What does phased retirement mean?

Phased retirement (Altersteilzeit) is a working time model that employees can use, by agreement with their employer, for their last years before retirement. Working hours are scaled back in various ways to make the transition into retirement easier.

From what point are you entitled to phased retirement?

In principle, all employees who have been subject to social security contributions for the last 1,080 days and have reached the age of 53 may take phased retirement. Not everyone who meets these criteria automatically has a right to it, though. Phased retirement has to be negotiated with the employer.

How is phased retirement funded?

Until 2010 the state still funded a certain share of phased retirement. That is no longer the case today. The employee usually works 50% of their original workload and is paid an additional 20% of their wage by the employer.

Phased retirement (Altersteilzeit): models and pitfalls

The basics of phased retirement

What is phased retirement?

Phased retirement (Altersteilzeit) is a part-time working model that people can use from the age of 55 for their remaining working time before retirement. In law it is governed by the German Phased Retirement Act (Altersteilzeitgesetz, AltTZG). There is no legal entitlement to phased retirement, however: it can only come into effect through a voluntary agreement between employee and employer. On top of that, many of the points laid down in the Phased Retirement Act can be adjusted individually.

Who can take phased retirement?

Phased retirement is possible for employees who have reached the age of 55 and have been subject to social security contributions for at least 1,080 calendar days in the last five years. No distinction is made between part-time and full-time work, and periods in which there was an entitlement to unemployment benefit or unemployment benefit II are counted in as well. Phased retirement has to be taken immediately before the earliest possible start of the old-age pension.

How does phased retirement work, and how does it differ from other models?

Phased retirement

Target group: Older employees, shortly before the regular retirement date (age 55)

Purpose: Serves as a transition into retirement and a reduction in working hours

Models: Block model or equal distribution model

Statutory rules: In Germany governed by the Part-Time Working Act.

Funding: Halved salary plus a 20% top-up payment from the employer

Pension contributions: The employer often pays a higher pension insurance contribution in order to reduce the loss of pension.

Regular part-time work

Target group: All employees, regardless of age

Purpose: flexible working time arrangements, a better work-life balance or adjustment to personal circumstances.

Models: agreed individually between employer and employee.

Statutory rules: Governed by the German Part-Time and Fixed-Term Employment Act (Teilzeit- und Befristungsgesetz)

Funding: Pay is based purely on the hours actually worked

Pension contributions: Contributions to the pension insurance are based on the lower income, which can lead to lower pension entitlements.

Other early retirement arrangements

Target group: Employees who want to leave working life before the regular retirement age.

Purpose: Early pension, often without any further paid work

Models: Early retirement, severance arrangements, early retirement agreements

Statutory rules: very varied, and also dependent on the company

Funding: Often through severance payments, private savings, a company pension or drawing the statutory pension early, often with deductions

Pension contributions: Retiring early often leads to permanent pension deductions and lower pension payments

As you can see, phased retirement is designed specifically for older employees to make the transition into retirement easier, and it is often supported by state rules. Regular part-time work, by contrast, can be used by any employee for a better work-life balance. Other early retirement arrangements make it possible to retire early, often without any further paid work, and are based on individual and company agreements.

Phased retirement models

In phased retirement, working hours are reduced by a certain percentage of the previous full-time employment under various models. That could be 50%, for example.

Example of the phased retirement block model

The block model

In the block model the existing working period is split into two phases: the working phase and the release phase. In the working phase employees carry on working full time as usual. In the release phase the employee is then released from work and no longer works, but continues to receive the agreed pay.

In practice this can look as follows:

Advantages: The block model allows a clear separation between the working phase and the release phase. In the release phase the employee can leave working life entirely. Within the block model, employees can therefore enter a kind of retirement earlier.

Disadvantages: The first, working phase may be more of a strain, since full-time work continues. So it is not suitable for people who want to reduce their working hours before retirement for health or personal reasons.

For the employer: This model means the employee can carry on with their existing tasks for the time being. For the employer it is therefore not much of a change at first. In the second half, however, a full-time position disappears, most likely along with a great deal of experience and qualifications.

Example of phased retirement equal distribution act

The equal distribution model

The equal distribution model works much like a classic part-time job: working hours are reduced evenly across the whole duration of the phased retirement. The employee works a reduced number of hours throughout, for example 50% of their previous working hours.

In practice this can look like this:

Advantages: Under the equal distribution model the employee gets a continuous reduction in working hours and can build an even transition into retirement.

Disadvantages: This model does not allow an early release phase. The employee therefore remains under a certain workload right up to retirement.

For the employer: With the equal distribution model the employee does cut their hours drastically and will probably have to hand over tasks, but their knowledge and experience stay with the business for longer. This period is also a good opportunity to train new employees.

Pitfalls of phased retirement

Phased retirement sounds like a relaxed transition into retirement, but there are a few pitfalls that can prove expensive later. Here are the most important risks:

A smaller pension

Because you earn less, you also pay less into the pension fund. There are often top-up payments from the employer, but they do not always make up for the loss. Check early on how phased retirement will affect your later pension.

The block model risk

Many people use the block model, in which you first carry on working normally and are then released from work. If your employer becomes insolvent during that phase, you may end up receiving no money at all. Protection against this is essential!

Company pension at risk

Many occupational pension schemes are based on your final salary - if that falls because of phased retirement, your company pension will be lower too. Be sure to clear this up with your HR department beforehand.

Tax surprises

Phased retirement can affect your tax burden, especially when a pension and other income come along later. A conversation with a tax advisor can help you avoid nasty surprises.

Keep an eye on health insurance

If you earn less, you also pay less into health and long-term care insurance. That can lead to higher own contributions in retirement. People with private cover in particular should keep an eye on this.

Dismissal is still possible

Even if you are already in phased retirement, your employer can dismiss you - for example in the case of redundancies for operational reasons. Anyone who thought part-time work was a safe bet can be in for a nasty surprise here.

Phased retirement can be worth it if it is well planned. But without protection it can end up bringing fewer benefits than expected. So think carefully about whether the model fits your situation!

Conclusion

Phased retirement allows businesses to plan staffing and succession in a targeted and relaxed way, encourages knowledge transfer and strengthens the working atmosphere. Employees benefit from a gentle transition into retirement, greater satisfaction and a better work-life balance. Flexible models and individual adjustments make sure the needs of both sides are met. With careful planning and financial support, phased retirement can create a win-win situation that contributes to the business's stability and productivity in the long term. Employees should, however, look closely at the risks and pitfalls of phased retirement before deciding on it.

Map phased retirement digitally too

To keep an overview of your employees' different employment arrangements, and to keep an eye on workloads and maximum working hours in particular, we recommend clockin as an app for digital time tracking.

With clockin your employees can record working hours easily on their mobile via the app. That is a big advantage, especially in flexible working arrangements with the option to work from home.

The app also lets you allow for different working time models or types of contract. You can set the maximum number of hours laid down in the employment contract individually for each employer and adjust it at any time.

Thanks to integrations with payroll systems, clockin automates your billing for you and makes sure all statutory provisions are met, which reduces administrative work and minimises errors.

With clockin's real-time analytics on working hours, costs and project hours you can also make well-founded decisions and increase your business's productivity.