Terminating and Cashing Out Company Pension Schemes: Options and Pitfalls for Employees
13 Apr 2025
8
Minutes
Katrin Straub
CEO at nextsure
Are you considering terminating your occupational pension scheme (bAV) and having the capital paid out? This step is often associated with significant financial disadvantages. Find out here what obstacles exist and what wiser options you have.
The topic in brief and concise terms
A termination of occupational pension provision (bAV) is usually not possible and often associated with significant financial disadvantages, such as back taxes.
Exceptions for termination and payout are rare, e.g., in cases of very small pension entitlements (micro entitlements).
Alternatives such as suspension of contributions or transferring the contract to a new employer are generally more advantageous than termination.
Quick Facts: Termination of the occupational pension scheme – The Essentials at a Glance
Termination of occupational pension schemes (bAV) is usually not readily possible. The legislator sees occupational pensions as a long-term retirement provision, which is why early payout is rare and under strict conditions. Often, the consent of the employer is required, as they are usually the policyholder. The payout generally occurs upon retirement, even if formal termination would be possible. Suspension of contributions or the transfer of the contract to a new employer are often better alternatives.
Practical Part: When is termination and payment conceivable?
Although terminating occupational pension schemes and receiving an immediate payout are exceptions, there are a few scenarios. A so-called small entitlement can allow for a payout. For instance, if the expected monthly pension in the year 2025 is below 37.45 euros, the contract may be settled. In 2024, this threshold was set at 35.35 euros in the old federal states. In such cases, the employer can even unilaterally settle the accrued capital without the employee's consent. Termination during an ongoing employment relationship usually requires the agreement of both parties and must not coincide directly with the end of the contract. The vesting of rights plays an important role here.
The following conditions often need to be met for an exceptional termination:
There is an ongoing employment relationship.
The implementation method is a direct insurance, pension fund, or pension scheme.
The employer, as the policyholder, agrees to the termination.
It is a small entitlement (the de minimis threshold according to § 3, paragraph 2 of the German Company Pension Act is not exceeded).
Even if these points are met, an immediate payout is not guaranteed and is often associated with significant costs. The exact conditions depend heavily on the individual case and the respective contract.
The Cost Trap: Financial Disadvantages of Cancelling an Occupational Pension Scheme
Terminating an occupational pension scheme can be costly. During the accumulation phase, employees benefit from tax and social security savings as contributions are often made from the gross salary. However, if terminated early and cashed out, these benefits are often reclaimed. This means that additional taxes and social security contributions can significantly reduce the payout amount. Additionally, insurers may charge administrative fees for contract termination. In the worst case, these costs may exceed the accumulated capital, resulting in the employee receiving little or no payout, or even having to pay additional costs despite the termination. Therefore, a careful assessment of the financial consequences is essential before terminating and cashing out an occupational pension scheme.
Meaningful alternatives to terminating the company pension
In light of the disadvantages of resigning, employees should consider alternatives. One commonly used option is making the contract paid-up. In this case, no further contributions are made, but the capital accumulated so far remains and continues to earn interest or be invested. The subsequent pension payout will then be correspondingly lower. This option is particularly worth considering during financial constraints or when a new employer does not offer a transfer. Another possibility is transferring the accumulated capital to the pension system of a new employer. This is often possible if the capital does not exceed a certain limit (e.g., 96,600 euros in 2025) and the job change is not more than a year ago. The private continuation of the contract with your own contributions can also be an option. Before making a decision, a thorough analysis of your situation and the contract terms, ideally with professional advice, is advisable. Also, clarify what exactly happens when you resign.
Expert Depth: Legal Framework and Recent Rulings
The Occupational Pensions Act (BetrAVG) strictly regulates the possibilities for termination. Section 3 of the BetrAVG generally prohibits the settlement of non-forfeitable entitlements, except for small entitlements. Non-forfeitability occurs immediately with employee-financed contributions (salary conversion). For employer-funded commitments, since 2018, a period of three years of employment and a minimum age of 21 years for the employee is required. A ruling by the Federal Labour Court (Case No. 3 AZR 586/16) clarified that the financial hardship of the employee does not entitle them to terminate and cash in the surrender value. The purpose of the occupational pension scheme, which is to provide retirement security, takes precedence. In the event of an actual payout of a one-off capital sum, the tax-favoured one-fifth rule may apply under certain circumstances if it is an atypical event (Federal Fiscal Court, ruling of 06/05/2020, Case No.: X R 24/19). Our expert tip: Always have the legal details checked individually, as general statements cannot fully capture the complexity. Also, clarify how a direct insurance is treated for tax purposes.
