Occupational pension provision: Your guide to supplementary retirement income and financial security in old age
26 May 2025
12
Minutes
Katrin Straub
CEO at nextsure
State pensions alone are often no longer sufficient to ensure your standard of living in retirement. An occupational pension scheme can fill this gap and also offers attractive benefits. Learn how to make the most of your company pension.
Topics on this page
The topic in brief and concise terms
The occupational pension benefit is an important supplement to the statutory pension, promised by the employer and offering tax advantages.
Employees have a legal right to salary conversion, and since 2019/2022, employers must contribute at least fifteen percent if they save on social security contributions.
There are five implementation methods (direct commitment, support fund, direct insurance, pension fund, pension funds) with different characteristics and legal frameworks.
Quick Facts: The most important information about company pension benefits at a glance
The occupational pension benefit is a promise from your employer for your retirement, disability, or survivor benefits. Since 2002, employees have had a legal right to salary conversion, where parts of the gross salary are invested in a company pension. Contributions are tax-free up to eight percent of the contribution assessment ceiling during the savings phase and up to four percent exempt from social security contributions. There are five implementation methods: direct commitment, support fund, direct insurance, pension fund, and pension fund. The benefits are taxed later in retirement, often at a lower personal tax rate.
Practical Part: How the company pension scheme works in everyday life
Imagine earning 3,500 euros gross per month and deciding to invest 150 euros of that through salary conversion into a company pension scheme. Thanks to savings on taxes and social contributions, your net outlay often amounts to only about half, approximately 75 euros. Since 2019, employers have been legally required to contribute at least fifteen percent of the converted amount as a subsidy, if they save on social security contributions. In this example, that would be an additional 22.50 euros flowing into your contract. This helps your pension capital grow faster.
Another example: A worker, 30 years old, pays 100 euros monthly through salary conversion. Her employer adds the mandatory fifteen percent subsidy (15 euros). Assuming an annual return of three percent, she would have saved over 90,000 euros after 37 years. The exact amount of the later pension depends on many factors, such as the return and the chosen method of execution. It's advisable to calculate various scenarios. The tax treatment of contributions is a significant advantage.
The five implementation methods offer different advantages and disadvantages:
Direct insurance: Employer takes out life insurance on the employee; very common.
Pension fund: Legally independent pension scheme, often in companies bound by collective agreements.
Pension funds: Offer more flexible investment options, potentially higher returns, but also higher risks.
Support fund: Pension scheme financed by the employer; the employee has no direct legal claim against the fund.
Direct commitment (pension promise): Employer pays pension directly from company assets; insolvency protection provided by the Pension Protection Association (PSVaG).
The choice of method is usually up to the employer. They must inform you about the chosen form and conditions. The benefits for employers should not be underestimated, as they can retain employees and save on ancillary wage costs. These fundamentals help you better understand the various options.
Expert Depth: Legal foundations and current judgments on corporate pension schemes
The legal basis for occupational pension benefits is constituted by the Occupational Pensions Act (BetrAVG). It regulates, among other things, the entitlement to salary conversion (§ 1a BetrAVG), the non-forfeitability of entitlements (§ 1b BetrAVG), and the obligation to review adjustments for ongoing benefits (§ 16 BetrAVG). Tax aspects are primarily governed by the Income Tax Act (EStG), especially § 3 No. 63 EStG regarding the tax exemption of contributions. A thorough understanding of these paragraphs is essential for a deep comprehension.
Recent court rulings continuously shape the landscape of occupational pensions. The Federal Labour Court (BAG) has, for example, repeatedly commented on the employer's liability in the event of benefit reductions by pension funds (e.g., BAG, judgment of 14.03.2023, 3 AZ R 197/22). It was clarified that the employer is fundamentally liable for the promised benefits, even if they are executed through an external provider. Another important topic is the conversion of pension promises to lump-sum payments, where the BAG sets requirements for proportionality and legitimate expectation (e.g., BAG, judgment of 20.06.2023, 3 AZR 231/22). Such rulings demonstrate how dynamic this legal field is and highlight the importance of comprehensive advice on occupational pensions.
Our expert tip: Pay close attention to the wording regarding the adjustment of pension benefits when signing a contract. According to § 16 BetrAVG, the employer is obliged to check the adjustment of ongoing benefits every three years and decide upon it at their reasonable discretion. Criteria include the interests of the beneficiary and the economic situation of the employer. Clear regulations can prevent discrepancies later on. Also, find out what happens to your entitlements in the event of termination.
