Germany’s planned early retirement pension for children (Frühstart-Rente) will only be effective if contributions begin at birth rather than at school age, according to Deutsches Aktieninstitut (DAI).

The coalition government has confirmed that the scheme will launch in 2026, providing €10 per month in state contributions to children in education (age six) until the age of 18 to an individual, funded and privately organised account.

The savings accumulated under this early start pension scheme will only be paid out and taxed upon retirement.

However, a new study by Vanguard and DAI, Children's savings accounts in international comparison – What can we learn from other countries for the early retirement pension?, has argued that while the reform marks an important shift towards funded provision in Germany’s pension system, it needs sufficient volume, simple products and an unbureaucratic government framework to be a success.

DAI chief executive and member of the board, Henriette Peucker, said: "If done well, the early retirement pension planned by the federal government could be a way to start saving during childhood.

“To be successful, the early retirement pension should start at birth, allow additional payments from third parties such as parents or grandparents, and, above all, reach every child. Simple and inexpensive private products enable reliable long-term savings. Targeted retirement provision requires that the early start pension flows directly into a retirement savings account after the age of 18.”

In addition to starting from birth, the report also emphasised that accounts must be created automatically if parents or guardians fail to take action themselves. This would prevent inequalities linked to social background and guarantee universal access to the scheme.

It also found that experience abroad shows that standardised solutions from private providers, with a high equity allocation, can deliver strong returns even for automatically opened accounts.

Families, relatives and even foundations should also be allowed to make additional contributions, the study argued, with the €10 monthly state payment seen as far too low to secure meaningful retirement income on its own.

It also found that tax incentives will play a critical role in making the scheme attractive. The report recommended exempting investment income from taxation, following the French and British models, and allowing private contributions to be tax-deductible.

Furthermore, to maintain a long-term focus, accounts should automatically convert into retirement products once a child turns 18, with investment strategies based on the core principles of diversification and a minimum 60 per cent allocation to equities.

Finally, the study argued that account opening and management should be fully digitised, using children’s tax identification numbers to reduce bureaucracy. At the same time, financial education on pensions should be made a standard part of the school curriculum.

Vanguard Group Europe managing director, Sebastian Külps, added that the accounts are a “gateway to financial education” and can motivate young investors to continue making private contributions even after the state contributions have expired.

“If Germany introduces the early start pension now and learns from international approaches, children can benefit from the capital market at an early age and look forward to significantly better retirement provisions in the long term,” he concluded.

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