Direct insurance tax-deductible: Your route to smart retirement planning 2025
04.06.25
9
Minutes
Katrin Straub
Managing Director at nextsure
Did you know that with a direct insurance policy you can reduce your tax burden and at the same time save for retirement? Many employees are not yet making the most of this opportunity. Find out here how to make contributions to a direct insurance policy tax-deductible and what you need to bear in mind.
The topic in brief and concise terms
Contributions to direct insurance are tax-free for new contracts (from 2005) up to eight per cent of the contribution assessment ceiling (2025: EUR 644/month) and free of social security contributions up to four per cent (2025: EUR 322/month).
The tax saving is applied directly through payroll; a separate entry in the tax return is usually not necessary during the savings phase.
During the payout phase, the benefits are subject to full income tax (deferred taxation) and, for those covered by statutory health insurance, to full health and long-term care insurance contributions (take the allowance into account).
Quick Facts: Tax advantages of direct insurance at a glance
Direct insurance offers attractive opportunities to save tax and boost retirement provision. Contributions are deducted directly from gross salary, which reduces taxable income. For 2025, up to EUR 644 per month can be paid in tax-free. This corresponds to eight per cent of the contribution assessment ceiling of the general pension insurance scheme.
In addition to the tax savings, there are no social security contributions payable on amounts of up to EUR 322 per month (four per cent of the 2025 contribution assessment ceiling). This double saving makes direct insurance a powerful instrument of the occupational pension provision. The tax relief applies during the accumulation phase; payments in retirement are then subject to deferred taxation. For older contracts (taken out before 2005), different rules sometimes apply, often with flat-rate taxation of contributions. The exact treatment, and whether a direct insurance policy is tax-deductible, depends on the individual contract.
Practical section: How tax savings specifically affect you
Let’s assume an employee earns a gross monthly salary of 3,000 euros and converts 150 euros of it into a direct insurance policy. Their taxable income is therefore reduced to 2,850 euros. Assuming a marginal tax rate of thirty percent, they save 45 euros a month in income tax. In addition, they save on social security contributions on the 150 euros, as this amount is below the social security exemption threshold of 322 euros (as at 2025).
A calculation example for 2025 illustrates the potential: with a monthly contribution of 200 euros to a direct insurance policy and a gross salary of 3,500 euros (tax class one, childless, liable for church tax), the monthly net saving from lower taxes and social security contributions can be around 80 to 100 euros. The actual net cost of retirement provision is therefore significantly lower than the gross amount converted. The exact saving depends on the individual tax class and income. More information about retirement provision in the tax return can be found in our blog. These examples show how contributions to a direct insurance policy are tax-deductible and reduce the net burden.
Understanding contribution limits and social insurance exemption
The tax deductibility of contributions to a direct insurance policy is subject to upper limits. In 2025, up to eight percent of the contribution assessment ceiling of the general pension insurance scheme (West) can be paid into a direct insurance policy tax-free. With a contribution assessment ceiling of a projected EUR 8,050 per month for 2025 (West), this results in a tax-free maximum amount of EUR 644 per month or EUR 7,728 per year.
For exemption from social insurance contributions, a different limit applies: contributions are only exempt from social security charges up to four percent of the contribution assessment ceiling. For 2025, this corresponds to an amount of EUR 322 per month or EUR 3,864 per year. Contributions above these four percent, but still within the eight percent, are tax-free but subject to social insurance contributions. It is important to know these two different limits in order to make optimum use of the benefits. The three pillars of retirement provision offer further options. Compliance with these limits is crucial so that the direct insurance policy remains tax-deductible and social charges are saved.
Here is an overview of the limits for 2025 (based on projected BBG West of EUR 8,050/month):
Tax-free: up to EUR 644 per month (eight percent of the BBG)
Exempt from social security contributions: up to EUR 322 per month (four percent of the BBG)
Annual tax-free maximum amount: EUR 7,728
Annual social security contribution-free maximum amount: EUR 3,864
These rules apply to new contracts (policies taken out from 2005 onwards). For older contracts, different rules may apply.
Expert depth: legal foundations and key legal provisions
The tax relief for direct insurance is primarily regulated in the Income Tax Act (EStG). The key provision here is Section 3 No. 63 EStG. This provision sets out the tax exemption for the employer’s contributions (from the first employment relationship) to a pension fund, a pension scheme or a direct insurance policy up to eight per cent of the contribution assessment ceiling in the general pension insurance scheme. The exemption from social security contributions for these contributions is anchored in Section 1 (1) sentence 1 no. 9 of the Social Security Remuneration Ordinance (SvEV), which applies to contributions of up to four per cent of the contribution assessment ceiling.
For older contracts concluded before 1 January 2005, Section 40b EStG (old version) is often applied. In this case, contributions could be taxed at a flat rate of 20 per cent by the employer, which led to a tax-free or tax-privileged payout. Subsequent taxation, i.e. the full tax liability of benefits in retirement, is regulated in the Pension Income Act (AltEinkG) and applies to new contracts. The link between insurance and tax is complex. Our expert tip: check carefully which rules apply to existing contracts, especially when changing employer.
Direct insurance in the tax return: What do I need to enter?
As a rule, employees do not need to separately declare the contributions to a direct insurance policy in their income tax return if these are tax-free under Section 3 No. 63 EStG. The employer deducts the contributions directly from gross salary and already takes the tax exemption into account in the monthly payroll calculation. The gross employment income shown on the wage tax certificate is already reduced by the tax-free contributions.
