Germany's Altersvorsorgedepot: Payouts, Tax and Inheritance Explained

A large retirement account balance does not, by itself, show how dependable your additional retirement income will be. What matters is how long payments last, how much they can fluctuate and how much remains available after tax. As payouts begin, the role of the investments therefore changes.

Germany's Altersvorsorgedepot, a retirement investment account that providers can offer from 1 January 2027, gives savers different options. Under the new system, retirement income can generally take the form of lifetime payments or a fixed-term drawdown plan. This choice affects not only the ongoing payments but also what happens to any remaining assets on death.

Greater choice does not mean unrestricted access to subsidised retirement savings. Payout arrangements, withdrawal options and tax treatment need to be considered together.

This article answers five key questions:

• When can Altersvorsorgedepot payouts begin, and what are the options?
• How does a drawdown plan differ from a lifetime annuity?
• Can you take a lump sum or withdraw money early?
• How are Altersvorsorgedepot payouts taxed?
• How should savings be invested during the payout phase?

The payout phase generally cannot begin before the saver's 65th birthday, and the first payment must be made no later than their 70th birthday. An earlier start is possible under certain conditions, for example when a German statutory old-age pension is already being received before age 65. The start date is therefore governed by statutory age limits and, where applicable, the earlier receipt of benefits from a statutory pension system.

There are two main ways to provide ongoing retirement income.

• With a lifetime annuity, the capital allocated to it is converted into regular pension payments for the rest of the recipient's life.
• With a fixed-term drawdown plan, savings are paid out gradually over an agreed period. The plan must run at least until the saver's 85th birthday, but it can last longer.

A combination is also possible within the lifetime income option. In this arrangement, 80% of the capital allocated to it is used to provide a lifetime annuity. The remainder is invested on the saver's behalf and at their risk, with the aim of providing additional lifetime payments that can vary in amount. This combination is distinct from a fixed-term drawdown plan.

Not every contract has to offer every payout option. At the start of the payout phase, retirement savings can also be transferred to another provider or into a product designed solely for the payout phase. For example, someone holding an Altersvorsorgedepot without an annuity option can still choose a lifetime annuity. The original choice of product does not necessarily determine how the savings will ultimately be paid out.

The main distinction is longevity risk: The risk of outliving the savings set aside for retirement. A lifetime annuity continues paying whether the recipient lives to 85, 95 or beyond. With a conventional annuity, the insurer takes on this risk and manages the investments.

A fixed-term drawdown plan, by contrast, has a defined end date. Payments stop when the agreed term ends, and any remaining capital is paid out. There is no mandatory requirement for a lifetime annuity afterwards. A plan ending at age 85 therefore does not automatically provide income for the years that follow.

Payment amounts also follow different rules. Payments from a conventional lifetime annuity remain the same or increase during the payout phase. Under a drawdown plan, the monthly amount is set at the outset and recalculated at regular intervals of no more than three years. Each calculation divides at least 80% of the capital remaining at that time by the number of months left in the agreed term. This allows the provider to hold back part of the remaining capital as a buffer. Any capital left at the end is paid out with the final payment. The 80% rule therefore applies to the capital included in the calculation; it does not establish a minimum payment relative to the previous monthly amount.

These differences also affect inheritance. Under a drawdown plan, money not yet paid out can generally be inherited. A conventional lifetime annuity, by contrast, normally ends on death. However, a guaranteed payment period of ten or 20 years can be agreed. If the annuity recipient dies within this period, the agreed payments continue to the surviving beneficiaries until the period ends.

Being able to inherit savings does not automatically mean that government support is preserved. When subsidised retirement savings are paid out following the saver's death, the government allowances and additional tax relief attributable to that amount generally have to be repaid. One important exception, subject to the statutory conditions, is a transfer to the surviving spouse's retirement savings contract. Whether the money can be inherited and whether government support is retained are therefore separate questions.

At the start of the regular payout phase, up to 30% of the capital then available can be taken as a one-off lump sum, separate from the monthly payments. This permitted partial lump-sum payment preserves government support. In other words, support already received does not have to be repaid solely because of this withdrawal. Preserving government support does not, however, make the payment tax-free.

The relevant amount is the value of the assets available at that time, not the total of earlier contributions. Taking part of the savings as a lump sum leaves less capital in the contract to fund ongoing retirement income. Greater access at the start of retirement therefore needs to be considered alongside later income needs.

During the accumulation phase, unrestricted access to subsidised retirement savings is generally not provided for. A withdrawal outside the circumstances permitted by German law is treated as a non-qualifying use (schädliche Verwendung). In that case, the allowances and separately assessed additional tax relief attributable to the subsidised amount withdrawn must be repaid. An early payout is therefore not the same as a regular retirement benefit.

