The new retirement savings plan: Germany's pension reform 2027 – the end of the Riester pension and up to 540 euros in government subsidies

The new retirement savings account is coming: ETF savings with government subsidies

Cancelling your Riester pension contract? What you need to know about the 2027 pension reform

Private retirement savings in Germany are at a historic turning point. After more than 20 years plagued by bureaucratic hurdles, high costs, and meager returns, policymakers have effectively ended the Riester pension scheme. To effectively combat the looming threat of poverty in old age and the pressing demographic shift, a new, government-subsidized retirement savings plan will launch in 2027. With a fundamentally new funding model, a bold move away from rigid guarantees in favor of high-yield ETF investments, and innovative components such as the "early start pension" for children, the government aims to finally make private retirement savings accessible to the masses.

But does the much-heralded pension reform really deliver on its promises in practice? What does this upheaval mean for millions of existing Riester savers, and does the capital market-oriented investment portfolio model also harbor hidden risks? The following article analyzes the new legislative process in detail, highlights the opportunities of the contribution-based subsidy model, and reveals where the legislature still lacks the courage for a genuine system change.

The state contributes – but is that really enough to avert the threat of poverty in old age?

The end of an era: Why the Riester pension scheme failed

For more than two decades, the Riester pension has been synonymous with everything that has gone wrong in German pension policy: excessive complexity, disappointing returns, high administrative fees, and a subsidy system that regularly overwhelmed even financial experts. What was conceived in 2001 as a revolutionary answer to demographic change has effectively failed. Since 2018, the number of active Riester contracts has been steadily declining, with up to a quarter of all contracts considered dormant or contribution-free. Millions of citizens who once believed they had made sound provisions for their retirement are now finding, with disillusionment, that their actual payout after all costs falls far short of expectations.

The structural problems of the Riester pension scheme were obvious. The legally mandated guarantee principle – at least the contributions paid in had to be guaranteed at the start of the pension – forced providers to adopt a defensive, low-yield investment strategy. This guarantee principle proved to be a fatal handicap precisely during periods of prolonged low interest rates. At the same time, high setup and administration costs ate up a significant portion of the meager returns. The result: a product that was neither attractive nor accessible and offered hardly any real benefits to those population groups who needed it most.

The demographic tipping point: Why there is a need for action

The failure of the Riester pension scheme would not in itself constitute an emergency were Germany not simultaneously facing a demographic shift of historic proportions. The statutory pension insurance system is based on a pay-as-you-go system – the contributions of today's working population finance today's pensions. This system is under dramatic pressure because the ratio between contributors and pensioners is deteriorating rapidly. In the early 1990s, there were statistically 2.7 working people for every pensioner. By 2023, this figure will have fallen to just 2.1. By 2050, this ratio could narrow to almost 1:1.

The pension level – that is, the ratio of the standard pension to the average wage – is currently around 48 percent of gross wages, remaining significantly below what is considered sufficient to maintain a certain standard of living. The consequences are already being felt: Around 42 percent of the nearly 19 million pensioners in Germany receive less than €1,000 net per month. The official at-risk-of-poverty threshold is €1,381 net per month. Women are structurally disadvantaged in this regard: At the end of 2024, their average old-age pension level was only €955, compared to €1,405 for men – a difference of almost a third.

The so-called pension gap is real and growing. According to the WHU Otto Beisheim School of Management's 2026 Pension Compass, German retirees spend an average of €3,148 per month but only have current income of €2,988. The resulting difference is currently bridged by withdrawing assets – a strategy that will not be sustainable in the long term for a growing segment of the population. Younger workers, in particular, who would have to save an average of 10 to 20 percent of their net income privately to maintain pension levels, feel the burden of this systemic failure directly. Reforming private pension provision is therefore not a social policy luxury, but a structural necessity.

The legislative process: A long road to reform

The German government, a coalition of the CDU/CSU and SPD, initiated the reform of tax-subsidized private pension schemes with the Pension Reform Act. On December 17, 2025, the Federal Cabinet approved the draft legislation, which was prepared under the leadership of Federal Finance Minister Lars Klingbeil (SPD). On February 27, 2026, the bill was debated in its first reading in the Bundestag and referred to the relevant committees. The Bundestag's Finance Committee, which was responsible for the legislation, held a public hearing with experts on March 11, 2026.

