Reform of subsidized private pension provision

On 30.09.2024, the Federal Ministry of Finance published a draft law on the reform of tax-incentivized private pension provision (pAV Reform Act). This takes up the proposals for change made by the government's focus group of politicians, financial experts and consumer advocates in particular. As the declining number of pension contracts since 2018 shows, the previous structure of the state-subsidized Riester pension has lost its appeal, primarily due to the high contract costs and complexity. As an alternative, the new statutory regulations provide for the promotion of private old-age provision within the framework of - differently - return-oriented old-age provision products. Various financial products such as funds, ETFs and individual shares will play a role as much more individual investment options; opportunities and potential returns on the capital market are to be exploited.

Key aspects of the reform plan

In future, there are to be two state-subsidized forms of investment: according to the BMF's objectives, a certified retirement savings account without guarantees for the capital paid in will create a higher-return - although higher-risk - pension option. Guaranteed products with either 80% or 100% guaranteed capital at the start of the payout phase are to be offered for security-oriented investors. Overall, the focus of the more standardized products is on old-age provision. Protection against reduced earning capacity, disability or surviving dependants will no longer be subsidized in future. However, the homeowner pension subsidy is to be retained.

The attractiveness of private pension provision is also to be increased by making the products more flexible. In the savings phase, it will be easier to switch providers thanks to greater comparability of pension contracts. The legislative amendments also provide for less complexity in the withdrawal of capital for owner-occupied residential property (owner-occupied pension subsidy) and a reduction in bureaucracy. For the payout phase, pensioners will be able to opt for payout plans until at least the age of 85 in addition to lifelong life annuities. Due to demographic developments, the age limit for the start of payout is set at 65.

Tax incentives

The previous system of tax incentives based on a favorable tax treatment remains in place: tax exemption of contributions in the savings phase is ensured by the allowances received or the deduction of special expenses as part of the income tax assessment. In the payout phase, taxation is deferred.

In future, a uniform minimum own contribution of EUR 120 per year is to apply for direct and indirect beneficiaries. The basic allowance - proportional to contributions - is EUR 0.20 for every euro of personal savings, with a maximum subsidized amount of EUR 3,000 (EUR 3,500 from 2030). This means that a state allowance of up to EUR 600 is possible. With a child allowance proportional to the contribution of EUR 0.25 cents per child and each euro of personal contribution, up to EUR 1,200 of pension benefits per child are additionally subsidized. The maximum possible child allowance is therefore (still) EUR 300. Pensioners with a low annual income of up to EUR 26,250 are additionally supported with a bonus allowance of EUR 175 per year. Career starters also receive a bonus of EUR 200 per year for a period of three years. 

As part of the special expenses deduction in accordance with Para. 10a EStG, the maximum amount should only apply to the taxpayer's own contributions; the bonus allowance can be claimed in addition. The maximum possible deduction of special expenses for a taxpayer thus amounts to EUR 3,600 plus any child allowances. However, the increased amount of the basic allowance for career starters as well as for low earners is not taken into account when determining the allowance entitlement as part of the more favorable test for the deduction of special expenses in accordance with Para. 3 No. 55f EStG as amended.

Implementation

The main parts of the reform are to apply from 01.01.2026. The new contracts can then be concluded and saved for. An independent and digital comparison platform is to be available free of charge from 01.01.2027, on which the offers of the various providers of certified pension contracts will be presented transparently.

Current Riester contracts will continue to be protected. In order to avoid possible disadvantages compared to new contracts, the maximum amount for the minimum own contribution calculation of four percent of the relevant income less the allowance will be limited to EUR 2,100 and thus fixed for existing contracts from January 1, 2026. At the same time, the maximum amount for the deduction of special expenses for Riester contracts already concluded will increase from EUR 2,100 to EUR 3,500 from the 2025 assessment period. Those entitled to the previous Riester pension can waive the application of the old law and switch to a new product.