Investment & Wealth
Occupational pension scheme
meaning of occupational pension
Occupational Pensions: Their Importance and How to Optimally Benefit
The state pension alone is often no longer sufficient to maintain your standard of living in retirement. Therefore, occupational pension schemes (bAV) are becoming increasingly important. Discover how you can benefit from bAV and which aspects are crucial.
The topic in brief and concise terms
Occupational pension schemes (bAV) are an important supplement to the statutory pension, becoming attractive through salary conversion and employer contributions.
Employees benefit from tax and social security contribution savings during the savings phase; contributions are tax-free up to 7,248 euros annually (2024).
There are five implementation methods (e.g., direct insurance, pension funds), the choice of which impacts return, security, and flexibility.
Quick Facts: Company Pension Scheme at a Glance
Company pension schemes (bAV) refer to employer-provided benefits for retirement, disability, or death. They are an important part of the German three-pillar model of pension provision. Since 2002, employees have been entitled to salary conversion. This means parts of the gross salary are directly transferred into the bAV. Since 2019, employers must contribute an additional 15 percent for new contracts if they save on social security contributions. This regulation makes the bAV more attractive for many employees. The bAV is thus a tool for employee retention and closing the pension gap. Learn more about the three layers of pension provision.
Practical Part: How Occupational Pensions Work in Everyday Life
The occupational pension (bAV) becomes a reality through various implementation methods chosen by the employer. There are five main forms: direct insurance, pension fund, pension fund, support fund, and direct commitment. In the case of direct insurance, the employer takes out a life insurance policy for you, for example. In 2021, there were 5.29 million active direct insurance contracts in Germany. Contributions can be paid tax-free up to eight percent of the contribution assessment ceiling (BBG West 2024: €90,600); that is €7,248. You can save social security contributions up to four percent of the BBG, i.e., up to €3,624 annually (as of 2024). A calculation example: With a monthly salary conversion of €100 and a 15 percent employer contribution, €115 flows into your contract. Many employees underestimate the compound interest effect over decades. The tax deductibility of direct insurance is a clear advantage. These practical aspects illustrate the direct benefit of the bAV for your pension provision.
Calculation example for salary conversion
Assume that an employee converts €200 of their gross salary each month. The employer adds the legally required 15 percent subsidy (€30) because they save on social security contributions. Thus, €230 flows into the bAV contract monthly. Over a term of 30 years and an assumed annual return of three percent, this could generate a capital of over €100,000. This highlights the potential.
Comparison of implementation methods
The choice of implementation method affects costs, flexibility, and investment opportunities. Here's a brief overview:
Direct insurance: Widely used, easy to handle, often with guaranteed benefits. In 2023, there were 8.78 million such contracts.
Pension fund: Legally independent pension institution, similar to insurance. Around 3.41 million contracts existed in 2023.
Pension fund: Offers higher return opportunities through more free capital investment but also higher risks. About 0.65 million contracts in 2023.
Support fund: Often used by larger companies, with no direct legal claims against the fund. Approximately 4.99 million insured (together with direct commitments) in 2021.
Direct commitment (pension commitment): The employer forms internal provisions and pays the pension directly.
Each method has specific advantages and disadvantages that must be weighed on a case-by-case basis. The advantages for employers are also varied. The complexity of the options underscores the necessity of good advice.
Expert Depth: Legal Basics and Design Tips
The Occupational Pensions Act (BetrAVG) has provided the legal basis for occupational pensions (bAV) since 1974. It regulates, among other things, eligibility requirements and the non-forfeitability of entitlements. Employer-funded commitments generally become non-forfeitable after three years of service and upon reaching the age of 21. Contributions from salary conversion are immediately non-forfeitable. An important aspect is insolvency protection: With most implementation methods, your claims are protected by the Pensions-Sicherungs-Verein (PSVaG). Our expert tip: When changing jobs, check the options for transferring your bAV. Often, a transfer of capital is possible if the value does not exceed the contribution assessment ceiling. For low earners (up to 2,575 euros gross monthly in 2024), there is the bAV subsidy: The state subsidises employer contributions of at least 240 euros annually with 30 percent, a maximum of 288 euros. This can significantly increase returns. Detailed knowledge of the paragraphs, such as § 1a BetrAVG (salary conversion) or § 3 No. 63 EStG (tax exemption), is essential for optimal planning. The tax treatment of the bAV thus offers considerable advantages. Careful planning and utilisation of these regulations are crucial for the success of your retirement provision.
