If you hire a tax advisor or income tax assistance union, the deadline is automatically postponed to 31 December. If you file your tax return voluntarily, for example, because you hope to receive refunds, you have four years to do so. You can therefore submit your 2012 tax return until December 31, 2016.

No taxes despite tax return

If you have to file a tax return, this does not automatically mean that you also have to pay taxes. You are only threatened with additional claims if your taxable income - in addition to the statutory pension, this also includes, for example, regular payments from a Riester or Rürup contract, the share of earnings from private pensions, rental income and income from self-employment - is above the above-mentioned tax-free subsistence minimum.

This basic minimum is the amount of income that you have to pay in taxes.

This basic tax-free amount is the same for everyone, whether pensioner or not. In 2012, it was 8.004 Euro for single people and 16.008 Euro for married people. That doesn't seem like much, but it's not that hard to get below that limit. After all, we are only talking about the income that is still taxable, i.e. what is left after deducting the pension allowance, savers' allowance, special expenses and income-related expenses.

An example: You get 1.000 Euro a month pension, so 12.000 Euro a year. Now the pension allowance comes into play. If you retired in 2012, 36 percent of your pension remains tax-free, so 4.320 Euro. Only 7.680 Euro would be taxable - and that falls under the basic tax-free amount. According to "Finanztest," the rule of thumb is that anyone who retired before 2006 can collect about 19.100 Euro in gross pension tax-free. The basic tax-free amount decreases for each pensioner year. If you have been retired since 2012, only about 15.120 Euro remain tax-free.

Important: The allowance of the first pension year remains constant over the entire pension term. So in the example, the allowance is always 4.320 Euro, even if the pension increases over the years. So if the pension climbs, for example, at some point to 12.480 Euro a year (1.040 a month), you will have to pay tax on 8.160 Euro and thus possibly break the hurdle of the basic tax-free amount.

Income can be "calculated down"

In addition to the pension allowance, there are a number of other ways to reduce taxable income. So you can claim in the Form R income-related expenses, the allowance for pensioners is currently 102 Euro. However, if you had higher expenses, you can also deduct more. For example, loan interest for the subsequent payment of pension insurance contributions, costs for pension and insurance advice or union dues are recognised as income-related expenses.

In addition, there are pension expenses, such as contributions to health and nursing care insurance, accident or motor vehicle insurance. They should be entered in the form "Pension expenses". You can enter costs for household help or tradesmen as well as church tax paid in the form. Under certain circumstances, you can also claim exceptional expenses, for example, if you had particularly high medical expenses.

When do pensioners have to file a tax return?

What pensions are to be stated in the tax return?

The taxation of pensions is divided into three groups:

• Life annuities from statutory pension insurance, the agricultural old-age pension fund and occupational pension schemes. This also includes pensions from own certified basic pension contracts (Rürup pension),
• Life annuities from private pension insurance contracts and Benefits from old-age provision contracts (so-called Riester pension) and
• Benefits from company pension schemes, including life annuities from the pay-as-you-go part of supplementary pension funds, such as VBL or a ZVK.

Pensions, e. g. company pensions, for which you have received a wage tax certificate, please enter N in Form N.

What pensions are to be stated in the tax return?

Which allowances can pensioners use?

Pensioners who file an income tax return can enter various allowances and expenses incurred and thus reduce their taxable income.

The personal pension allowance

The pension allowance is determined in the second full year of pension receipt. In the year of the pension start and in the second pension reference year, the pension is taxed with the so-called taxation share. The remaining amount in the second year is the personal pension allowance, which then remains tax-free throughout life. From the third year, the pension is taxable in full after deduction of the personal pension allowance and the income-related expenses allowance of 102 Euro.

The pension allowance for civil servants

Like the retirement allowance (Rentenfreibetrag), the pension allowance (Versorgungsfreibetrag) will decrease to zero percent by the year 2040. However, the pension allowance only applies to pensions and company pensions from direct commitments and from support funds. In addition, pensioners receive a supplement to the pension allowance. This supplement also decreases over time.

This is how the figures look at the start of the pension in 2014:

• The pension allowance is 25,6 percent, up to a maximum of 1.920 Euro.
• The supplement to the pension allowance is 576 Euro.
• In addition, the allowance for income-related expenses of 102 Euro is deducted.
• In total, 2.598 Euro of pension payments remain tax-free - for life.

The old-age tax allowance

The old-age tax allowance can be used by pensioners or retirees who receive additional income or wages in addition to their pension. Additional income includes, for example, income from renting, capital assets, self-employment, private sales transactions or Riester pensions. Before this, however, the tax office deducts various amounts (savings allowance, income-related expenses). The amount of the old-age tax allowance depends on the year of birth of the pensioner.

This is how the figures look when the retiree reaches the age of 64 in 2013:

• As of 2014, the old-age tax allowance amounts to 25,6 percent for life, up to a maximum of 1.216 Euro.

The income-related expenses allowance

Every taxpayer receives a flat-rate income-related expenses allowance of 102 Euro per year for their pension or annuity.

Special expenses

Contributions to statutory health and nursing care insurance can also be entered by pensioners as special expenses in the "Form Pension Expenses" (Anlage Vorsorgeaufwand). Pensioners receive a health insurance subsidy from their pension insurance provider by which the contributions are to be reduced. Donations are tax-deductible as special expenses. The collected donation receipts thus reduce the taxable income. If you do not donate or have no other special expenses, the tax office deducts an allowance of 36 Euro.

Exceptional costs

Elderly and sick people in particular incur exceptional costs that can reduce their taxable income. Whether it is accommodation in a nursing home, the employment of a domestic helper or a contract with a tradesman. But pensioners can also claim medical expenses such as medication, glasses or dentures.

The mini-job

If a pensioner (over 65 years of age) has a 450-euro job, this income is tax-free for him.

Tip: If, as a pensioner, you remain below the basic tax allowance with the various tax-free allowances, flat rates and deductible expenses, then you also do not have to pay tax on your income.

Which allowances can pensioners use?