An exception may apply to old contracts that are taxed at a flat rate under Section 40b EStG, or where voluntary top-up payments are made that do not fall under the tax exemption. The benefits paid out from a direct insurance policy at retirement age are, however, to be declared in Annex R (for pensions and other benefits) or Annex R-AV/bAV (for benefits from retirement savings contracts and occupational pension schemes). For most employees, the process during the savings phase is therefore very straightforward. It is advisable to check the annual payslip and the wage tax certificate to ensure the correct offsetting. Information on the deductibility of other forms of pension provision may also be relevant.
Payout phase: taxes and social security contributions in retirement
While in the accumulation phase, contributions to the direct insurance policy are tax-deductible and social security contributions are saved, in the payout phase the so-called deferred taxation applies. This means that the benefits from the direct insurance policy (both pensions and lump-sum payments for new contracts) must be taxed in full at the personal income tax rate as other income pursuant to section 22 no. 5 of the German Income Tax Act (EStG). In old age, this is often lower than during working life, which can nevertheless mean a tax advantage.
In addition to income tax, benefits from the direct insurance policy are also subject to contributions to statutory health and long-term care insurance if the pensioner is insured under the statutory scheme. The full contribution rate applies here (employee and employer share), which can amount to around eighteen to nineteen per cent. However, there is an allowance for health insurance contributions on occupational pensions. For 2025, this is expected to be EUR 187.25 per month (adjusted annually). Only the amount of the pension above this threshold is subject to contributions. In the case of a lump-sum payment, it is notionally spread over ten years in order to calculate the monthly burden for social security contributions. The question of whether a private pension is subject to health insurance contributions is often asked. For direct insurance, the answer is clear for those insured under the statutory system.
Key points about the payout phase:
Full income tax liability on benefits (deferred taxation).
Personal tax rate in retirement is decisive.
Full contributions to statutory health and long-term care insurance (employee and employer shares) for those insured under the statutory scheme.
Allowance for health insurance contributions (2025: approx. EUR 187.25/month).
Lump-sum payments are spread over ten years for social security contributions.
Legacy contracts (before 2005) may be more favourable from a tax perspective at payout.
Although direct insurance offers many advantages, there are also aspects that should be considered. Deferred taxation and full social security contributions during retirement can reduce the net payout. The returns on the contracts can be affected by costs, so a careful comparison is important. Another point is the lower flexibility compared with purely private investment products. If you change employer, transferring the contract can sometimes be complicated, even though there are legal rules governing transfers (what to do if the new employer does not take over the direct insurance policy).
In addition, the converted salary portions reduce the assessment basis for the statutory pension and other social benefits such as unemployment benefit or sick pay. A careful weighing-up of the advantages and disadvantages is essential. It may make sense to view direct insurance as one building block of a diversified retirement provision strategy, which also takes into account capital-forming benefits or other private pension arrangements. The question of whether direct insurance is tax-deductible should always be considered in the overall context of personal financial planning.
Optimise your pension provision with nextsure
The tax deductibility of direct insurance offers an excellent opportunity to structure your retirement provision efficiently while saving tax today. With the right information and a suitable strategy, you can fully exploit the benefits. At nextsure, we understand that every financial situation is unique. That is why, as a digital insurance portal, we offer you tailored and easy-to-understand insurance solutions.
Use our expertise to analyse your individual situation and find the optimal solution for your occupational pension provision. We help you understand the complexity of tax regulations and structure your direct insurance optimally. A well-planned direct insurance policy can make a significant contribution to your financial security in old age.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete suggestions for optimisation.
More useful links
Federal Ministry of Finance offers tax guidelines relevant to income tax and retirement provision.
Federal Ministry of Finance provides a document on the tax incentives for private retirement provision.
German Pension Insurance offers a detailed explanation of direct insurance.
Federal Statistical Office (Destatis) publishes press releases that may contain statistics on retirement provision or demographics.
Federal Ministry of Labour and Social Affairs (BMAS) provides information on additional retirement provision options.
Publications of the Federal Government offer publications on the topic of retirement provision.
FAQ
Is a direct insurance policy always tax-deductible?
Yes, contributions to direct insurance policies taken out after 1 January 2005 are tax-free within the statutory maximum limits (§ 3 No. 63 EStG). This means they reduce gross income subject to tax. For older contracts (before 2005), different rules applied, often with flat-rate taxation under former § 40b EStG.
What is the maximum tax-free contribution to direct insurance in 2025?
For 2025, up to EUR 7,728 per year (equivalent to EUR 644 per month) can probably be paid tax-free into a direct insurance policy. This is eight per cent of the contribution assessment ceiling of the general pension insurance scheme (West).
Do I also save on social security contributions with direct insurance?
Yes, contributions to the direct insurance are also free from social security contributions up to an amount of four per cent of the contribution assessment ceiling (2025: expected to be EUR 3,864 per year or EUR 322 per month).
What does deferred taxation mean for direct insurance?
Deferred taxation means that contributions are tax-free during the accumulation phase, but benefits (pension or lump-sum payment) in old age must be taxed in full at the personal income tax rate applicable at that time.
Are health insurance contributions due on the payout of the direct insurance?
Yes, if you are covered by statutory health insurance in retirement, you must pay contributions to statutory health and long-term care insurance on the benefits from the direct insurance policy. The full contribution rate applies, but an allowance is taken into account (2025: approx. EUR 187.25 per month).
Is a direct insurance policy still worthwhile despite taxes and deductions in retirement?
Whether a direct insurance policy is worthwhile depends on many individual factors, such as the amount of tax and social security contribution savings during the accumulation phase, the contract’s return and your personal tax rate in retirement. A precise calculation and advice are recommended. The employer contribution (at least fifteen per cent in the case of salary sacrifice) further improves its attractiveness.
