Cancel and cash out company pension scheme: Clearly assess options and consequences
30 May 2025
12
Minutes
Katrin Straub
CEO at nextsure
Are you considering cancelling your occupational pension scheme (bAV) and cashing out the capital? This step needs careful consideration, as it often carries more disadvantages than advantages. We’ll guide you on what you need to know and what smarter options are available for your financial future.
The topic in brief and concise terms
Termination of occupational pension schemes is generally not legally provided for and often results in significant financial disadvantages due to tax repayments.
Alternatives such as contribution exemption or transferring the occupational pension scheme contract are generally more sensible than a cancellation.
The payout of the occupational pension capital usually occurs only at retirement age, even if termination would be possible.
The reality of occupational pension scheme cancellations: Often not possible and rarely beneficial
Many employees are considering terminating their occupational pension scheme (bAV) to quickly access funds. However, the reality often looks quite different: a proper termination by the employee is generally not provided for by law. The main reason for this is the pension purpose of the bAV; the capital is meant to secure your retirement in old age. An early payout contradicts this fundamental goal and is therefore only conceivable in narrowly defined exceptional cases. The hurdles for termination are intentionally set high. Remember that the contract partner of the insurer is usually your employer, whose consent is often required. Even if a termination were theoretically possible, the payout of the capital usually only occurs at the normal retirement age. Instant access to the money is therefore mostly an illusion. This circumstance makes careful consideration of alternatives essential.
High cost trap: Tax and social security disadvantages when paying out
Should there be an exceptional case leading to an early disbursement of the occupational pension capital, you must expect substantial financial drawbacks. During the savings phase, you benefit from tax and social security contributions savings, as contributions are made from your gross income. In the event of an early disbursement, these advantages are reversed. You must repay the taxes and social security contributions saved up to that point. Additionally, there are often administrative fees from the insurer that further reduce the payout amount. In the worst-case scenario, these repayments and costs can even exceed the accumulated capital, resulting in a real loss-making situation. A correct tax treatment is crucial here. You should definitely consider these financial consequences before pursuing the path of termination further.
Exception for Small Annuities: When a Settlement is Possible
One of the few exceptions where an early payout of your occupational pension (bAV) may be possible is the so-called small entitlement provision. This applies when the expected monthly pension from the occupational pension does not exceed a certain threshold. For the year 2025, this threshold is approximately 37 euros of monthly pension in the former West German states. If your entitlement is below this, you may be able to request a settlement, even without the employer's consent. The specific regulations can be found in the Occupational Pensions Act (§ 3 BetrAVG). The following points are relevant here:
The calculation of the pension amount is made at the time the application is submitted.
The settlement amount corresponds to the accrued capital.
Even with a settlement of a small entitlement, taxes and social security contributions still apply.
The application must be actively submitted by the employee.
Carefully check whether your occupational pension falls under this provision. Even if this is the case, the decision should be well-considered, as retirement savings are reduced here as well. It remains important to assess whether a transfer of the occupational pension might still be a better option.
Sensible Alternative 1: The Contribution Suspension of Your Occupational Pension (bAV)
If you can no longer or do not want to pay the ongoing contributions for your occupational pension, cancelling it is rarely the best option. A much more flexible and often more advantageous option is suspension of contributions. In doing so, you stop the contributions, but your previously accumulated capital remains in the contract and continues to earn interest. Your entitlement to a future, albeit reduced, occupational pension remains. The suspension of contributions avoids the disadvantages of cancellation, such as tax back payments. Usually, there are small administrative fees for the conversion. This option provides you with financial leeway without completely giving up your pension provision. You can often resume contributions later. Consider whether this might be a better solution for your situation, rather than recklessly risking the value of old contracts.
A sensible alternative 2: Transfer of occupational pension rights when changing employer
A common reason for considering the termination of company pension schemes is a change of employer. However, there are better solutions than hastily cancelling these schemes. The Occupational Pension Act provides the option to transfer the accumulated capital to the new employer’s pension provider (§ 4 BetrAVG). This is generally possible if:
The transfer value does not exceed a certain limit (approximately €96,600 for 2025).
The transfer request is submitted within one year of the job change.
The new employer and their pension provider give their consent.
