Germany's Pension Landscape in 2024: Rise in Recipients and Benefits Accompanied by Higher Taxation Rates
Pension Taxation in Germany: Gradual Transition Towards Full Income Taxation
In 2005, a significant reform was introduced to the pension taxation system in Germany, which has been gradually transitioning statutory pensions towards full income taxation. This change, outlined in the 2005 Pension Income Tax Act, has seen the taxable portion of statutory pensions increase progressively over the years.
Starting from 2005, the taxable portion of statutory pensions began at 50%, and it has been increasing each year. By 2040, 100% of statutory pensions will be subject to income tax. The remaining portion of the pension income remains tax-free, reflecting pension contributions made before 2005, which were not previously taxed.
The taxable portion of statutory pensions depends on the year a person began to receive their pension. For example, pensions starting in 2025 are approximately 85% taxable. This system is combined with Germany's progressive income tax rates and a basic tax-free allowance (Grundfreibetrag), which applies to total taxable income, including pensions. For 2025, this allowance is €12,096 for singles and €24,192 for married couples filing jointly.
Pensioners must consider that if their combined income (pension plus other taxable income) exceeds the tax-free allowance, they will pay income tax on the taxable portion of their pension. This system applies to statutory pensions (gesetzliche Rentenversicherung). Private or occupational pensions may be treated differently for tax purposes.
In 2021, 41% or 8.9 million of the 21.9 million pension recipients paid income tax. Approximately 70 percent of these benefits were subject to tax, amounting to 282.6 billion euros. In 2021, around 81% of the pension recipients who paid tax had other incomes such as annuities, employment income, or rental income.
With the entry into force of the Growth Opportunities Act on March 27, 2024, the transition phase for tax-free pension contributions was extended to 2058. From this point on, new statutory pensions will be fully taxable as income. The total pension benefits in 2024 amounted to around 403 billion euros, marking a 5.7 percent or 21.7 billion euros increase compared to the previous year.
The number of pension recipients also increased by 0.75 percent or 167,000 people compared to the previous year, reaching 22.3 million people in 2024. However, the exact number of pensioners who paid income tax in 2024 is not yet known due to the long time frames for tax assessment. The data for the year 2024 regarding the number of pensioners who paid income tax is not available.
This system ensures a progressive inclusion of statutory pensions into the taxable base, with a gradual increase in the taxable share culminating in full taxation by 2040, while allowing partial tax exemption for earlier pensioners, reflecting the change from a system tax-free in pension benefits to one taxing them during payout.
Businesses and individuals in the field of wealth-management and personal-finance might take notice of the gradual transition in Germany towards full income taxation of statutory pensions, especially considering the progressive tax rates and the basic tax-free allowance. In the year 2040, 100% of these pensions will be subject to income tax, affecting both new and older pensioners.