Important legal aspects are:
The general prohibition on settlements according to Section 3 (1) BetrAVG.
The exception for small entitlements (de minimis threshold) according to Section 3 (2) BetrAVG.
The regulations on the non-forfeitability of entitlements.
The tax treatment of payouts, including the possible one-fifth rule.
The necessity of employer consent in many termination scenarios.
The specific regulations for implementation methods such as support funds or direct commitments.
These points illustrate that a termination is a complex process with many legal pitfalls.
Special case of changing employers: What happens to the occupational pension scheme?
A change of employer is a common reason to consider the future of occupational pensions. Termination is usually not the best solution in this case. Instead, there is often the option of so-called portability. If the accumulated capital does not exceed the contribution assessment ceiling of the pension insurance (€96,600 for 2025) and the change of employer was not more than twelve months ago, the capital can be transferred to the new employer’s pension provider. This ensures the continuation of pension provision without the drawbacks of termination. If a transfer is not possible or desired, the contract can be made non-contributory or possibly continued privately. Termination by the employer is generally no longer possible once a change of job has been announced. It is advisable to obtain information about options from the new employer at an early stage.
Tax aspects and social contributions on termination and payout
The tax advantages during the savings phase of occupational pension schemes (bAV) can reverse if a contract is terminated. Contributions converted from gross salary are tax and social security-free up to certain limits. In the event of early capital payout, these saved taxes and social contributions usually need to be repaid. This can lead to a significant reduction in the payout amount. The full tax liability on the payout (possibly mitigated through the fifths rule) as well as contributions to health and long-term care insurance on the capital payout must be taken into account. During regular pension payments in retirement, the income is also taxable and subject to health and long-term care insurance contributions, often at more favourable terms than a lump-sum payout. Find out how you might optimise health insurance contributions for direct insurances or whether it is sensible to keep old insurance contracts unchanged.
nextsure: Your experts for occupational pensions
More useful links
Bundesministerium für Arbeit und Soziales (BMAS) provides information on occupational pensions.
Gesetze im Internet offers the German law regarding occupational pensions (BetrAVG).
Deutsche Rentenversicherung provides a brochure on occupational pensions.
Wikipedia contains an article on occupational pensions.
Bundesregierung provides a publication on occupational pensions.
Deutsche Rentenversicherung explains salary conversion for occupational pensions.
FAQ
Is the termination of an occupational pension scheme generally excluded?
In principle, yes, since the legislator wants to promote long-term retirement security. Exceptions are rare and subject to strict conditions, such as small entitlements or the employer's consent for certain implementation methods.
What role does the employer play in terminating my occupational pension?
The employer is often the policyholder of the occupational pension scheme contract. Therefore, their consent to termination is required in many cases (e.g., for direct insurance, pension funds).
What does 'Beitragsfreistellung' mean as an alternative to cancellation?
By suspending contributions, you will no longer make further payments into your occupational pension scheme. However, the capital accumulated so far will be preserved and paid out to you upon retirement (possibly reduced).
What tax implications should I consider when making a withdrawal?
An early withdrawal generally results in the subsequent taxation of tax benefits received during the accumulation phase. Social security contributions may also become due. The payout itself is then fully taxable (potentially subject to the fifth part rule).
What are small entitlements in the context of terminating occupational pension plans?
Mini entitlements are very small pension claims. If the monthly pension is below a certain de minimis threshold (e.g., €37.45 in 2025), the contract can be settled, meaning the capital is paid out.
Can I simply transfer my occupational pension scheme to my new employer when changing jobs?
Yes, this is often possible (portability) if the accumulated capital does not exceed a certain limit (e.g., €96,600 in 2025) and the change of job is not too long ago (usually within one year).
