The Federal Government is embarking on comprehensive reforms to ensure people are well provided for in their old age. Innovative approaches and a fresh perspective on the potential returns offered by the capital markets can help in this regard.

By introducing the “early start” pension, the Federal Government aims to provide young people with initial capital for their private pension provision at an early stage, enabling them to gain positive experiences with investing and to strengthen their financial literacy.

The Federal Cabinet approved the draft bill on the introduction of the “early start” pension on 12 August, and the German Bundestag gave its approval on 16 October. The “early start” pension is due to come into effect in January 2027. 

How the “early start” pension works

Children aged between 6 and 18 are to receive a monthly state payment of 10 euros towards an individual, funded, privately managed pension savings account – starting with those born in 2020. Parents can open the individual account with a provider of reformed private pension system solutions and voluntarily top it up with a private contribution. The government grant is then paid automatically via the provider, without the need for a further application. 

The individual savings accounts will tie in with the new private pension scheme offerings. In this way, the Federal Government is making it easier for young adults to get started with independent supplementary pension provision – those who continue to contribute to their pension savings account, building on their experience with the “early start” pension scheme, can thus build up assets for their retirement.

Wealth grows over the long term

With the “early start” pension scheme, young people can build up savings even with small regular contributions. The key factor is the long-term perspective. Long-term investment in the capital market and the reinvestment of dividends ensure a significant compound interest effect.

Based solely on the state subsidy totalling 1,440 euros – assuming an average nominal annual return of seven percent – the value of a portfolio like this could reach around 2,200 euros by the time the child turns 18. Without contributing a single additional euro, they could see their assets grow to around 53,000 euros by the time they retire. If, for example, parents contribute 50 euros a month, the savings account could even grow to over 300,000 euros by the time the child retires. The returns remain tax-free until the start of the payout phase, i.e. until retirement.

All children within a year group benefit

Children and young people whose parents do not open a pension savings account should also be able to benefit, and for this there is a collective investment scheme. This ensures that everyone benefits from the opportunities offered by capital-market-oriented pension provision.

The “early start” pension is available to all children in a given year group, regardless of their parents’ initiative or financial circumstances. If no individual pension scheme is set up, the Federal Government invests the funds collectively on the capital market, under the management of the German Federal Bank. The entitlement arising from this can be transferred to a personal pension scheme as initial capital until the person turns 35.

Reforms for a stable pension system

Good provision for old age is a key focus of the Federal Government’s reform efforts. To ensure a stable pension system, it is strengthening the state pension, as well as occupational and private pension provision. An important component is the reformed private pension system. The new pension products, featuring a new funding scheme, are set to be available to citizens from January 2027.

The Pensions Commission has also presented its proposals for a fundamental pension reform, including the introduction of a compulsory funded pension component (“statutory capital-market-based pension”). The governing coalition has agreed to implement the recommendations as part of a package of legislation. The “early start” pension, tax-advantaged private pension schemes and the planned statutory capital-market-based pension are intended to complement one another effectively.