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Germany Sheds Light On Deferred Pension System

by Ulrika Lomas,, Brussels

12 December 2012

German Parliamentary State Secretary Hartmut Koschyk has recently provided information on the country’s current system of taxing pensions.

According to Koschyk, more pensioners in Germany are now subject to taxation as a result of changes to the system of taxing pensions; the transition to a so-called system of “deferred taxation” (nachgelagerte Besteuerung), whereby benefits are no longer taxed with respect to the interest portion, but with respect to the taxable portion.

Introduced within the framework of the Retirement Income Act, the system of deferred taxation has applied in Germany since 2005 following a decision from Germany’s Federal Constitutional Court.

The Court had ruled that the old system was unconstitutional as public service pensions were treated differently to annuities from statutory pension insurance.

Koschyk outlined details of the progressive transition to a system of deferred taxation, noting that the taxable portion of pensions is gradually being increased to 2039. For all pensions that began in 2005, or before January 1, 2005, (2004) the taxable portion stood at 50%. The taxable portion increases thereafter by 2 percentage points every year to 80% in 2020. From 2021 to 2040, the taxable share is to rise by a further 1 percentage point annually until finally pensioners entering retirement in 2040 are required to pay tax on the full amount of pensions (100% taxable portion). The transition to full deferred taxation will then be complete.

Pension increases are taxed at 100%, however.

Koschyk emphasized that certain types of pension are now exempt from taxation, including pension income from statutory accident insurance, and from war pensions and severe disability pensions.

Parliamentary State Secretary Koschyk ended by stating that the decisive factor in determining whether or not tax is due on pensions is the amount of income. If income exceeds the current basic allowance of EUR8,004 (USD10,337), this may then be subject to taxation (EUR16,008 for a married couple).

TAGS: tax | pensions | interest | retirement | Germany

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