It involves a direct insurance policy, pension fund, or pension scheme.
The transfer secures the continuation of your retirement provision without any losses. In this way, you can continue saving into your company pension scheme seamlessly. Discuss your options early on with both your former and new employer. Thus, the question of what happens to the company pension scheme upon termination of the employment contract can often be answered positively.
Expert Depth: Understanding Legal Foundations and Pitfalls
The termination and payout of an occupational pension scheme (bAV) is a complex area governed by the Company Pension Act (BetrAVG). Central to this is § 1b BetrAVG, which regulates the non-forfeitability of entitlements. This means that your claims remain intact after a certain period (usually three years of service and a minimum age of 21), even if you leave the company. However, termination with immediate payout is only intended in exceptions such as mini-benefit entitlements (§ 3 BetrAVG). Our expert tip: Do not underestimate the employer's consent requirement. Since the employer is often the policyholder, they can oppose a termination to avoid jeopardising their own obligations from the pension commitment. With an employer-financed bAV, the hurdles are even higher. An optimisation of contributions is more achievable in retirement rather than through termination. Always seek expert advice in case of doubt to avoid costly mistakes.
Long-term Perspective: Why Occupational Pensions Remain an Important Component
In spite of potential financial constraints or changed life plans, the importance of occupational pension schemes should not be underestimated. Alongside the state pension and private provisions, it forms one of the three pillars of retirement provision in Germany. Due to government incentives during the accumulation phase (tax and social security savings) and the often mandatory employer contribution (at least fifteen percent in the case of salary conversion), it is an attractive retirement planning tool. Cancelling and withdrawing from the occupational pension scheme not only leads to financial disadvantages but also reduces your future pension and therefore your standard of living in retirement. Think long-term and examine all alternatives carefully. Is an occupational pension scheme fundamentally sensible for your situation? Most of the time, yes. Before making a final decision, professional advice can help you find the right solution and optimise your retirement planning. The option to deduct contributions to the occupational pension scheme for tax purposes is also a significant benefit.
Conclusion: Terminate the occupational pension only in emergencies – consider alternatives!
More useful links
The Federal Ministry of Justice provides the Occupational Pension Act (BetrAVG) in its entirety, the central legal basis for occupational pensions.
The Federal Ministry of Labour and Social Affairs (BMAS) offers information on income and assets in the context of social benefits, which can be relevant for assessing occupational pension payouts.
The Finanzamt.NRW provides detailed information on the taxation of benefits from occupational pensions.
The AOK explains the regulations concerning health insurance contributions on pension benefits, including those related to occupational pensions.
The Techniker Krankenkasse (TK) offers insights into allowances and contribution calculations for occupational pension schemes.
The German Pension Insurance provides a comprehensive brochure on occupational pensions, highlighting important aspects and regulations.
The Federal Statistical Office (Destatis) delivers official statistics and press releases that can provide relevant background information on economic and demographic trends.
FAQ
Under what conditions is it even possible to terminate the occupational pension scheme?
Termination is only possible in very limited exceptional cases, such as with a so-called small entitlement (very low expected pension) or sometimes with the employer's consent, although payouts usually still occur only at retirement age.
What are the tax implications of withdrawing a company pension scheme?
In the event of a payout, especially an early one, the tax benefits received during the savings phase must be repaid. The capital is fully liable to tax, and social security contributions are applicable.
What does 'Unverfallbarkeit' mean in company pension schemes?
Vesting means that your claims from the occupational pension scheme (bAV) remain in effect even after the termination of the employment relationship, provided certain conditions (e.g., minimum duration of the commitment, minimum age) are met. This is regulated in § 1b BetrAVG.
Can my employer refuse the termination of my company pension scheme?
Yes, since the employer is usually the policyholder of the occupational pension scheme contract, their consent is generally required for termination. They may refuse this to ensure the purpose of the benefits is secured.
What is the current de minimis threshold for small pension entitlements?
The threshold for a potential compensation for a minimal pension entitlement is set at a monthly pension of approximately 37 euros (West) for the year 2025. This value can be adjusted annually.
What alternatives are there to cancelling my occupational pension scheme?
The most common and often better alternatives are suspending the contract contributions, transferring to a new employer, or in some cases, continuing privately.
