For individuals who retired in 2005 or earlier, the tax-free portion was 50 percent. A (personal) allowance is formed from the non-taxable pension, allowing these pensioners to use a "pension allowance" of 50 percent from 2005. This pension allowance remains unchanged for life.
Since 2005, the so-called taxable portion has increased annually by two percentage points, and from 2021 by one percentage point per year. Thus, individuals retiring from 2040 onwards will have to fully tax their state pension income.
Hans Müller retired on 01.01.2009 and received a state pension of 12.000 Euro last year. For Hans Müller, 58 percent of his pension is taxable, and the pension allowance is 42 percent. Thus, Müller would have to declare 6.960 Euro as income to the tax office for the year. However, if he has no other income, he does not have to submit a tax return, as the amount is below the basic allowance of 9.744 Euro (2021).
The lifelong pension allowance for Hans Müller is 5.040 Euro. He would only have to tax income above this allowance if it also exceeds the basic allowance.
Income from renting and leasing or capital gains must, however, be added to the income.
If Hans Müller were to receive a pension of 15.000 Euro and retire in 2021, he would have to tax 12.150 Euro (81 percent) of his pension and therefore also submit a tax return.
Note: The pension allowance for Müller remains the same until the end of his life. Even if his pension income increases due to pension adjustments, only 5.040 Euro would remain tax-free each year in the first example. The allowance refers to a specific amount of money, not a percentage of the respective pension. Thus, Mr Müller must fully tax future pension adjustments.
