Early Retirement at Age 45: A Regretful Decision When Not Seized - If failing to retire at 45, you opt to give funds instead
In a recent shift, the new German government coalition has abolished the supplementary income limit for early retirees, allowing individuals to retire earlier, continue working, and still pay into the statutory pension insurance. This change, along with other pension-related decisions, has sparked interest among the German population.
For those considering early retirement, it's essential to understand the tax implications. In Germany, income from both the pension and continued work is aggregated and taxed progressively. The 2025 tax brackets start at 14% for income above €11,604, rising up to 42% for income up to €277,825, and 45% beyond that. There is a basic tax-free allowance of €12,096 for singles (€24,192 for couples) in 2025. If your combined income from pension and work stays below this limit, you pay no income tax. Above it, the full amount exceeding the allowance is taxed.
Individuals may also be subject to the solidarity surcharge (5.5%) depending on income levels and potentially church tax (8–9%) depending on the federal state. It's important to note that after retirement and receiving a pension, individuals are generally not required to pay pension contributions on income from continued work. However, other social security contributions (like health insurance) may still apply depending on the situation.
The coalition has proposed a tax exemption of 2000 euros for those in this situation, known as the active pension. However, it remains unclear whether this exemption will also apply to deduction-free early retirement.
Working past the early retirement age can result in additional pension years, even if not for 45 years. This includes private care of relatives, raising children, military or alternative service. Those who have accumulated 45 years of insurance coverage can retire early without deductions, up to two years before the regular retirement age. They can apply for the "old-age pension for particularly long-term insured."
Employment contracts do not automatically end at retirement, especially for those choosing early retirement, to avoid age discrimination. It's recommended to have a conversation with your employer about this. Terminating employment contracts during early retirement can be considered age discrimination.
Early retirement allows one to save a financial cushion for old age, as one's salary continues while also receiving a pension. However, those who do not apply for early retirement are giving up a lot of money, as they can continue working and still receive their pension.
The German Pension Insurance (DRV) offers detailed advice on early retirement, and individuals are informed if they have earned enough pension years to apply for the old-age pension for "particularly long-term insured."
For a personalized calculation based on your precise income mix, it's always advisable to consult a tax advisor. The new government coalition's comprehensive pension plans are further analysed in our analysis.
- Understanding the financial implications of early retirement is crucial, as income from both work and pension is taxed progressively in Germany, with the tax brackets starting at 14% for income above €11,604.
- For those considering the active pension, it's important to note that the coalition has proposed a tax exemption of 2000 euros, however, the applicability of this exemption to deduction-free early retirement remains unclear.
