Taxation of pensions
With the adoption of the German Retirement Income Act (AltEinkG), the legislature established a completely new basis for the taxation of pensions from 1 January 2005.
This was guided by the fundamental concept of deferred taxation. Deferred taxation means that the pension contributions are exempt from taxation during the savings phase and the pension benefits drawn from there are subject to taxation in full. Previously, both pension benefits from the statutory pension insurance scheme and those from professional pension funds were taxed on the basis of an income-based proportional taxation scheme. This means that during the savings phase, pension plan contributions are taken in part from taxed income and that this payment is therefore only to be taxed according to that proportion of income.
Since pension contributions were at least in part paid from taxed income in the past, pension drawn is not immediately taxed in full, as this would otherwise lead to double taxation. This is why legislature has stipulated long-term transition rules, as shown in this table:
Year of retirement until and including/ taxation proportion
|from 2040||100 percent|
How heavily you are actually taxed depends on whether this pension is your only source of income or you receive income from other sources as well. The pension falls under other sources of income as regards income tax law. In addition to the other sources of income, there are still six more types of income (e.g. from capital gains). Of the seven types of income, the sum of all earnings which are subject to taxation determine the amount of income tax to be paid. Please note that personal questions on tax returns and tax liability can only be answered by a tax consultant who is familiar with your personal income situation.