Occupational pension scheme tax deduction: Your path to an optimized retirement in 2025
10 Jun 2025
8
Minutes
Katrin Straub
CEO at nextsure
Did you know that you can reduce your tax burden with contributions to an occupational pension scheme (bAV)? Many employees are not yet taking full advantage of this opportunity. Find out here how you can deduct occupational pension contributions from your taxes and secure more net income from your gross income for your future.
The topic in brief and concise terms
Contributions to occupational pension schemes will be tax-free up to 7,728 euros annually and exempt from social security contributions up to 3,864 euros in 2025.
Salary conversion reduces gross income and thereby the immediate tax and contribution burden.
During the payout phase, there is a deferred taxation, often at a lower personal tax rate.
Maximize tax advantages of occupational pension schemes during the accumulation phase
Occupational pension provision (bAV) enables employees to save parts of their gross salary for retirement in a tax- and social contribution-favorable manner. In 2025, contributions up to €7,728 annually can be paid tax-free into certain bAV contracts such as direct insurance, pension funds, or pension schemes. This corresponds to eight percent of the contribution assessment ceiling of the general pension insurance (West). Of this, up to €3,864 (four percent of the contribution assessment ceiling) is also free from social contributions. This regulation reduces your taxable income and thus your immediate tax burden. Many employees significantly underestimate the annual savings potential through these allowances. The exact amount of savings depends on your personal income and tax class. A well-considered bAV arrangement takes these factors into account. This tax incentive makes the bAV an attractive instrument to enhance one's own retirement provision.
Salary conversion: How the tax-saving model works
The core element of the tax benefits in occupational pension schemes is salary conversion. [1,2] Here, a part of your gross salary is directly paid into your occupational pension contract. [1] This amount reduces your taxable income and income subject to social security contributions. [2] Suppose you convert 200 euros monthly: these 200 euros are not subject to your usual tax rate and social contributions, resulting in a direct net saving. [3] The actual net cost for your retirement provision is therefore lower than the amount paid in. Since 2019, employers are also required to contribute at least fifteen percent for new contracts, provided they save social security contributions through salary conversion. [4,5] This further increases the effectiveness of your contributions. The direct insurance is a commonly chosen method for salary conversion. The exact effects on your net salary can be calculated individually.
Understanding the implementation methods of occupational pension schemes and their tax treatment
There are five different methods of implementing occupational pension schemes, which can be treated slightly differently for tax purposes: direct insurance, pension fund, pension funds, support funds, and direct commitment. [5,6] For the first three (direct insurance, pension fund, pension funds), the tax allowances already mentioned apply up to eight percent of the contribution assessment ceiling (2025: 7,728 Euro) and exemption from social security contributions up to four percent (2025: 3,864 Euro). [5,4] For direct commitments and support funds, contributions during the accumulation phase can even be tax-free without limit. [1,4] However, in the case of deferred compensation, contributions are only exempt from social security contributions up to the four percent limit. [1] The choice of implementation method depends on various factors and should be considered carefully. Find out, whether an occupational pension scheme is beneficial for you. The complexity of the various models underscores the importance of good advice.
Withdrawal phase: Leverage deferred taxation and tax allowances
The taxes and social contributions saved during the accumulation phase become due in the payout phase – this is called deferred taxation. [1,4] Your occupational pension is then taxed as additional income at your personal tax rate. [2] As the tax rate in retirement is often lower than during working life, this can still result in a benefit. [4] In addition, contributions for health and long-term care insurance are payable on the occupational pension. [1] Since 2020, there has been an allowance for health insurance contributions for retirees with statutory health insurance, which will be 187.25 Euros monthly in 2025. [6,2] Health insurance contributions only need to be paid on occupational pension portions exceeding this allowance. However, this allowance does not apply to long-term care insurance. Under certain circumstances, the one-fifth rule can be used for tax relief of lump-sum payments. [4] It is important to know the rules for taxation of retirement planning precisely. Therefore, careful planning of the payout phase is crucial.
Here are some aspects to consider when it comes to payouts:
Personal tax rate in retirement.
Health and long-term care insurance contributions incurred.
Utilizing the allowance for health insurance contributions (2025: 187.25 Euros). [6]
Option of lump-sum payment versus lifelong pension.
Check the application of the one-fifth rule for lump-sum payments. [4]
Possible impacts on other income and welfare benefits.
These points help you better assess the financial impact of your occupational pension scheme in old age.
Special Cases and Expert Tips for Optimising Your Company Pension Scheme Tax
In addition to the general rules, there are some special situations and design options. Contracts concluded before the first of January 2005 (so-called old contracts) may be taxed at a flat rate of twenty percent, and the later pension will then be taxed only on the earnings portion. [6] When changing employers, the accumulated capital can usually be transferred to the new provider without tax implications, provided certain conditions are met. [1] Our expert tip: Carefully examine the transfer arrangements and conditions of the new occupational pension contract when changing jobs. For low earners with a monthly gross income of up to 2,575 euros (as of 2025), there is a government subsidy if the employer contributes additionally to the occupational pension. [2] This amounts to thirty percent of the employer's contribution, but no more than 288 euros annually. [2] A comprehensive review of your insurance situation can reveal further optimization potentials. The details can be complex, so individual advice is worthwhile.
