Many retirees feel that the taxation of their pension benefits is unfair. They also fear that part of the pension could be taxed twice: first while working and then again when paid out.
Double taxation in Germany is unconstitutional. However, it may be that pensioners, especially during the years of transition from upward taxation (taxation of pension contributions) to downward taxation (taxation of pensions), will have to pay taxes on their pension, even if they have already paid the amount of their contributions.
Legislative changes in recent years are designed to mitigate this problem. However, the question remains whether double taxation is effectively excluded in all cases.
When does pension double taxation occur?
Double taxation occurs when pension contributions paid from income that have already been taxed exceed the amounts of pensions that are later paid tax-free.
Simply put, pension insurance contributions that cannot be tax deducted during your working life are compared with the portion of the pension that is expected to remain tax free throughout your retirement period. If the inflow of tax-free pension is lower than the contributions that were already taxed, part of the income could be taxed twice.
Which wines will benefit most from the new rules?
According to calculations (for example by financial mathematician Wener Siepel), delaying the final full taxation of pensions until 2058 would benefit those born between 1975 and 1980 the most.
They can deduct their full pension contributions at the time of employment without having to pay tax on the same percentage of their pension. In a fundamental sense, these wines have the highest tax advantages. But here, too, what ultimately matters is individual work experience.
Example: Heinz Rudolf from Wedemark
Heinz Rudolf from Wedemark near Hannover is 68 years old and has been retired for several years. During his working life, he paid contributions to compulsory pension insurance for decades. At that time, he could not claim a portion of these contributions for tax purposes.
Today, Heinz Rudolf receives a monthly pension, much of which is taxable. However, in order to determine whether he is subject to double taxation, it is not enough to add up the taxes he has paid to date.
What is more important is how high the total amount of pension contributions Heinz Rudolf paid from income that was already taxed was. This amount must be compared with the total expected tax-free pension he will statistically receive at the time of retirement.
If contributions that have already been taxed exceed the total inflow of tax-free pensions, double taxation may arise. However, Heinz Rudolf will have to prove this fact to the tax inspector himself. To do this, he needs, among other things, his old tax assessments, proof of contributions and pension documents.
The example is fictitious and is intended for illustrative purposes.
Why did pension taxation change?
Since 2005, the statutory pension has gradually been converted into so-called subsequent taxation. This means that pension contributions made during your working life can be more tax deductible. In turn, a later pension will be subject to higher tax.
From 2023, pension costs will be fully tax deductible. At the same time, the share of taxable pensions for new pension cohorts is increasing more slowly than originally planned.
Instead of increasing by a full percentage point, the tax share increases by only 0.5 percentage points annually. Therefore, full taxation of new pensions should not be achieved until 2058 at the earliest.
The taxable portion of the pension remains forever
The taxable portion of the pension depends on the year the pension payment began.
For each new pensioner group, a certain tax rate is established. The tax office calculates the individual pension benefit from the first full annual gross pension. This amount almost always remains unchanged.
This has an important consequence: subsequent pension increases tend to increase taxable income, while personal pension benefits do not increase accordingly.
However, whether you need to pay income tax actually depends on more than just your tax rate. Rather, the deciding factors are the amount of total income, the applicable basic benefit, health and long-term care insurance contributions, and possible advertising and special expenses. Other income from company pensions, private pensions or rent may also affect tax liability.
These retirees may be particularly affected.
The Federal Financial Court has identified several groups for which the risk of double taxation may be comparatively higher. This is particularly true for former self-employed individuals, as they often had to pay their own pension contributions entirely and did not receive tax-free employer contributions.
Single retirees may also be hit harder. For them, the estimated inflow of tax-free pensions may be lower because survivors’ pensions are not taken into account.
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Men may also be affected by a statistically lower life expectancy. Because they receive their pension for a shorter period of time on average, the total tax-free pension amount may be lower.
Particular attention should also be paid to cases where pensioners have been making contributions for many years from income that was already subject to tax, while a significant portion of their later pension is subject to tax.
On the other hand, workers with regular employment and regular employer subsidies are generally considered to be less at risk.
Are the previous changes enough?
The federal government has responded to case law on possible double taxation. Starting in 2023, retirement savings expenses are fully deductible. In addition, the annual increase in the tax share was slowed by the passage of the Growth Opportunity Act.
Reports prepared by the Federal Ministry of Finance concluded that the current rules, as amended, complied with constitutional requirements.
Critics say further changes are needed. The Taxpayers Association and tax experts, among others, have called for slower tax rate increases to be extended to earlier groups of retirees.
Therefore, it remains unclear whether the Legislature will provide even more relief to existing retirees in the future.
Can pensioners get back overpaid taxes?
Double taxation is not automatically determined by the tax office. Victims usually have to prove this themselves.
This often requires old income tax assessments, proof of paid pension insurance contributions, German pension insurance insurance history and all pension assessments. Documentation of the extent to which pension costs have been taken into account for tax purposes may also be important. For married pensioners, documents from a spouse may also be required.
The calculation is complicated. It is not enough to simply compare the amount of contributions paid with the previous pension payment. In principle, it is necessary to take into account the expected inflow of tax-free pensions over the entire statistical benefit period.
Keep your tax receipts and proof of contributions.
Retirees should keep tax returns, pension documents and evidence of pension contributions as complete as possible.
If there is another legal change or litigation later, these documents could be critical. Without old tax and tax documents, it is often difficult to prove possible double taxation.
If you have any doubts about the taxability of your pension, you can check the tax assessment with a payroll tax assistance association, a tax advisor or a tax law professional.
Not every taxable pension is double taxed
A high taxable portion of a pension does not automatically mean that there is unacceptable double taxation.
Retirees don’t necessarily have to pay taxes just because a significant portion of their pension is taxable. If taxable income after deducting recognized expenses is below the basic rate, no income tax is still due.
Therefore, an individual examination is always crucial.
Frequently asked questions about double taxation of pensions
How do I know if my pension is taxed twice?
To do this, pension contributions paid from taxable income must be compared with the expected inflow of tax-free pension. If the amount of contributions already taxed is higher, double taxation is possible.
However, the calculation is complex and should be checked professionally if in doubt.
Do I have to pay taxes despite the high tax rate?
Not necessarily. The taxable portion simply indicates how much of the pension is generally taxable. Whether income tax is actually applied depends on the total amount of taxable income, the basic allowance and possible deductions.
What documents need to be retained for verification?
Of particular importance are old tax notices, pension notices, insurance histories and evidence of pension insurance contributions paid and withheld from taxes. These documents may be required to prove possible double taxation.
List of sources
Federal Financial Court: Decisions and principles of calculation on possible double taxation of pensions.
Federal Ministry of Finance: Tax information and pension tax reports.
Annual Tax Law 2022.
Growth Opportunity Act.
German pension insurance: Information on taxation of state pensions.
Financial advice: double taxation of pensions explained.
Insurance Journal: Reports on reports commissioned by the Federal Ministry of Finance.
Taxpayers Association: Statements on Pension Taxation.
The basis is the source text provided.
- About the author
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Dr. Utz Anhalt is a writer, journalist, social law expert and historian. In 2000, he received a master’s degree in history and politics from the University of Hannover. His main focus is social law and social policy. He was a researcher for documentaries on ZDF, History Channel, Pro7, NTV, MTV, Sat1.