Statutory and private pensions: taxable share, frozen allowance, income portion

Ms Kessler retires on 1 January 2026 and receives 18,000 € from the statutory pension insurance in her first year. Of that, 15,120 € is taxable, or 84 percent. The following year her pension rises by 600 €, and she applies 84 percent again. The tax office does not: for it, the whole increase is taxable, because the tax-free portion does not grow with the pension.

Two kinds of pension, two ways of calculating

In German income tax law, pensions belong to the other income of § 22 EStG. That sounds like a leftover category, yet for millions of people it is the most important type of income in retirement. Within that provision the law separates two groups of life annuities, and each follows its own method of calculation.

The first group sits in double letter aa. It covers payments from the statutory pension insurance, from the agricultural old-age fund, from the professional pension schemes of doctors or lawyers, for example, and from basic pension contracts under § 10(1) no. 2(b), which people commonly call Rürup pensions.

What these pensions share is that contributions during the saving years became increasingly deductible as special expenses. Whoever could pay in with tax relief is meant to pay tax on the benefit later. The law completes this shift from taxing contributions to taxing benefits gradually, one retirement cohort after another.

The second group sits in double letter bb. It covers life annuities that do not fall under aa and whose individual payments contain a return on the annuity right. The typical case is a private pension insurance paid for out of income that had already been taxed. Only that return is taxed here, not the repayment of the capital invested.

The classification is therefore no formality. A statutory pension starting in 2026 is taxed at 84 percent, while a private annuity that begins at age 67 is taxed at only 17 percent. Anyone drawing both works out two entirely different amounts and reports them separately in the return.

The cohort table in § 22

The basis of assessment is the annual amount of the pension, meaning the total pension payments received in the calendar year. Which share of it is taxable comes from a table printed in the statute itself. It assigns a percentage to every starting year, and only that year counts, not age or pension size.

The first row reads up to 2005 and shows 50 percent. Anyone who retired before or during 2005 is therefore taxed on half of the annual amount. Older cohorts do not get more favourable treatment still; the table groups all of them in that single row.

From 2006 onwards the share first rises by two percentage points per cohort, until it reaches 80 percent for pensions starting in 2020. For 2021 and 2022 two more steps of one point each follow, to 81 and 82 percent. Those values continue to apply unchanged to the pensioners concerned.

Since pensions starting in 2023, the table in the version read on 23 September 2026 climbs more gently. Every new cohort receives half a percentage point more than the one before: 82.5 percent for 2023, 83 percent for 2024, 83.5 percent for 2025 and 84 percent for a pension starting in 2026.

The end of the transition therefore lies far in the future. Only for a pension starting in 2058 does the table show 100 percent. Anyone retiring before that year keeps a tax-free portion for good; anyone starting later is taxed on the entire pension.

Anyone using older leaflets or calculators should therefore always check the row for their starting year against the current statutory text. The gentler curve from 2023 is the version in force today; a table still showing full one-point steps for the cohorts from 2023 reflects an outdated state of the law.

The row is determined once and never changes afterwards. Someone who retires in 2026 stays in the 2026 row with that pension for good, even though later cohorts carry higher shares. The table thus describes not how a single pension develops but how entire cohorts are treated.

The tax-free portion: a euro amount that is frozen

The percentage from the table is only the starting point. Under sentence 4, the difference between the annual amount of the pension and the taxable share is the tax-free portion of the pension. In practice it is usually called the pension allowance, although the statute never uses that word.

Sentence 5 provides that this tax-free portion applies from the year following the year the pension started, for the entire period the pension is drawn. What gets fixed is not a percentage but an amount in euros. It stays with the pension until it ends, whatever happens to the pension afterwards.

Sentence 7 draws the consequence for the yearly pension increases. Regular adjustments of the annual amount do not lead to a new calculation. Every euro by which the pension rises through such an adjustment is therefore fully taxable, because the tax-free portion stays where it was.

This leads to an observation that surprises many pensioners. After a few years, the share of their pension actually being taxed sits noticeably above the table value for their cohort. Someone who started at 84 percent and then sees several increases soon pays tax on a higher share, although nothing in the table has changed.

