Germany: Active pension from 2026: opportunities and imitations

Since January 1, 2026, employees who continue to work beyond the standard retirement age will benefit from the new active pension. A monthly tax allowance of up to EUR 2,000 makes continuing to work in retirement financially attractive – but with important special features.

With the Labor Market Promotion Act, the legislator introduced the active pension on January 1, 2026. The tax measure is intended to provide incentives for people to remain in the workforce longer and counteract the shortage of skilled workers. 

Who benefits from the active pension? 

The regulation applies to employees subject to social security contributions who have reached the standard retirement age. This is 67 years for those born in 1964 or later, with staggered age limits for earlier birth cohorts.

Minor employment such as mini-jobs, civil service positions, self-employment and freelance workers, as well as pension payments and severance payments are excluded from the active pension. 

Requirements 

The active pension can be claimed if the following requirements are met:

1. there must be an employment relationship subject to social security contributions; and
2. the employee must have reached the statutory standard retirement age.

Since January 2026, special rules apply to fixed-term active pension contracts. Normally, a fixed-term contract without objective grounds can last a maximum of two years and be extended up to three times. However, pensioners now benefit from an important exception: after the original unlimited contract ends, the parties can enter into a new fixed-term employment contract for up to two years according to the general rules. Details are specified in Sec. 41 para. 2 sentence 1 Social Security Act, Part VI ("SGB VI") (new version since January 1, 2026). 

Legal consequences 

If the requirements are met, the following legal consequences arise:

• Tax exemption: up to EUR 24,000.00 per year (i.e., EUR 2,000.00 per month) can be tax exempt
• Important to note: severance payments and pension payments are excluded. These payments do not fall under the tax exemption of the active pension.

Special features 

The progression clause 

The tax-free amount has no influence on the level of taxes that the employee must pay on other income. Normally, the situation is different for tax-free benefits – they increase the tax rate on the remaining income. This is not the case here. This legislative decision is to be welcomed, as it creates a genuine incentive for the active pension. 

Social security remains unchanged 

Based on our current knowledge, social security contributions are charged on the active pension. The employer continues to pay its contributions to unemployment and pension insurance, while the employee no longer has to pay these contributions. Both the employer and the employee shall continue to pay their contributions to health and home and institutional care insurance. There is however no definitive legal certainty in this regard yet, and the first practical cases remain to be seen. 

Practical consequences 

Obligations for employers 

Employers must record the tax-free wages separately in the payroll account, show the amount in the electronic wage tax certificate, and document the requirements, e.g. by providing proof of reaching the standard retirement age.

If the employee has multiple jobs, the allowance can only be used in one employment relationship. If in doubt, the employee must confirm that the tax exemption has not already been taken into account elsewhere. 

Strategic opportunities for employers 

The active pension offers concrete advantages:

• Employee retention: Employers now have a good financial argument to encourage older employees to stay. The regulation can be easily combined with part-time work or a gradual transition.
• Knowledge retention: Experienced employees can be used specifically for training new colleagues. The regulation enables an orderly transition and good succession planning. 

Information for employees 

• Make individual calculation: The actual benefit depends on salary level, tax rate, and other income.
• Clarify pension law implications: Employees should obtain information from the German pension  insurance scheme on how continued employment affects pension levels.
• Submit income tax return: As the annual wage tax adjustment is excluded, a tax return is required for final assessment.  

Conclusion 

The scope of application of the active pension is very narrow. Due to the individual tax situation, the economic advantage should also be calculated very precisely. The actual financial benefit depends significantly on individual factors such as salary level, personal tax rate, and other income. A blanket statement about the benefits is not possible. Individual tax advice is essential. The economic benefits and potential constitutional challenges are awaited with keen interest.