The meeting of the Finance Committee on March 25, 2026, was crucial: at the request of the coalition parties, the CDU/CSU and SPD, significant changes were made to the original government draft at the last minute. These last-minute corrections demonstrate the intensity of the political wrangling over details. Furthermore, at the request of the Bundesrat (Federal Council), the possibility of extending the circle of those directly eligible for funding to include the self-employed and all persons of working age will be examined. The law still needs to be passed by the Bundestag (Federal Parliament) and the Bundesrat; the launch of the new product range is planned for January 1, 2027.

The core instrument: The state-subsidized retirement savings account

The centerpiece of the reform is a new product concept: the state-subsidized retirement savings account. It differs fundamentally from the previous Riester pension in that it does without the previously legally mandated full contribution guarantee. This allows, for the first time, direct and state-subsidized investment in capital market-oriented assets – globally diversified stocks, exchange-traded funds (ETFs), bonds, and, in the future, also ELTIFs (European Long-Term Investment Funds). For more conservative savers, the option remains to take out classic guaranteed products – either with an 80 percent or 100 percent capital guarantee at retirement.

Alongside the return-oriented option without a guarantee, a so-called standard account is being introduced. This standard product is deliberately simple in structure, can be opened online, and must be available from every provider. It is aimed at consumers who do not want to, or cannot, delve deeply into product details. Individual decisions are only required with the standard account if the saver explicitly wishes to deviate from the predefined standard settings. The originally planned effective cost limit of a maximum annual return reduction of 1.5 percent for the standard product was lowered to 1.0 percent by the Finance Committee – an important step toward protecting investor returns.

To increase market transparency and protect consumers from opaque fee structures, closing costs for retirement savings contracts will in future be spread over the entire contract term. This significantly limits the financial disadvantage of switching providers prematurely. In practice, this means that anyone wishing to switch providers within the first five years will pay a maximum switching fee of €150. After this period, switching is completely free.

The new funding model: Percentage-based allowance system instead of a flat-rate subsidy

One of the most fundamental differences compared to the Riester pension scheme is the new funding system. The old Riester logic, with its flat-rate basic allowance of €175 and fixed child allowances, is being replaced by a contribution-based model – the more that is paid in, the higher the subsidy, up to a maximum limit. The original model in the government draft stipulated a basic allowance of 30 cents per euro paid in for the first €1,200 per year, rising to 35 cents from 2029. For further contributions up to the maximum limit of €1,800 per year, an additional 20 cents per euro was planned.

The amendments passed by the Finance Committee on March 25, 2026, further adjusted the subsidy model to benefit small savers. The new system provides for a subsidy of 50 percent of annual contributions up to €360 – meaning someone contributing €30 per month and saving €360 per year receives a government subsidy of €180. For contributions exceeding this amount, up to the annual maximum of €1,800, the subsidy is 25 percent. The maximum subsidy is €540 per year for monthly contributions of €150. This new regulation is noteworthy: it establishes a significantly higher subsidy rate for the lowest contribution tier, specifically designed to incentivize low-income earners and small savers to begin private retirement savings.

The tax framework is being further developed in parallel. The special expenses deduction remains in place and covers self-made retirement savings contributions up to €1,800, plus any applicable subsidies. The tax office will continue to automatically check, as part of a more favorable tax treatment assessment, whether the tax reduction is more advantageous than the direct subsidy. The fundamental principle of deferred taxation – tax exemption during the savings phase, tax liability upon payout in retirement – ​​remains unchanged. Savers must therefore be aware that their subsequent supplementary pension will be taxed as income, even if the government subsidies appear attractive during the savings phase.

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Children as a target group: Early retirement

An ambitious and educationally and actuarially interesting component of the reform is the so-called early start pension. It aims to introduce an entire generation to the capital market at an early age and allow the effects of compound interest to take hold over decades. For children between the ages of six and 18 attending an educational institution in Germany, the state pays ten euros per month into an individual, capital-funded, and privately managed retirement savings account.