Design tips: How to optimise your company pension scheme benefits
To optimise your occupational pension scheme benefits, you should consider a few points. Make use of the maximum tax-free and social security contribution-free allowance for your contributions. In 2025, up to €7,728 can be paid in tax-free and €3,864 free of social security contributions. This significantly maximises your savings during the accumulation phase. Check with your employer about the amount of the employer's contribution. Since 2022, this has been mandatory for old contracts (concluded before 2019) at a minimum rate of fifteen per cent of the conversion amount, if the employer saves on social security contributions.
Check the flexibility of your contract. Is it possible to transfer the occupational pension scheme when changing employers? Since 2005, there has been a legal right to portability for newly concluded contracts of certain implementation paths if the transfer value does not exceed a certain limit. Also clarify what options you have in case of payment difficulties, such as premium suspension or reduction. Early planning of whether an occupational pension scheme is worthwhile pays off.
Our expert tip: Do not be guided solely by high promised returns. Also pay attention to the security of the investment and the cost structure of the chosen product. A transparent presentation of all fees is crucial here. Compare different offers if your employer gives you a choice or if you can obtain additional information through an external advisor. Cancelling and cashing out an occupational pension scheme is often associated with disadvantages and should be carefully considered.
The following aspects should be taken into account when selecting and designing:
Amount of your own contributions and the employer's contribution.
Flexibility in adjusting contributions and payment breaks.
Possibilities when changing employers (portability).
Regulations for survivor and disability protection.
Cost structure and transparency of the offer.
Security and return opportunities of the capital investment.
Options on payout (pension, capital, or combination).
Carefully considering these points leads to a customised pension solution. This equips you well to set the course for a financially secure future.
The path to a tailored solution: Consultation and next steps
Occupational pension provision is a complex topic with many individual aspects. A general recommendation is hardly possible, as your personal situation, financial goals, and your employer's offers are crucial. Professional advice can help you develop the optimal strategy for you. At nextsure, we see ourselves as your partner for tailored and easily understandable insurance solutions. We support you in evaluating the various occupational pension options and making an informed decision. Take the opportunity to actively shape your retirement provision and build financial security for the future.
Request an individual risk analysis now: Have your insurance situation checked free of charge and receive specific optimisation suggestions.
More useful links
Federal Ministry of Labour and Social Affairs (BMAS) offers comprehensive information on occupational pensions.
German Pension Insurance provides an informative brochure on occupational pensions.
Laws on the Internet offers the full text of the Law on Improving Occupational Pensions (BetrAVG).
Statista supplies current statistics and data on occupational pensions in Germany.
Association of German Insurers (GDV) provides statistics on occupational pension contracts.
Wikipedia offers a comprehensive article on occupational pensions with basic information.
ifo Institute publishes academic papers on pensions, which also examine occupational pensions.
Federal Agency for Civic Education (bpb) informs about occupational pensions in the context of pension policy.
Federal Ministry of Finance provides a definition of occupational pensions in its glossary.
FAQ
What are the tax-free contributions to occupational pension schemes?
In 2025, contributions of up to eight percent of the contribution assessment ceiling of the statutory pension insurance (West) can be paid tax-free into a direct insurance, pension fund, or pension scheme. This amounts to 7,728 euros annually. Contributions of up to four percent (3,864 euros) are exempt from social security contributions.
What implementation methods are there for company pension benefits?
There are five implementation methods: Direct commitment (pension promise), support fund, direct insurance, pension fund, and pension plan. Each method has specific characteristics regarding financing, liability, and insolvency protection.
Is the employer's contribution to the occupational pension scheme mandatory?
Yes, since January 2019 for new contracts and since January 2022 also for existing salary conversion contracts (concluded before 2019), the employer must make a contribution of at least fifteen percent of the converted salary, provided that this leads to savings in social security contributions.
How are benefits from occupational pension schemes taxed in retirement?
Benefits from occupational pension schemes are subject to what is known as deferred taxation. This means that contributions are tax-advantaged during the accumulation phase, but the later pensions or lump-sum payments must be taxed at the individual's personal income tax rate. Additionally, contributions to health and long-term care insurance are incurred.
What is the difference between a direct promise and a direct insurance?
In the case of a direct commitment (pension commitment), the employer undertakes to pay the benefits directly from the company's own assets. In the case of a direct insurance policy, the employer takes out a life or pension insurance on the employee's life with an external insurance company.
Can I cancel my occupational pension benefit and cash it out?
Early termination and payout are generally not intended and often come with disadvantages, such as the loss of subsidies or tax consequences. The conditions depend on the specific contract and implementation method. An <a href="/blog/betriebliche-altersvorsorge-kundigen-und-auszahlen">early payout</a> is only possible within strict limits.
