How is the statutory pension taxed?
In 2005, the legislature amended the taxation of state pensions by the Retirement Income Act (Alterseinkünftegesetz). Since then, a fixed portion of the pension has been taxable, the rest remains (yet) tax-free. You must pay tax on your income from the pension, which is what is known as downstream taxation. The amount of tax to be paid depends on the year in which you retire. For persons who retired in 2005 or previously, the tax-free portion was 50 percent. A (personal) exemption amount is formed from the non-taxable pension, so that these pensioners will be able to use a "pension allowance" of 50 percent from 2005. This pension allowance remains unchanged for life.
Since 2005, the so-called taxation rate has been increasing by two percentage points annually, and by one percentage point per year since 2021. Persons retiring after 2040 will have to pay full tax on their statutory pension income.
Example: Hans Müller retired on January 1, 2009 and received a total statutory pension of 12.000 Euro last year. For Hans Müller, 58 percent of his pension is taxable; the pension allowance is 42 percent. For example, Müller would have to declare 6.960 Euro as income at the tax office for the year. However, if he has no further income, he does not have to file a tax return, as the sum is less than the basic tax allowance of 8.354 Euro (from 2014 onwards). The life-long pension allowance for Hans Müller amounts to 5.040 Euro. However, he would only have to pay tax on income above this exemption amount if it were also higher than the basic exemption amount.
However, income from rentals and leases or capital gains must be attributed to income. If Hans Müller, on the other hand, retired in 2017, he would have to pay tax on 8.880 Euro (74 percent) of his pension and would therefore have to file a tax return, provided that the basic tax-free allowance would not change until then. Attention: Until the end of his life, Müller's pension allowance remains the same. Even though his income from pensions increases after pension adjustments, only 5.040 Euro remained tax-free each year. The exemption does not apply to a specific sum of money, but does not apply to a portion of the respective pension. Mr. Müller will therefore have to pay full tax on future pension adjustments.
Tip: The tax office automatically deducts a flat-rate amount of 102 Euro for income-related expenses without further proof. If you have higher expenditures, you should include them in the tax return to push your taxable income down. For example, you can specify tax consultancy costs (for Form R), pension advice or a lawyer, if he or she supports you in pension matters. However, you will have to prove this higher expenditure.
