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(2022) What does the 2005 Retirement Income Act regulate?

The Pension Income Act regulates the taxation of pensions. It affects everyone, both pensioners who were already retired in 2005 and all future retirees. The tax burden for new pensioners increases year by year - at the same time, the benefits for employees also grow.

Tax-advantaged pension provision
In addition to the statutory pension insurance, private pension insurance is also recognised as a pension provision (so-called basic pension or Rürup pension). Contributions to private pension insurance are only tax-advantaged if the insurance is aimed at a lifelong pension for the taxpayer. In addition, the insured person must be at least 60 years old when the pension payments begin. For contracts concluded from 2012 onwards, pension payments may not begin until the age of 62. This ensures that they are pension provision products. Furthermore, pension entitlements must not be transferable, pledgeable, sellable, or capitalisable. The insurance sum must also be paid out as an annuity; lump-sum payments are generally prohibited. However, tax-advantaged pension products can be supplemented with additional insurance - for example, occupational disability insurance.

Investment products that do not necessarily serve as pension provision are not tax-advantaged. These are usually freely available capital investments, which also include endowment life insurance. An exception is endowment life insurance policies concluded before 2005. They remain tax-free.

For pensioners, this means the following:

Since 2005, 50 per cent of pension income has been taxable. From 2006 to 2020, the taxable portion of pensions increases by two percentage points annually, and from 2021, the portion increases by only one percentage point per year. In 2040, the pension will be 100 per cent taxable, whereas employee contributions to pension provision will then be largely tax-free.

Also regulated in the Pension Income Act: Temporary pensions, such as disability pensions, and non-temporary pensions, such as old-age pensions, have been treated equally for tax purposes since 2005. Pensions from insurance policies that are tax-advantaged during the accumulation phase are taxable during the payout phase.

 

At the end of May 2021, the Federal Fiscal Court published its two rulings on the possible double taxation of pensions. However, the lawsuits filed by the affected pensioners were unsuccessful. The Federal Fiscal Court considers double taxation to be possible only in a few individual cases. It considers the basic system of pension taxation to be lawful, i.e. the limited deduction of pension expenses during working life, combined with the partial tax exemption of pensions during the payout phase. Double taxation is only likely to occur for later generations of pensioners (Federal Fiscal Court rulings of 19.5.2021, X R 33/19 and X R 20/21). However, the unsuccessful plaintiffs have lodged a constitutional complaint against the two decisions of the Federal Fiscal Court (Ref. 2 BvR 1143/21 and 2 BvR 1140/21).

The issue is how double taxation is calculated in detail. The Federal Fiscal Court has taken a very schematic view, which only leads to excessive taxation of pensions in individual cases. For the calculation of possible double taxation, the nominal value principle applies. In simple terms, the actual contributions paid and subsidised pension expenses are to be compared with the actual pension payments received, which are partially exempt. Neither amounts are to be discounted or compounded, nor is inflation to be taken into account.

However, some experts, as well as the plaintiffs in case X R 33/19, argued that during the working phase, no pension amounts are acquired in cash, but rather pure pension points. The actual amount of the pension only becomes clear much later. However, the Federal Fiscal Court did not delve into the "depths" of financial and insurance mathematics but compared contributions paid with payments received. Whether this is correct or whether there is a more favourable calculation for taxpayers is to be clarified by the constitutional judges in Karlsruhe.

The federal and state governments have now finally agreed to issue affected tax assessments on a provisional basis regarding the disputed point. Specifically, tax assessments are issued provisionally with regard to the "taxation of annuities and other benefits from basic provision under section 22 number 1 sentence 3 letter a double letter aa EStG". The provisional note is attached to all income tax assessments for assessment periods from 2005 onwards in which an annuity or other benefit from the so-called basic provision is recorded (BMF letter of 30.8.2021, V A 3 - S 0338/19/10006 :001).

This means that pensioners will now receive income tax assessments with a note on the - partial - provisional nature of the tax assessment. If the Federal Constitutional Court finds that the current taxation of statutory pensions and pensions from occupational pension schemes and similar pension schemes is unconstitutionally high, the tax assessments issued now and in the future can be amended without a prior objection.