Things are different when the annual amount changes for real, in a way that is not a regular adjustment, because the pension goes up or down for some other reason. Sentence 6 then requires the tax-free portion to be adjusted in the same ratio as the new annual amount bears to the annual amount on which the calculation was based.

In the year the pension starts, no fixed amount is used yet. The table percentage is simply applied to the payments received in that year. If the pension begins part-way through the year, the first annual amount is therefore smaller, and the frozen amount only becomes decisive for the following year.

Successive pensions and the month of death

One pension often follows another from the same insurance, such as an old-age pension after a reduced earning capacity pension, or a widow's pension after the pension of the deceased spouse. Sentence 8 has a rule of its own for these cases, so that the later pension does not receive the less favourable share of its own starting year.

The percentage of the later pension is then based on a notional year. The running time of the earlier pensions is subtracted from the year in which the later pension begins. If a reduced earning capacity pension ran for ten years and the old-age pension starts in 2026, the row for 2016 applies, meaning 72 percent instead of 84 percent.

This calculation has a floor. The percentage cannot be set lower than the one for 2005, so never below 50 percent. The rule also applies only to pensions succeeding one another after 31 December 2004.

Finally, sentence 9 deals with the death of the recipient. The pension for the month of death is still attributed to the deceased. It therefore belongs in the deceased person's final income tax return, even if the money is credited only after death, and not in the income of the heirs.

Private life annuities: the income portion

For life annuities under double letter bb, the law takes a different route. The return on the annuity right is the difference between the annual amount and the amount obtained by spreading the capital value evenly over the expected running time. Only this notional interest is taxed, not the return of capital.

Nobody has to work that out personally. The statute condenses the result into a second table, giving the income portion by the completed year of life of the beneficiary when the annuity begins. What matters is therefore the age at the start of the annuity, not the calendar year.

The older the beneficiary is when the annuity starts, the shorter the expected running time and the smaller the interest portion. Someone starting at 60 or 61 is taxed on 22 percent of every payment, at 65 or 66 it is 18 percent, and at 67 it is 17 percent.

Once determined, the percentage applies for the entire time the annuity is drawn. Unlike the taxable share, there is no frozen euro amount here: if the private annuity rises, for example through profit participation, the increase is also taxed only at the income portion.

For temporary life annuities limited to a fixed period, and for annuities whose duration depends on the lives of several people, sentence 5 refers to a statutory ordinance. The table in the statute covers only the lifelong annuity of a single beneficiary.

Sentence 2 adds the so-called opening clause. On application, part of a pension from basic provision is also taxed only at the income portion, to the extent it rests on contributions paid up to the end of 2004 above the maximum contribution. The taxpayer must prove that the maximum contribution was exceeded for at least ten years.

Be careful when classifying a contract by its name. A private pension from a basic pension contract belongs, despite its private provider, to double letter aa and therefore to the cohort table. The income portion applies only to life annuities whose contributions received no relief as basic provision, typically the classic private pension insurance.

Comparing the two tables shows their different logic. The cohort table rises with every calendar year, because the legislature is completing the shift to taxing benefits. The income portion table falls with age, because it only captures an interest element, which shrinks when the expected running time is shorter.

From the taxable portion to income

The taxable portion of the pension is not yet the income. From receipts under § 22 no. 1, 1a and 5, § 9a sentence 1 no. 3 EStG deducts a flat-rate allowance for expenses of 102 euros in total, unless higher expenses are proven.

The words in total matter. Someone drawing a statutory pension, a private annuity and payments from a Riester contract receives the flat-rate amount not three times but once for all three together. Under sentence 2 it may also only be deducted up to the amount of the receipts, so it never creates a loss.

Whether tax is actually due on the income so determined is decided only by the tariff of § 32a and its basic allowance, which this course does not cover. Many pensioners with a single statutory pension pay no tax at all, even though a substantial part of their pension is taxable.

One relief is expressly excluded for these pensions. The old-age relief amount of § 24a, covered in the second module, is not calculated on life annuities under letter a. Anyone whose only income is a pension therefore does not receive it, even if they reached the required age long ago.