Exceptions include certain uses for owner-occupied residential property permitted by law. However, the new system does not require every contract to offer this option. What matters is whether the chosen contract provides for it or whether a transfer to an appropriate provider is necessary. A lump-sum settlement of a small pension that meets the statutory definition may also preserve government support.

Retirement savings that have not received government support are treated differently. Using that money for another purpose is not treated as a non-qualifying use for tax purposes. Whether and when it can be paid out nevertheless depends on the contract terms. The absence of government support does not automatically mean unrestricted access.

Subsidised retirement savings are subject to deferred taxation. During the accumulation phase, gains and investment income within the contract are not taxed as they arise. Later payments, however, are generally subject in full to German income tax to the extent that they derive from subsidised personal contributions, government allowances and the returns generated by those amounts. In these cases, it is not just the investment gains that are taxed.

The same principle generally applies to the permitted lump-sum payment of up to 30% at the start of the payout phase. Such a payment can increase taxable income in that year. The actual tax liability depends on the individual's tax circumstances. The fact that a withdrawal preserves government support therefore does not establish how much will remain after tax.

Whether health and long-term care insurance contributions are also due depends on the recipient's insurance status. For people with compulsory coverage under Germany's statutory health insurance and social long-term care insurance schemes, payments from government-supported private retirement savings are generally exempt from these contributions. For voluntary members of the statutory health insurance scheme, however, such payments may be taken into account when calculating contributions. The actual amount payable therefore depends on the individual's health insurance status.

Payments arising from contributions that did not receive government support need to be considered separately. These may include, for example, contributions above the maximum eligible for support or contributions made in years when the saver was not eligible. Such payments are not automatically treated in the same way as payments derived entirely from subsidised retirement savings. The form of payment also matters.

Germany's Income Tax Act distinguishes here, in particular, between lifetime annuities and other payments. For a lifetime annuity funded by unsubsidised contributions, tax generally applies to the annuity's earnings portion, a method known as Ertragsanteilsbesteuerung. For other payments, the relevant amount may instead be the difference between the payout and the contributions attributable to it. The term "Ertragsanteilsbesteuerung" therefore cannot be applied indiscriminately to every type of payout.

Where both subsidised and unsubsidised contributions have been paid into a single contract, the subsequent benefits must be split accordingly for tax purposes. Looking only at the account balance or the agreed gross payment is therefore not enough when planning the income available in retirement. The source of the capital and the payout option also matter.

The investment focus changes once payouts begin. Previously, the priority was building wealth over the long term; now, the remaining capital must fund regular payments. At the same time, retirement can last for many years. Near-term income needs and the long-term performance of the savings therefore need to be considered together.

There is no equity allocation that suits everyone or is prescribed uniformly by law. What matters is how long the savings need to last, the size of planned withdrawals and what other secure retirement income is available. Savers also need to consider how much volatility they can withstand, both financially and personally.

With a drawdown plan, market fluctuations affect more than the account balance. Because monthly payments are regularly recalculated using the remaining assets, fluctuations can also change future payout amounts. A market fall may therefore directly affect the money available later.

These different time horizons create an important trade-off: Savings needed for near-term payments have a different role from money that may not be required for another ten or 20 years. Lower-risk investments become more important for near-term needs. However, moving away from return-seeking investments entirely can also create risks over a long retirement, particularly in relation to inflation.

With a conventional lifetime annuity, the insurer manages the investments and takes on longevity risk. Under the combination of an annuity and additional variable payments, however, some capital remains invested on the saver's behalf and at their risk. The risks savers still need to manage therefore depend largely on their chosen payout arrangement.

With an Altersvorsorgedepot, the payout option determines how accumulated savings become additional retirement income. Lifetime annuities, fixed-term drawdown plans and partial lump-sum payments serve different purposes. They differ particularly in how long payments last, the capital market risks that remain and what happens to assets on death.

It is equally important not to confuse access to savings, preserving government support and tax-free treatment. The appropriate arrangement depends on ongoing income needs, other sources of retirement income, tax treatment and the degree of uncertainty the saver can accept. No single payout option is best for everyone.

The payout phase reflects many of the decisions made while building retirement savings. Government support, investment strategy and existing pension plans therefore need to be considered well before payouts begin.

• How does the Altersvorsorgedepot work?
• What government support is available for the Altersvorsorgedepot?
• Which ETFs and funds can be used for retirement saving?
• What does the new system mean for existing Riester pension plans?

This article is provided for information purposes only. The legal and tax information contained herein is not intended to constitute or replace legal advice, nor does it purport to cover all legal or tax considerations that may be relevant to the subject matter of this article. The information is not exhaustive and does not take into account the individual circumstances of any particular investor or group of investors. It cannot replace advice from a tax adviser based on the circumstances of the individual case. Although the information has been compiled with due care, no representation, warranty or guarantee is given as to its accuracy, completeness or currency.