German tax law · Retirement income
Taxation of pensions in Germany
Pensions are generally taxable in Germany, but different types of retirement income are not taxed under the same rules. For German statutory pensions and comparable basic pension arrangements, the taxable portion depends in particular on the year in which the pension begins. Separate rules apply to occupational pensions, private annuities and foreign retirement benefits.
Downstream taxation
Contributions receive increasing tax relief, while later pension payments are taxed
Since 2005, Germany has gradually shifted major retirement systems toward downstream taxation. Contributions to the German statutory pension system and certain other basic retirement arrangements receive tax relief, while later pension payments are increasingly subject to income tax.
For pensions from the German statutory pension system, agricultural pension funds, professional pension schemes and certain basic pension contracts, Section 22 of the German Income Tax Act determines the taxable portion by reference to the year in which the pension starts.
Personal pension allowance
The tax-free portion is generally fixed as a euro amount
The taxable-share percentage does not mean that the same percentage of the current pension remains tax-free every year. Instead, the non-taxable portion is generally converted into a personal pension allowance expressed as a fixed euro amount.
The allowance is generally determined by reference to the annual pension amount in the year following the year in which the pension begins. The resulting euro amount then generally remains fixed for the remaining life of the pension.
Example
How the personal pension allowance works
If a German statutory pension starts in 2026, the taxable share is generally 84 percent. The initially non-taxable share is therefore 16 percent.
If the annual pension in the first full pension year is EUR 30,000, this would generally produce a fixed pension allowance of EUR 4,800. If the pension later rises to EUR 32,000, the allowance generally remains EUR 4,800 and the taxable amount increases accordingly.
Annual pension
EUR 30,000 in the relevant first full pension year.
2026 taxable share
84 percent, corresponding initially to EUR 25,200 of taxable pension.
Pension allowance
16 percent, generally producing a fixed allowance of EUR 4,800.
Later pension increase
The allowance generally remains EUR 4,800, so later ordinary increases raise the taxable amount.
Which type of pension?
Not every retirement benefit is taxed under the taxable-share system
Before calculating tax, the type of retirement arrangement must first be identified. German income tax law uses several different systems for retirement income.
German statutory pension
Old-age, disability and survivor pensions from the German statutory pension system generally fall under downstream taxation pursuant to Section 22 No. 1 sentence 3 letter a double letter aa EStG.
Professional pension scheme
Pensions from professional pension schemes for doctors, lawyers and other regulated professions generally follow the same taxable-share system.
Basic pension / Rürup
Benefits from qualifying German basic pension contracts can also fall within the downstream taxation system.
Occupational pension
Direct insurance, Pensionskasse and Pensionsfonds benefits are generally governed by Section 22 No. 5 EStG. Direct pension promises and support funds can instead constitute employment income.
Private annuity
For certain privately funded annuities that did not receive tax incentives, only the statutory earnings portion may be taxable.
Foreign pension
A foreign pension must first be compared with German pension and retirement categories and may also require analysis under an applicable tax treaty.
Pension commencement
The actual year the pension starts is critical for the taxable share
For pensions covered by the taxable-share system, the calendar year in which the particular pension actually begins generally determines the applicable taxable percentage. The original pension award should therefore be retained permanently.
If a taxpayer receives several pensions or different categories of retirement benefits, the relevant commencement date may need to be determined separately for each benefit.
German income tax return
A taxable pension does not automatically mean that German income tax is actually due
The taxable pension amount is only one part of the overall German income tax calculation. Whether tax is actually payable depends on total taxable income and available deductions.
Other income can result in German income tax even where the statutory pension itself is relatively modest. Deductible health and long-term care insurance contributions and other personal deductions may reduce the final taxable income.
Other pensions
Occupational pensions, private annuities and foreign retirement income may increase taxable income.
Investment and rental income
Other taxable income is generally considered together with pension income in the German assessment.
Health and long-term care insurance
Qualifying contributions may be deductible as special expenses.
Other deductions
Depending on the individual's circumstances, additional deductible expenses can reduce the German tax burden.
Foreign pensions
Foreign retirement benefits require an additional treaty analysis
If a person lives in Germany and receives a pension from another country, the applicable double-tax treaty should first be reviewed to determine which country has the right to tax the payment.
If Germany has a taxing right, the foreign benefit must then be classified under German domestic tax law. The German treatment can differ materially from the tax treatment in the country where the pension originates.
Germany–USA
U.S. Social Security, 401(k) and IRA benefits follow different rules
U.S. retirement income requires careful classification. U.S. Social Security is governed by a special social-security provision of the Germany–U.S. tax treaty. 401(k), Traditional IRA and Roth IRA arrangements are pension plans subject to different treaty and German domestic rules.
U.S. Social Security
For a person treaty-resident in Germany, Germany generally has the taxing right under the treaty's special social-security rule.
401(k)
A U.S. pension plan with treaty protection during the accumulation phase and a separate German analysis when distributions are made.
Traditional IRA
A U.S. pension plan expressly covered by the treaty, with its own contribution and distribution history.
Roth IRA
A special U.S. retirement arrangement funded generally from already-taxed contributions and requiring its own German classification.
Common mistakes
Common misunderstandings about German pension taxation
Assuming the same percentage remains tax-free every year
The taxable-share percentage is used to calculate a fixed personal pension allowance. Later ordinary pension increases therefore generally increase the taxable amount.
Confusing gross pension with taxable income
Actual German income tax is calculated only after the relevant taxable income, deductions and personal allowances have been taken into account.
Treating all pensions the same
Statutory pensions, occupational pensions and private annuities can be subject to completely different German tax rules.
Failing to document the pension start date
The year in which a qualifying pension begins permanently determines the applicable taxable-share percentage.
Treating foreign pensions like German pensions automatically
The treaty and the German tax classification of the foreign arrangement must be reviewed first.
Assuming no tax return is required because no tax was withheld
German income tax is often not withheld from pension payments. This does not mean that no filing obligation or tax liability can arise.
Related guidance
Related topics
Frequently asked questions
Taxation of pensions in Germany
What is the taxable share for a pension beginning in 2026?
Does that mean exactly 16 percent of my pension is tax-free every year?
When will new German pensions become 100 percent taxable?
Does every pensioner have to file a German income tax return?
Is an occupational pension taxed the same way as the German statutory pension?
How are foreign pensions taxed in Germany?
Is U.S. Social Security taxed like a German statutory pension?
Why does my taxable pension increase after a pension adjustment?
German tax advice
Do you receive German or foreign pension income?
We review the pension type, commencement date, taxable share and personal pension allowance, as well as the German treatment of occupational pensions and foreign retirement benefits. In cross-border cases, we also apply the relevant double-tax treaty.
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