Keep an eye on legal foundations and recent judgments
The legal basis for company pension schemes is formed by the Occupational Pensions Act (BetrAVG). [3] This Act, among other things, regulates the right to salary conversion (§ 1a BetrAVG) and the vesting of entitlements. [2,4] The tax aspects are mainly anchored in the Income Tax Act (EStG), particularly § 3 No. 63 EStG for the tax exemption of contributions. [5,2] Legislation and jurisdiction regarding occupational pensions (bAV) are continuously evolving. For example, in 2024 there was a BFH ruling on the tax treatment of the reversal of a pension adjustment. [3] Contribution assessment limits and allowances are regularly adjusted; an alignment of limits in East and West Germany is planned for 2025. [1] Our expert tip: Keep yourself regularly informed about current changes to optimise your occupational pension scheme and take full advantage of all benefits. An understanding of the three layers of retirement provision helps to correctly classify the occupational pension scheme. Stay informed to not miss any important developments.
Frequently Asked Questions about the Tax Deductibility of Occupational Pension Schemes
Many employees have specific questions when it comes to occupational pensions and taxes. A common question concerns the necessity of including the occupational pension scheme (bAV) in the tax return. During the savings phase, this is usually not required for employees as the contributions are deducted directly from the gross salary and the employer electronically submits the data. [6,5] Only during the payout phase do the benefits need to be taxed as income and declared accordingly in the tax return (e.g., appendix R-AV/bAV or appendix N). [5] Another question revolves around the transfer of the bAV when changing employers. Generally, a transfer of the bAV contract is possible, but the exact modalities depend on the old and new employers as well as the method of implementation. It is important that the transfer can be carried out tax-neutrally if certain conditions are met. [1] Clarifying such questions in advance provides security. For individual situations, professional advice is often indispensable.
Here is a list of typical questions about bAV and taxes:
Do I have to include my bAV contributions in my tax return? (Answer: Usually no, during the savings phase) [5]
How are bAV benefits taxed in retirement? (Answer: Deferred taxation with an individual tax rate) [1]
What tax allowances are there upon payout? (Answer: e.g., €187.25/month for health insurance contributions in 2025) [6]
What happens to my bAV if I change jobs? (Answer: Transfer is often possible) [1]
Is a bAV worthwhile even with a low income? (Answer: Yes, possibly with government support) [2]
Can I also set up a bAV as a mini-jobber? (Answer: Yes, the entitlement exists) [5]
These answers provide initial orientation for your planning.
Your next steps for optimal company pension scheme usage
More useful links
Bundesfinanzministerium offers a detailed document that could relate to income tax regulations and appendices.
Bundesfinanzministerium provides a brochure explaining the taxation of retirement income.
Deutsche Rentenversicherung offers a brochure on occupational pensions.
Deutsche Rentenversicherung provides an encyclopedia entry explaining occupational pensions for employers and tax advisors.
Bundesministerium für Arbeit und Soziales informs about the law to strengthen occupational pensions (Betriebsrentenstärkungsgesetz).
Gesetze im Internet offers the Betriebsrentengesetz on the official German legislation website.
Statistisches Bundesamt (Destatis) publishes a press release likely containing statistics on pensions or retirement provision.
FAQ
Where do I enter the occupational pension scheme in the tax return?
During the savings phase, as an employee, you generally do not need to include the contributions to the occupational pension scheme (bAV) in your tax return, as they are already considered by the employer during payroll accounting. [5] However, in the payout phase, you must declare performances as income in either the ‘Anlage R-AV/bAV’ (for pensions from retirement provision contracts/occupational pensions) or ‘Anlage N’ (for supplementary pension benefits such as direct commitments). [5]
What allowances apply to bAV payouts in 2025?
For pensioners with statutory health insurance, a monthly allowance of 187.25 euros will apply in 2025 for contributions to health insurance on occupational pensions. [6.2] For the taxation of the pension itself, there is the general tax-free allowance (2025: 12,096 euros), which applies to all income. [4]
What happens to my occupational pension scheme if I change employers?
When changing employers, you can usually take your occupational pension scheme with you. Either the existing contract is continued with the new employer (if they agree and the implementation method allows it), transferred to the new provider (portability), or made dormant. The transfer of capital can be tax-neutral under certain conditions. [1]
Are contributions to the support fund unlimited tax-free?
Yes, contributions to support funds (and direct commitments) are tax-free for the employee in unlimited amounts during the savings phase. [1,4] However, if the financing is done through salary conversion, the contributions are only exempt from social security up to four percent of the contribution assessment ceiling. [1]
Does the employer always have to contribute to salary conversion?
Since 2019, employers are required to pay a flat-rate subsidy of fifteen percent of the converted compensation for new contracts (and since 2022 for many existing contracts), provided they save social security contributions through compensation conversion. Collective agreements may contain different regulations. [4,5]
Can I cash in my company pension early?
An early withdrawal of capital from an occupational pension scheme (bAV) before retirement age is generally not possible or is associated with significant disadvantages. The bAV is specifically intended for retirement provision. [2]
