Cancelling and cashing out occupational pension schemes: options and pitfalls for employees
13.04.25
11
Minutes
Katrin Straub
Managing Director at nextsure
Are you thinking about cancelling your company pension scheme (bAV) and having the capital paid out? This step is often associated with significant financial disadvantages. Find out here what hurdles exist and which smarter options you have.
The topic in brief and concise terms
Cancelling occupational pension provision (bAV) is usually not possible and is often associated with significant financial disadvantages such as back taxes.
Exceptions for termination and payout are rare, e.g. in the case of very small pension entitlements (minimal entitlements).
Alternatives such as making the contract contribution-free or transferring it to a new employer are usually more advantageous than cancelling it.
Quick Facts: Termination of the bAV – the essentials at a glance
Cancellation of occupational pension provision (bAV) is not straightforward in most cases. The legislature treats bAV as a long-term retirement provision, which is why an early payout is only rarely possible and subject to strict conditions. Employer consent is often required, as the employer is usually the policyholder. As a rule, payment is made only when retirement begins, even if cancellation would be formally possible. Paid-up status or the transfer of the contract to a new employer are often the better alternatives.
Practical section: When is termination and payout conceivable?
Although termination of occupational pension provision and immediate payout are the exception, there are a few scenarios. A so-called small entitlement may enable a payout. If the expected monthly pension, for example, is below EUR 37.45 in 2025, the contract may under certain circumstances be cashed out. For 2024, this threshold was EUR 35.35 in the old federal states. In such cases, the employer may even unilaterally, i.e. without the employee's consent, settle the accumulated capital. Termination during an ongoing employment relationship usually requires the consent of both parties and must not be in direct temporal connection with a contract termination. The vesting of the entitlements plays an important role here.
The following conditions often have to be met for an exceptional termination:
There is an ongoing employment relationship.
The implementation route is direct insurance, a pension fund scheme or a pension fund.
The employer as policyholder agrees to the termination.
This is a small entitlement (the de minimis threshold under Section 3(2) BetrAVG is not exceeded).
Even if these points apply, an immediate payout is not guaranteed and is often associated with considerable costs. The exact conditions depend heavily on the individual case and the respective contract.
The cost trap: Financial disadvantages of cancelling a company pension scheme
The cancellation of an occupational pension scheme can be expensive. During the savings phase, employees benefit from tax and social security savings, as contributions are often made from gross salary. However, in the event of early cancellation and payout, these advantages are often clawed back. This means that back taxes and social security contributions can significantly reduce the amount paid out. In addition, insurers may charge administrative fees for terminating the contract. In the worst case, these costs exceed the accumulated capital, meaning that despite cancelling the policy, the employee receives no payout or only a very small one, or may even have to make an additional payment. A careful review of the financial consequences is therefore essential before having a bAV cancelled and paid out.
Practical alternatives to cancelling the occupational pension
In view of the disadvantages of terminating a contract, employees should consider alternatives. A commonly used option is to make the contract paid-up. No further contributions are paid in, but the capital accumulated so far remains intact and continues to earn interest or be invested. The later pension payout is then correspondingly lower. This option is particularly worth considering in the event of financial difficulties or if a new employer does not offer a transfer. Another option is to transfer the accumulated capital to the pension scheme of a new employer. This is often possible if the capital does not exceed a certain limit (e.g. EUR 96,600 in 2025) and the job change was no more than a year ago. Continuing the contract privately with your own contributions can also be an option. Before making a decision, a careful analysis of your situation and the contract terms, ideally with expert advice, is recommended. Also clarify what exactly happens upon termination.
Expert depth: legal framework and recent rulings
The German Occupational Pensions Act (BetrAVG) strictly regulates termination options. Section 3 of the BetrAVG generally prohibits the cash settlement of vested entitlements, except in the case of small entitlements. Vesting takes effect immediately for employee-funded contributions (salary sacrifice). For employer-financed commitments, a period of three years’ service and a minimum employee age of 21 have applied since 2018. A ruling by the Federal Labour Court (case no. 3 AZR 586/16) made it clear that an employee’s financial hardship does not give rise to a right to termination and payment of the surrender value. The purpose of occupational pensions, retirement provision, takes precedence. In the event of an actual payment of a lump sum, the tax-favourable one-fifth rule may, in some circumstances, apply if the transaction is atypical (BFH, judgment of 06/05/2020, case no. X R 24/19). Our expert tip: Always have the legal details reviewed on an individual basis, as general statements cannot fully reflect the complexity. Also clarify how a direct insurance policy is treated for tax purposes.
