Taxation of Investment Returns on Private Pension Insurance — How Much of the Pension Is Actually Left After Taxes?

What is income-share taxation?

Income-share taxation is the tax framework for lifetime pension payments from a private pension insurance plan. It is governed by Section 22 of the Income Tax Act (EStG). The principle behind it is simpler than the name suggests: Not the entire monthly pension is taxable—only a certain percentage of it, known as the “income portion.”

The reason for this rule is understandable: Anyone who makes private contributions to a pension plan does so from income that has already been taxed—that is, from their take-home pay. Therefore, the entire payout should not be taxed again upon retirement. Only the portion that is considered actual return is taxed—that is, the portion that exceeds the contributions made.

In many cases, this makes earnings-based taxation a genuine tax advantage compared to other types of income. While interest and investment income from a securities account are subject to a 25% withholding tax, the effective tax burden on private pension insurance plans is often only 4 to 7 percent due to profit-sharing taxation—one of the most favorable tax treatment options under German tax law.

How is the income portion calculated? The table under Section 22 of the Income Tax Act (EStG)

The income portion is set by law and depends solely on your age at the start of your retirement. The earlier you retire, the longer your pension payments will continue, statistically speaking—and the higher the taxable portion of your pension income will be. The later you start receiving your pension, the lower your tax burden will be.

Important: Once determined, the benefit share remains constant for life. It is set at the start of pension payments and does not change—regardless of how long the pension is actually paid.

Source: Section 22, No. 1, Sentence 3, a) bb) of the Income Tax Act (EStG). The complete table listing all age groups can be found on the German Pension Insurance website.

Sample Calculation: How much of a €750 net pension is left?

Let’s assume that, starting at age 67, you receive a monthly private pension of 750 euros. Your personal tax rate during retirement is 30 percent.

In this example, out of a monthly pension of 750 euros , 711.75 euros remain after taxes —a tax deduction of only about 38 euros per month, despite a personal tax rate of 30 percent. This shows how effectively taxation of the earnings portion reduces the tax burden compared to other types of income.

Taxation of Distributed Earnings vs. Deferred Taxation

To properly understand the taxation of income shares, it is helpful to compare it with so-called deferred taxation, which applies to the statutory pension, the Rürup pension, and other state-subsidized forms of retirement savings.

Both systems have their merits—and both can be usefully combined. Anyone who has a private pension plan in addition to the statutory pension benefits from the significantly more favorable tax treatment of the private portion in retirement.

When is taxation of profit shares an advantage?

The taxation of earnings shares is most advantageous when several factors come together:

• Retirement starting at age 65: The later you start, the lower the earnings portion—and the lower the lifetime tax burden on your pension.
• Low personal tax rate in old age: Those with little additional income in retirement pay a favorable tax rate on what is already a small portion of their income—often less than 10 percent on an effective basis.
• Combination with Other Sources of Income: In addition to a statutory pension, which is taxed at a higher rate, a privately funded pension—which is taxed at a lower rate—results in a lower overall tax burden.
• Long-term pension receipt: Since the earnings portion is set once and remains constant, long-term pensioners benefit the most—the longer the pension is paid out, the more attractive the ratio of taxes to payouts becomes.
• Comparison with withdrawals from a securities account: Investment income from a non-restricted securities account is subject to a 25 percent withholding tax. A private pension plan with taxation on investment returns is often significantly more tax-efficient.

Common Mistakes and Misunderstandings

Mistake 1: Confusing the income portion with the actual tax

The taxable portion does not indicate how much tax you pay—but rather what portion of your pension is actually subject to tax. Your personal tax rate is then applied to this portion. As a result, the actual tax burden is, in most cases, significantly lower than many people expect.

Mistake 2: Assuming that the entire pension is taxable

A common misconception: Many people assume that their private pension is fully taxable. That is not true. For example, if you start receiving your pension at age 67, only 17 percent of it is taxable—83 percent is tax-free.

Mistake 3: Failing to Strategically Plan When to Start Receiving Your Retirement Benefits

Since the earnings portion is determined once at the start of retirement and remains in effect for life, the timing of retirement has significant tax implications. Anyone who retires two years earlier may end up paying more in taxes for decades—without even realizing it.

Mistake 4: Treating All Types of Pensions the Same

Not every pension is taxed on the investment income portion. The statutory pension, the Rürup pension, and company pensions are subject to deferred taxation. Only private life annuities from a private pension insurance plan generally benefit from the favorable taxation of investment income. Making a blanket assumption here can lead to incorrect planning.

Frequently Asked Questions

Does the income-based taxation also apply to the Riester pension?

No. The Riester pension and the Rürup pension are subject to deferred taxation—which means that the payouts are fully taxed at the individual’s tax rate during the retirement phase. Taxation on investment returns applies only to private pension insurance plans that were funded from after-tax income without government subsidies.

What happens to the profit-sharing portion if I die before then?

The income portion is independent of how long the pension is actually paid. It is determined once at the start of the pension and remains constant—until the final payment. If the pension ends prematurely due to death, the tax liability on the amounts that are no longer paid naturally ceases as well.

Can I reduce my benefit amount by delaying the start of my pension payments?

Yes, and that can be well worth it. If you delay the start of your retirement from age 63 to age 67, the earnings portion drops from 20 to 17 percent—a 15 percent reduction. Over the course of a long retirement, this adds up to a noticeable tax savings.

Do I have to pay social security contributions on my private pension as well?

Pensions from private pension insurance plans are generally not subject to social security contributions —unlike company pensions, which are subject to health and long-term care insurance contributions. This is another advantage of private pension insurance compared to company pension plans.

As a retiree, do I have to file a tax return?

If your total income in retirement exceeds the basic tax exemption of 12,348 euros (2026), you are generally required to file a tax return. Even if that is not the case, it may still be worthwhile to file a return voluntarily—for example, to claim income-related expenses, special expenses, or extraordinary burdens.

Conclusion: No downside—often a real tax benefit

Taxation based on investment returns is not a disadvantage of private pension insurance—in most cases, it is a genuine tax advantage. Those who use after-tax income to build up private retirement savings benefit in old age because only a small fraction of their pension is taxed. The effective tax burden is often less than 7 percent—a rate that hardly any other form of investment in Germany can match.

Forward-looking planning is key to making the most of this benefit: When will you retire? What other sources of income will you have? And how can you combine different retirement planning components to keep your overall tax burden as low as possible in retirement?

If you answer these questions early on, you’ll get more out of your private retirement savings—and you’ll be able to plan for retirement with greater financial peace of mind. Seek advice before your retirement is just around the corner. After all, some decisions cannot be reversed once retirement begins.