The practical implementation is complex but pragmatic. Parents can open an individual account for their child with a provider of their choice, which meets the strict requirements of the new standard product. If no individual account is opened for their child, the child will automatically be enrolled in a state-provided safety net – no child should be disadvantaged due to parental inaction. Additional contributions from parents, grandparents, or other individuals are also possible. Crucially, the returns from the account are tax-free until retirement.

For fiscal reasons, the early retirement pension was initially launched only for those born in 2020, meaning children who will turn six in 2026. Around €50 million was allocated in the 2026 federal budget for this first cohort. The subsidy is intended to apply retroactively from January 1, 2026. Full implementation across all age groups between six and 18 would cost approximately €1 billion annually – a sum that explains the budgetary pressures leading to the phased implementation. From 2029 onward, further cohorts are to be included, so that the model will gradually extend to all age groups up to 18.

For families already actively saving in the new system, there are additional incentives. A child allowance of up to €300 per child per year is granted for monthly contributions of €25 or more. Together with the basic allowance, this results in substantial government subsidies for families with several children, which can significantly enhance their private retirement savings.

The transition: What Riester savers need to know

A reform of this magnitude inevitably raises the question of what will happen to the millions of existing Riester contracts. The German government has opted for clear grandfathering: Existing Riester contracts will continue and can be funded under the old subsidy conditions. No one will be forced to terminate their existing contract, switch providers, or repay subsidies already received. However, no new Riester contracts can be concluded after January 1, 2027.

For active Riester savers, there are three concrete options. First: Continue the contract unchanged and contribute under the existing terms. Second: Transfer the accumulated savings to a new retirement savings account or a new guaranteed product, retaining all previously received subsidies and tax benefits in full. Third: Suspend the Riester contract and open a new retirement savings account simultaneously. Switching within the first five years of the contract term may cost a maximum of €150 with the current provider; after that, it is free of charge. These transitional solutions are sensibly designed but require individual assessment by each saver: Those who incur high ongoing costs in an existing Riester contract could be significantly better off switching to the new system in the medium term.

The first products based on the new retirement savings account are expected to launch in the fourth quarter of 2026, giving interested parties ample time to familiarize themselves with the system. Government subsidies will begin on January 1, 2027. The Central Agency for Retirement Savings (ZfA) remains responsible for reviewing and disbursing the subsidies. The subsidy will be paid directly into the account and cannot be deposited into a current account.

The new sovereign wealth fund: More than just a detail

Among the most notable changes made by the Finance Committee on March 25, 2026, is the decision to include a state-managed fund as an additional investment option in the system. This sovereign wealth fund will be available alongside private providers as a standardized, low-cost alternative. The concept is based on Nordic and Anglo-Saxon models, where state-regulated funds – such as the Swedish AP7 model or the UK's National Employment Savings Trust (NEST) – have been successfully operating for years as an affordable basic alternative for retail investors.

The political thrust is clear: those who don't want to deal with the multitude of private providers or lack access to financial advice should have a simple, transparent, and cost-effective standard option offered by the state. This is a direct response to the criticism that even the planned effective cost limit of 1.0 percent for actively managed ETF portfolios is still significantly higher than the minimum costs of broad market index ETFs, which are available for self-managed use at 0.06 percent. The precise structure of the sovereign wealth fund is not yet finalized and is likely to be the subject of intense debate during the further legislative process – not least because the insurance and fund industries have a considerable economic interest in ensuring that the sovereign wealth fund does not pose serious competition for their products.

Critical voices: What the reform doesn't solve

The reform is generally welcome, but not without serious weaknesses and vulnerabilities. While the financial and insurance sectors have generally welcomed the law, various associations and consumer protection groups have expressed significant criticism.

The central risk problem lies in the nature of capital market-based investments without guarantees. Even broadly diversified equity ETFs can lose 50 percent or more of their value in a crisis, and historical periods of losses can last up to 15 years. Anyone experiencing a severe stock market crash shortly before retirement could be significantly worse off under the new system than under the old guaranteed model. The Federal Financial Supervisory Authority (BaFin) and experts at the hearing pointed to precisely this scenario. The Riester pension protected against such scenarios – at the expense of returns. The new system prioritizes higher returns – at the expense of security.

