How is a Riester-Rente pension taxed when you receive payments in retirement?

Riester pensions use the principle of nachgelagerte Besteuerung (deferred taxation). This means contributions and government allowances are made with pre-tax euros (or attract a tax deduction), the savings grow largely tax-free during the accumulation phase, and payments in retirement are taxed as income at your marginal tax rate at that time.

All Riester pension payments received in retirement, including both the return of contributions and any investment gains, are fully taxable as income in the year they are received. The pension is declared under sonstige Einkünfte (miscellaneous income) or as Leibrenten depending on the product type. Lump-sum payouts (which are limited to 30% of the accumulated capital under Riester rules) are also fully taxed in the year of payout.

The tax advantage relies on the expectation that your marginal tax rate in retirement will be lower than during your working years. For most employees who contributed at the 42% or 45% marginal rate during peak earning years and expect a lower retirement income, this deferral produces a net tax saving over the lifetime of the contract. However, for very high earners who also expect high retirement income, the benefit may be limited. The government allowances (Zulagen) are not repaid when you reach retirement; they remain in the account and are taxed as part of the payouts. If you terminate the contract early or emigrate, the allowances must be repaid to the Zulagenstelle.

This is general information only, not professional tax advice. Consult a qualified tax professional for your specific situation.