Investment & Wealth
Occupational pension scheme
direct insurance tax-deductible
Direktversicherung steuerlich absetzbar: Your Path to Smart Retirement Planning 2025
Did you know that with direct insurance, you can reduce your tax burden while also saving for retirement? Many employees are not yet making the most of this opportunity. Find out here how you can make contributions to direct insurance tax-deductible and what you need to consider in the process.
The topic in brief and concise terms
Contributions to direct insurance policies for new contracts (from 2005 onwards) are tax-free up to eight percent of the assessment ceiling (2025: €644/month) and exempt from social security contributions up to four percent (2025: €322/month).
The tax savings are applied directly through the payroll; a separate declaration in the tax return is usually not necessary during the saving phase.
During the payout phase, the benefits are subject to full income tax (deferred taxation) and for those with statutory insurance, full health and long-term care insurance contributions apply (note the exemption amount).
Quick Facts: Tax Advantages of Direct Insurance at a Glance
The direct insurance offers attractive opportunities to save taxes and boost retirement provisions. Contributions are deducted directly from the gross salary, which reduces the taxable income. For the year 2025, up to 644 euros per month can be paid in tax-free. This corresponds to eight percent of the contribution assessment ceiling of the general pension insurance.
In addition to the tax savings, there are no social security contributions up to an amount of 322 euros per month (four percent of the contribution ceiling in 2025). This double saving makes direct insurance a powerful instrument for occupational pension schemes. The tax benefits occur during the saving phase; payouts during retirement are then subject to deferred taxation. Different regulations often apply to old contracts (concluded before 2005), often with flat-rate taxation of contributions. The precise handling and whether direct insurance is tax-deductible depend on the individual contract.
Practical section: How tax savings have a concrete effect
Let's assume an employee earns 3,000 euros gross per month and converts 150 euros of that into a direct insurance policy. This reduces their taxable income to 2,850 euros. Given an assumed marginal tax rate of thirty percent, they save 45 euros in income tax monthly. Additionally, they save on social security contributions for the 150 euros, as this amount is below the social security exemption threshold of 322 euros (as of 2025).
An example calculation for 2025 illustrates the potential: With a monthly contribution of 200 euros to a direct insurance and a gross salary of 3,500 euros (tax class one, childless, liable to church tax), the monthly net savings through lower taxes and social security contributions can be around 80 to 100 euros. The actual net cost for retirement provision is therefore significantly lower than the converted gross amount. The exact savings depend on the individual tax class and income. More information on pension provision in the tax return can be found on our blog. These examples show how contributions to direct insurance can be tax-deductible and reduce the net burden.
Understanding Contribution Limits and Social Security Exemption
The tax deductibility of contributions to direct insurance is linked to maximum limits. In 2025, up to eight percent of the contribution assessment ceiling of the general pension insurance (West) can be paid tax-free into a direct insurance policy. With an expected contribution assessment ceiling of 8,050 Euros per month for 2025 (West), this results in a tax-free maximum amount of 644 Euros per month or 7,728 Euros per year.
A different limit applies for social security exemption: Contributions are only exempt from social contributions up to four percent of the contribution assessment ceiling. For 2025, this corresponds to an amount of 322 Euros monthly or 3,864 Euros yearly. Contributions that exceed these four percent but are still within the eight percent are tax-free but subject to social security. It is important to know these two different limits to optimise the benefits. The three layers of pension provision offer additional options. Adhering to these limits is crucial to ensure that direct insurance remains tax-deductible and social contributions are saved.
Here is an overview of the limits for 2025 (based on the projected assessment ceiling West of 8,050 Euros/month):
Tax-free: up to 644 Euros monthly (eight percent of the assessment ceiling)
Exempt from social contributions: up to 322 Euros monthly (four percent of the assessment ceiling)
Annual tax-free maximum amount: 7,728 Euros
Annual social contribution-free maximum amount: 3,864 Euros
These regulations apply to new contracts (concluded from 2005). Different regulations may apply to older contracts.
Expert Depth: Legal Foundations and Important Paragraphs
The tax incentives for direct insurance are primarily regulated in the Income Tax Act (EStG). The key section here is § 3 No. 63 EStG. This section determines the tax exemption for employer contributions (from the primary employment relationship) to a pension fund, pension scheme, or for direct insurance, up to eight percent of the contribution assessment limit in general pension insurance. The exemption from social security contributions is anchored in § 1 para. 1 sentence 1 No. 9 of the Social Insurance Remuneration Regulation (SvEV), referring to contributions up to four percent of the contribution assessment limit.