Current judgments and developments
The case law on bAV is constantly evolving. For example, the Federal Fiscal Court (BFH) has repeatedly commented on deferred taxation and the application of the one-fifth rule for capital disbursements. It is important to keep an eye on recent judgments as they can impact contract design and payments. For instance, it has been clarified that strict criteria apply to the application of the one-fifth rule for partial capital payouts. Furthermore, politicians plan further adjustments to make the bAV more attractive, especially for low earners and small businesses. A bill proposes raising and dynamising the income threshold for low-earner subsidies.
Design tips for employees
Take advantage of your entitlement to salary conversion and the employer's contribution. Here are some tips:
Start early: The earlier you start with bAV, the more you benefit from compound interest. Even small contributions over 30 to 40 years can amount to a significant sum.
Utilise the maximum subsidy framework: If possible, make full use of the tax- and social insurance-exempt maximum amounts. In 2024, this will be up to 7,248 euros tax-free and 3,624 euros free from social contributions.
Demand employer contribution: Insist on the statutory subsidy of 15 percent if your employer saves on social insurance contributions.
Check contract details: Pay attention to costs, guaranteed benefits, and contract flexibility, especially if you are considering changing employers.
Seek professional advice: bAV is complex. Professional advice can help you find the optimal solution for your individual situation.
These tips can help you lay the foundations for a solid additional retirement provision. The question of whether an occupational pension is advisable can generally be answered positively. However, the precise design is crucial.
Weighing the advantages and disadvantages of occupational pensions
Occupational pension schemes offer numerous advantages. Employees benefit from tax and social security savings during the accumulation phase. The employer contribution of at least 15 percent further increases the return. The entitlements are often protected against insolvency and there are simplified health checks for additional components. For employers, occupational pension schemes are a tool for employee retention and can reduce ancillary wage costs. However, there are also disadvantages: The net salary during payment is lower. The later pension is fully taxable and, for those with statutory insurance, subject to contributions for health and long-term care insurance, although there are allowances. Accessing the capital before the start of retirement (at the earliest from age 62) is usually not possible. When changing employers, there can be obstacles to taking over the contract if the capital exceeds 96,600 euros (as of 2025) or if the change occurred more than twelve months ago. Careful consideration of these aspects is important before concluding a contract. The occupational pension scheme for entrepreneurs has its own facets. A well-informed decision ensures long-term benefits.
More useful links
Wikipedia provides a comprehensive overview of occupational pensions in Germany.
The GDV (Gesamtverband der Deutschen Versicherungswirtschaft) provides statistics on contracts for occupational pensions in the German insurance industry.
The ABA (Arbeitsgemeinschaft für betriebliche Altersversorgung) offers statistics on the prevalence of occupational pensions in Germany.
The ABA (Arbeitsgemeinschaft für betriebliche Altersversorgung) supplies statistics on the benefits and payouts of occupational pensions.
The Bundesministerium für Arbeit und Soziales (BMAS) provides a press release on a survey regarding the prevalence of occupational pensions.
The Bundesministerium für Arbeit und Soziales (BMAS) offers information on retirement income and additional pension options.
The Deutsche Rentenversicherung provides a brochure on occupational pensions.
Statista offers a thematic page with extensive statistics and data on occupational pensions.
Deloitte presents a study on occupational pensions (bAV).
Wikipedia provides information on the German Company Pension Act.
FAQ
What significance does occupational pension provision have for my retirement?
Occupational pension provision is an important second pillar alongside the state pension and private provision. It helps close the gap in retirement provision and secure the standard of living, since the state pension is often insufficient.
How much is the employer's contribution to occupational pension schemes?
Employers must contribute 15% of the converted salary if they save on social security contributions through the employee's salary conversion. This obligation applies to new contracts since 2019 and to existing contracts since 2022.
What tax advantages does occupational pension provision offer?
Contributions to occupational pension schemes in the forms of direct insurance, pension funds, and pension plans are tax-free up to eight percent of the pension insurance contribution ceiling (2024: 7,248 euros). Up to four percent (2024: 3,624 euros) are also free from social security contributions.
What happens to my occupational pension if I change employers?
There are several options when changing employers. Claims from salary conversion are immediately vested. The contract can often be maintained without contributions, continued privately, or transferred to the new employer under certain conditions (portability). A transfer is possible if the value does not exceed the contribution ceiling and the change was not too long ago.
What types of occupational pension schemes are there?
There are five types of implementation methods: direct insurance, pension funds, pension plans, support funds, and direct commitments (also known as pension commitments). The employer chooses the implementation method.
Is the capital in the occupational pension protected in the event of the employer's insolvency?
Yes, in most cases, claims from occupational pension schemes are protected by the Pension Protection Association (PSVaG) in the event of the employer's insolvency. This applies particularly to direct commitments, support funds, and under certain conditions also to pension plans and pension funds.
