Freelancers and Self Employed: How do German Pensions work?

Growing old… that’s what we associate with pensions. So when you are young, it feels like there is all the time in the world to prepare for retirement, old age and pensions. In reality, a pension is the money we plan our existence around when we are no longer able to earn money in our professions - assuming also that retirement is something we would all like and deserve. With so many different systems worldwide, how do German pensions work for freelancers and self -employed people?

Things like taking holidays or sick leave are things we as self-employed people must account for ourselves - with no HR companies or legislations on our time to bridge this gap. So too is retirement and future planning. For many of us self-employed, the route of blue chip stock brokering and the trading of bonds is often out of the question, and it can take a decade to even be able to afford advice around these murky waters - all of which is to say, every person has a right to the most basic security of income when they are no longer working.

As pensions are connected with governments and companies - this is going to of course bring paperwork, and red tape. First off, when you are an employee, this is not really an issue as it is all configured with your employer who must work with statutory pension meaning in principle, all employees in the statutory pension insurance are compulsorily insured. 

A large number of the self-employed in Germany have so far not been obliged to make provisions for old age, the risk of reduced earning capacity or for their own death. Certain groups of self-employed, on the other hand, are already included in statutory pension insurance, for example self-employed craftsmen, artists and publicists. You could also benefit from comprehensive protection of the pension insurance - from any rehabilitation that may be necessary in the event of illness to family coverage.

Pension insurance is optionally available to all other self-employed persons: via the “compulsory insurance upon request” or via the “voluntary insurance”. The self-employed can best find out which form of coverage is best in individual cases in a consultation with the German Pension Insurance.

Certain groups of the self-employed are legally included in the pension insurance. These include above all craftsmen in trades requiring approval, artists, publicists, midwives and independent teachers. For them, the legislator assumes a special need for protection. All other self-employed can apply for compulsory pension insurance.

If you do not want to apply for compulsory insurance, you should consider choosing voluntary insurance. Self-employed craftsmen traditionally belong to the group of compulsory insured persons in the pension insurance. This includes all traders who are registered in the craft role and actually work independently.

Other types of Self Employed workers

Anyone who is more similar to an employee than a self-employed person in terms of work and income level is subject to pension insurance. In this case, insurance is generally compulsory in all branches of social insurance. Self-employed ‘’workers’’ on the other hand, can be exempted from compulsory insurance in pension insurance upon request. The circle of self-employed workers includes workers who do not normally employ an insured person in connection with their self-employment, and work permanently and essentially only for one client. The work for a client is permanent if there is a standing order relationship or an order is placed again regularly.

Voluntary Insurance

The complete pension insurance benefits package is also available to the self-employed through voluntary contributions. In addition to the right to an old-age pension, this can also include the right to a rehabilitation benefit and a disability or survivor's pension - but only if there is sufficient compulsory insurance before.

Insurance contributions

Self-employed persons who are subject to compulsory insurance usually pay the so-called regular contribution. If you wish, you can also pay a contribution that depends on your personal income.

• Regular contribution

This is the most common form of contribution obviously, taking into account the current contribution rate of the pension insurance (18.6% as of 2020), this results in a regular monthly contribution of EUR 579.39 in the West and EUR 533.82 in the East (based on an approximate income of €3,500).

• Half the regular fee

In the first three years after taking up self-employment, entrepreneurs only have to pay half the regular contribution on application. In this case, only EUR 289.70 in the East and EUR 266.91 in the West . However, the self-employed can apply to pay the full regular contribution in the first three years.

• Income-related contribution

If desired, the pension insurance contribution of the self-employed can also be lower or higher than the regular contribution. Prerequisite: You can use the last tax assessment to provide evidence of a correspondingly different income from work or have it estimated (this applies particularly to new self-employed).

The gain from a self-employed activity under income tax law is deemed to be ‘’labor income’’. This can be the difference between the business assets at the end of the past and the previous calendar year, but also the excess of operating income over operating expenses. 

Formula for calculating contributions

The formula for determining the monthly pension contribution is:

Annual employment income x dynamic factor (for 2018: 1.0466) x contribution rate (for 2019: 18.6%): 12 months = monthly contribution

The dynamic factor mentioned above for the year for which the last income tax assessment notice is available applies. 

Frequency of contributions

The pension contributions are due no later than the third to last banking day of a month. Anyone who participates in the direct debit procedure avoids any late payment surcharges. By the end of February each year, the pension insurance sends proof of the contributions paid for the past calendar year.

Social clause

In general, it is not like there are great immediate considerations off the bat for the self employed - at some point we will have to make those contributions! But it is about the self-determined or voluntary contributions, something best discussed with experts or a Steuerberater, or, for the more ambitious of you… a lot of research!

For more complicated systems like the Rürup pension you’ll need to do extensive research to understand if it is the best fit for you but ultimately making a decision now about your retirement and pension may change your business model or revenue strategy today, so we hope we have been able to fill in some of the initial basics to get you started!