The insurance industry, in turn, criticizes the fact that the heavy weighting of ETF solutions does not adequately address longevity risk. Those who base their retirement savings on a payout plan with a final age of 85 risk ending up with no income from their subsidized retirement savings in their very old age. The lifelong annuity as the preferred payout option becomes less of a given in an ETF portfolio model.

Consumer advocates and unions complain that even the cost limit for the standard product, reduced to 1.0 percent following committee amendments, remains relatively high. The opposition, particularly the Greens, criticizes the lack of automatic enrollment for all citizens – an opt-out model based on the Nordic system. Without such mandatory participation, or at least automatic registration with an active opt-out option, experience shows that the program only reaches those segments of the population who are already informed and financially stable. People with low incomes, a lack of financial literacy, or unstable employment histories – precisely those who most urgently need supplementary retirement savings – are, in our experience, less likely to be reached by voluntary programs.

The fiscal costs of the reform are considerable, but manageable within the broader economic context. The federal government is projected to spend €50 million in 2026 and up to €197 million in 2030, the states between €52 and €198 million, and municipalities between €18 and €70 million. These sums appear modest in relation to the overall pension issue, but they signal the political will to actually invest.

International context: What Germany can learn from others

A look beyond Germany reveals that capital-funded, state-subsidized private pension schemes have been successfully practiced in many countries for decades. Since the 1990s, Sweden has combined a pay-as-you-go pension system with a mandatory capital-funded component (Premium Pension). The United Kingdom relies on the auto-enrollment system, which automatically enrolls all employees in occupational pension schemes with an active right of opt-out – with convincing results in terms of coverage rates. The USA utilizes a well-established system of capital market-linked private pensions with tax advantages through its 401(k) plans, although these lack statutory guarantees.

With its pension fund, Germany is on the path to a structure that has long been proven internationally. At the same time, the country is catching up more slowly than necessary, and the crucial step – the widespread automatic inclusion of all employed persons – is still missing from the current draft. This is the difference between a reform that carefully modernizes the existing pension system and a genuine system change that could structurally close the pension gap.

Practical guidance: What savers should do now

Given the timeline, a differentiated approach is recommended for different groups of savers. Those who do not yet have a retirement savings contract should carefully compare the first offers on the market from the fourth quarter of 2026 onwards – particularly with regard to the actual effective costs, the investment strategies offered, and the flexibility during the payout phase. Looking at the new standard custody account provides a reliable starting point, as it must meet legally defined cost ceilings and minimum structural requirements.

Riester savers should use the remaining time until 2027 to critically review their existing contracts. Ongoing costs, actual returns, and whether the current provider will later offer the new retirement savings account are key decision criteria. For many holders of expensive Riester fund policies or costly bank savings plans, transferring to the new system could bring significant advantages in the medium term – especially since subsidies and tax benefits are fully retained upon transfer.

Parents of children born in 2020 should consider whether they want to open an individual investment account for their child once the legal framework is in place, or whether the government's guaranteed savings plan is sufficient. The initial bonus, tax-free wealth accumulation over decades, and the ability to integrate it with their own retirement savings scheme make an individual account the more attractive option in most cases.

A step in the right direction – but not a breakthrough

The pension reform law with the new pension account is a long overdue and fundamentally correct step. The departure from the failed Riester logic, the opening up to high-yield capital market investments, the significant simplification of the subsidy structure, and the cost cap for the standard product are advances that make the system more attractive and fairer. The increased subsidies for small savers in the first contribution segment and the early retirement pension for children are socially sensible additions.

Nevertheless, it would be illusory to believe that the reform alone can overcome the structural risk of poverty among the elderly in Germany. As long as automatic broad-based impact is lacking—that is, a system that includes all employed people and not just the informed and engaged—private retirement savings will remain a tool for those who already think enough about their finances. The new retirement savings account improves private retirement planning. Whether it will also make it a mass phenomenon that actually helps to close the pension gap in demographic change remains to be seen. The will to reform is evident—but the decisive courage for a genuine systemic change has not yet been fully summoned.

Konrad Wolfenstein

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