Taxation of pensions

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

2005	50 percent
2006	52 percent
2007	54 percent
2008	56 percent
2009	58 percent
2010	60 percent
2011	62 percent
2012	64 percent
2013	66 percent
2014	68 percent
2015	70 percent
2016	72 percent
2017	74 percent
2018	76 percent
2019	78 percent
2020	80 percent
2021	81 percent
2022	82 percent
2023	83 percent
2024	84 percent
2025	85 percent
2026	86 percent
2027	87 percent
2028	88 percent
2029	89 percent
2030	90 percent
2031	91 percent
2032	92 percent
2033	93 percent
2034	94 percent
2035	95 percent
2036	96 percent
2037	97 percent
2038	98 percent
2039	99 percent
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.