Two weeks ago, pension advisor Andreas Irion received a visit. His client Renate Frei* has a problem. In 1977, at the age of 17, she began her training. She worked non-stop for more than 40 years until she fell ill in 2018. It took over a year for her to fully recover. At almost 60, she tried to come back to life in terms of health and work. Without success.
Today Frei is over 60 with 44.5 years of contributions for the pension. Now she could retire as early as possible, but she would have to cope with deductions. Frei doesn’t want that. She prefers to pay additional contributions voluntarily in order to get the full 45 years of retirement.
Topping up the pension can also be worthwhile in other cases. But not everyone is allowed to deposit. Until March 31, voluntary pension contributions for 2022 still to be transferred. An extension of the deadline is possible. The Handelsblatt explains all the details.
In order to be allowed to pay voluntary contributions at all, you must meet one condition: you must not have paid any compulsory contributions to the pension fund in the past year. These can be people who take care of the household, mothers or the self-employed who are not compulsorily insured. Carers who do not actively pay into the pension fund, but whose pensions are covered by the long-term care insurance, cannot pay any voluntary contributions either.
Clients like Renate Frei, who retired towards the end of their fifties, usually come to pension advisors. And want to fill up their retirement years in order to get their pension without deductions after 45 years. According to Irion, young mothers have also made additional voluntary contributions in recent years. Because for a child, parents are already credited with three years of contributions for the upbringing period. If you buy two more years, you are entitled to an old-age pension
“It makes sense for everyone who is allowed to pay back. You save taxes and protect yourself from inflation,” says Andreas Irion, the pension advisor. People should use the contributions as a pension if they firstly trust the state pension system and secondly do not believe that they can do better themselves, for example by investing in exchange-traded funds, stocks or other investments.
What’s in it for you?
During her consultation with Andreas Irion, Ms. Frei decided to top up the remaining five months. In this way, she can draw the full pension without any deductions. But if she had decided against it and had retired as early as possible, she would have had to accept deductions. After deducting health and long-term care insurance, monthly pensions would be EUR 1,680 from July 2023.
However, if she decides to live on her savings until December 2024 and “buys” the five additional months of pension, her pension would be 1,910 euros per month. That is 230 euros more than the fastest possible entry in summer. Is it worth it for free? Irion sets up an example calculation:
Frei must start the calculation with a minus. Because if she foregoes 1680 euros per month from July 2023 to December 2024, she will be missing more than 28,000 euros. However, she makes up for the loss after ten years and five months. Like many other pension insurance schemes, the model is a bet on living as long as possible. The German Association of Actuaries certifies that the client has a life expectancy of 91 years. If she retires at 65, she will get 1,910 euros a month for 26 years. This results in a total pension of 595,920 euros. So the waiver is good business for Frei in the long run.
How does this work?
The amount of the voluntary additional payments has a lower and upper limit. It changes regularly and is between 96.72 euros and 1320.60 euros per month this year. You can deposit up to twelve times a year. How often and how high the contributions are made may differ. Each until March 31st voluntary contributions for the previous year are subsequently paid. “The payment is still possible if you have submitted an informal application by the deadline, then you can also pay in later,” says pension advisor Irion.
The voluntary pension contributions increase the old-age pension later in the same way as the compulsory contributions. For every month paid in, Frei earns pension points. Irion recommends postpaying dues for the previous year, not the current one, whenever possible. “Because the assessment basis for the pension points, the average salary, usually increases every year,” he says. That makes pension points more expensive. If you want to achieve a pension point West with voluntary contributions, you have to transfer a total of 7,236 euros per year or 603 euros per month for 2022. In 2023 it will already be 8,024 euros or just under 670 euros per month.
In the calculation example that Renate Frei wants to use to supplement her pension, she can theoretically only pay the minimum sum of around 93 euros for each month. This increases her pension by two euros per month.
In addition, Frei can also draw tax advantages from the pension arrears. “The client can claim her contributions as a pension expense for tax purposes,” says Irion. Since 2023, these can be fully claimed as pension expenses in the tax return.
*Name changed.
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