Important legal aspects are:
The general prohibition on settlement under Section 3(1) of the BetrAVG.
The exception for small entitlements (de minimis threshold) under Section 3(2) of the BetrAVG.
The rules on vesting of entitlements.
The tax treatment of payments, including the possible application of the one-fifth rule.
The need for employer consent in many termination scenarios.
The specific rules for implementation vehicles such as support funds or direct commitments.
These points make it clear that termination is a complex process with many legal pitfalls.
Special case when changing employer: what happens to the occupational pension scheme?
A change of employer is a common reason to think about the future of occupational pensions (bAV). A termination is usually not the best solution here. Instead, there is often the option of so-called portability. If the accumulated capital does not exceed the contribution assessment ceiling of statutory pension insurance (€96,600 for 2025) and the change took place no more than twelve months ago, the capital can be transferred to the new employer’s pension provider. This ensures the continuation of retirement provision without the disadvantages of termination. If a transfer is not possible or not desired, the contract can be made paid-up or possibly continued privately. Termination by the employer is generally no longer possible once a job change has been announced. It is advisable to find out about the options with the new employer at an early stage.
The tax advantages during the accumulation phase of the occupational pension scheme (bAV) can have the opposite effect in the event of cancellation. If contributions are converted from gross salary, they are exempt from tax and social security contributions up to certain limits. In the case of an early lump-sum payment of the capital, these saved taxes and social security contributions generally have to be taxed retrospectively or paid subsequently. This can lead to a significant reduction in the payout amount. Full tax liability on the amount paid out (possibly mitigated by the one-fifth rule ) as well as contributions to health and long-term care insurance on the capital payment must be taken into account. In the case of a regular pension payment in retirement, the benefits are also subject to tax and to contributions for health and long-term care insurance, but often under more favourable conditions than a one-off payment. Find out how you may be able to optimise health insurance contributions for direct insurance policies or whether it makes sense to leave old insurance contracts unchanged.
nextsure: Your experts for occupational pensions
The decision to cancel a company pension scheme has far-reaching financial consequences. As a digital insurance portal focused on tailored protection solutions, nextsure helps you make the best decision for your situation. We analyse your contracts and clearly show you the advantages and disadvantages of cancellation, as well as possible alternatives. Our expertise in the field of company pension schemes helps you avoid pitfalls and optimise your retirement provision. Benefit from our experience with over one thousand clients advised in the field of company pension schemes.
Request your individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific optimisation suggestions.
More useful links
Federal Ministry of Labour and Social Affairs (BMAS) provides information on occupational pension provision.
Laws on the Internet provides the German Occupational Pensions Act (BetrAVG).
German Pension Insurance offers a brochure on occupational pension provision.
Wikipedia contains an article on occupational pension provision.
Federal Government offers a publication on occupational pension provision.
German Pension Insurance explains salary conversion for occupational pension provision.
FAQ
Is the cancellation of an occupational pension scheme generally excluded?
In principle, yes, as the legislator wants to promote long-term retirement provision. Exceptions are rare and subject to strict conditions, such as small vested pension entitlements or the employer’s consent for certain implementation routes.
What role does my employer play in cancelling my occupational pension scheme?
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 policies and pension funds).
What does 'waiver of premiums' mean as an alternative to cancellation?
If your policy is made contribution-free, you no longer pay any further contributions into your occupational pension contract. However, the capital accumulated so far remains intact and will be paid out to you when you reach retirement age (possibly reduced).
What tax implications should I expect when receiving a payout?
An early payout generally leads to retrospective taxation of the tax advantages received during the savings phase. Social security contributions may also become payable. The payout itself is then fully taxable (if applicable, one-fifth rule).
What are small pension entitlements in the context of bAV termination?
Small pension entitlements are very low pension claims. If the monthly pension is below a certain de minimis threshold (e.g. EUR 37.45 in 2025), the contract can be commuted, i.e. the capital paid out.
Can I simply transfer my occupational pension scheme to my new employer when I change jobs?
Yes, this is often possible (portability) if the accumulated capital does not exceed a certain limit (e.g. EUR 96,600 in 2025) and the job change was not too long ago (usually within one year).
