Retirement provision: Make provisions for old age as a child - the early start pension

Berlin. Children receive 10 euros a month from the state - for their pension, which is still decades away. That is the core of the new early start pension. It should be the starting capital for retirement provision, regardless of the parents' finances. The Bundestag will vote on a federal government bill on Friday. The draft will also come to the Federal Council.

For children and young people between the ages of 6 and 18, the state pays 10 euros per month into a retirement savings account contract. This can be a custody account selected by the parents, or automatically a public investment managed by the Bundesbank.

The income is tax-free until the start of the payout phase. According to the Ministry of Finance, the subsidized capital is generally not paid out before the person reaches the age of 65. Parents and grandparents can also top up the deposit through voluntary payments - deposits of up to 6,840 euros per year are permitted.

According to the Ministry of Finance, only a standard deposit contract with a cost cap of one percent is supported. Providers are not allowed to charge any closing or sales costs until they reach the age of majority. The Bundestag Finance Committee decided that the money should only be invested in broadly diversified global stocks or stock funds.

The law is scheduled to come into force at the beginning of January 2027. The early start pension starts with those born in 2026, i.e. those born in 2020 - the state support has a retroactive effect. From 2027 onwards, the birth cohort of those aged six in the respective calendar year will be included every year. All children who are now seven or older are left empty-handed. The state pays the early start pension until the child reaches adulthood. The deposit is then transferred to the tax-subsidized private pension scheme.

The big advantage of an early start is time, according to the Treasury. The compound interest effect can work for many years. The longer money stays invested, the more noticeable this effect can be.

According to calculations by the Ministry of Finance, the state funding alone creates a deposit value of around 2,200 euros up to the age of majority. This could amount to around 53,000 euros by the age of 65 without any further payments. According to the ministry, if parents add 10 euros a month, the deposit can grow to around 107,000 euros by the age of 65 - with an additional payment of 50 euros, it would be around 320,000 euros.

According to the Ministry of Finance, the calculations are based on an assumed average performance of 7 percent per year. This corresponds to the long-term average return of globally diversified equity investments after deducting any costs. The actual performance could be higher or lower. The draft law states: If the starting capital is less than the sum of the early start pension invested for a beneficiary due to an unfavorable development on the capital market, there is no entitlement to compensation from the federal government.

The federal government's spending on the early start pension should initially be 198 million euros per year and increase to 411 million euros by 2030.

The early start pension is also intended to ensure that more young people engage with the stock market. They should feel the performance of their own portfolios - and also see that a temporary loss often compensates for itself in the long term.

This is intended to create incentives to continue private provision into adulthood with your own contributions. Because private provision will become increasingly important in the next few years. To this end, the federal government has developed a successor to the less popular private Riester pension.

The German banking industry welcomes the plans. The early start pension supplements the planned retirement savings account with an offer for children and young people and makes it easier to get started early on with funded retirement provision. “It can make a significant contribution to introducing young people to long-term wealth creation via the capital market at an early stage,” it said in a statement.

"Ten euros a month will not close the pension gap. But the early start pension can bring millions of young people into contact with the capital market and long-term investing at an early stage and as a matter of course," said Marc Tüngler, General Manager of the German Association for the Protection of Securities Holdings.

The German Federation of Trade Unions, on the other hand, describes the early start pension as a deception. “It is not a pension and hides the social and ethical risks of the capital market,” it said in a statement. It should therefore be rejected. “The early start pension is primarily a state-financed way of customer acquisition for private financial service providers, banks and insurance companies.”

Dorothea Mohn from the Federal Association of Consumer Organizations said that when it comes to financial education, politicians are falling short of their demands. "Information from financial providers is important. But it does not replace independent financial education. Children and families need quality-assured educational offerings instead of advertising material."