For existing contracts made before the first of January 2005, § 40b EStG (old version) often applies. Here, contributions could be taxed at a flat rate of twenty percent by the employer, leading to a tax-free or tax-advantaged payout. The deferred taxation, meaning the full tax liability of the benefits in retirement, is regulated in the Pension Income Act (AltEinkG) and concerns new contracts. The connection between insurance and tax is complex. Our expert tip: Carefully check existing contracts to see which regulations apply, especially in the event of a change of employer.
Payout phase: Taxes and social contributions in retirement
During the accumulation phase, contributions to direct insurance are tax-deductible and social security contributions are saved, while the disbursement phase involves what is known as deferred taxation. This means that benefits from direct insurance (both pensions and lump-sum payments for new contracts) must be fully taxed at the personal income tax rate under § 22 No. 5 of the German Income Tax Act. This rate is often lower in retirement than during working life, which can still result in a tax advantage.
In addition to income tax, contributions to statutory health and long-term care insurance are required for benefits from direct insurance if the retiree is covered by statutory insurance. The full contribution rate (employee and employer share) applies here, which can amount to approximately eighteen to nineteen percent. However, there is an exemption amount for health insurance contributions on company pensions. For 2025, this is expected to be 187.25 euros per month (with annual adjustments). Only the portion of the pension that exceeds this amount is subject to contributions. In the case of a lump-sum payment, it is fictitiously spread over ten years to calculate the monthly burden for social security contributions. The question of whether a private pension is subject to health insurance is often raised. For direct insurance, the answer is clear for those with statutory insurance.
Key points to the disbursement phase:
Full income tax obligation on benefits (deferred taxation).
The personal tax rate in retirement is crucial.
Full contributions to statutory health and long-term care insurance (employee and employer share) for those with statutory insurance.
Exemption amount for health insurance contributions (2025: approx. 187.25 euros/month).
Lump-sum payments are spread over ten years for social security contributions.
Old contracts (before 2005) may be more tax-favorable upon disbursement.
Disadvantages and what you should consider
Although the company pension scheme offers many advantages, there are also aspects that need to be considered. The deferred taxation and full social security contributions during the retirement phase can reduce the net payout. The return on the contracts can be affected by costs, so a thorough comparison is important. Another point is the lower flexibility compared to purely private investment forms. When changing employers, transferring the contract can sometimes be complicated, even though there are legal regulations for the transfer (what to do if the new employer does not take over the company pension scheme).
Moreover, the converted salary components reduce the basis for statutory pension calculations and other social benefits like unemployment benefits or sick pay. A careful consideration of the pros and cons is essential. It may be sensible to view the company pension scheme as a building block of a diversified retirement strategy, which also includes capital-forming benefits or other private pension forms. The question of whether a company pension scheme is tax-deductible should always be considered in the overall context of personal financial planning.
Optimise your retirement planning with nextsure
The tax deductibility of the direct insurance provides an excellent opportunity to efficiently plan your retirement provision while saving on taxes today. With the right information and an appropriate strategy, you can fully reap the benefits. At nextsure, we understand that every financial situation is unique. That’s why, as a digital insurance portal, we offer you tailor-made and easy-to-understand insurance solutions.
Use our expertise to analyse your individual situation and find the optimal solution for your occupational pension scheme. We help you understand the complexity of tax regulations and perfectly structure your direct insurance. A well-planned direct insurance 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 optimisation suggestions.
More useful links
Bundesfinanzministerium offers tax guidelines that are relevant to income tax and retirement provision.
Bundesfinanzministerium provides a document on the tax support of private retirement provision.
Deutsche Rentenversicherung offers a detailed explanation on direct insurance.
Statistisches Bundesamt (Destatis) publishes press releases that may contain statistics on retirement provision or demographics.
Bundesministerium für Arbeit und Soziales (BMAS) provides information on additional retirement options.
Publikationen der Bundesregierung 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 legal limits (§ 3 No. 63 EStG). This means they reduce the taxable gross income. Different rules applied to old contracts (before 2005), often subject to flat-rate taxation according to § 40b EStG old version.
What is the maximum tax-free contribution to direct insurance in 2025?
For the year 2025, it is expected that up to 7,728 euros annually (equivalent to 644 euros monthly) can be paid tax-free into a direct insurance policy. This is eight percent of the income threshold for the general pension insurance (West).
Do I also save on social contributions with direct insurance?
Yes, contributions to direct insurance are also exempt from social contributions up to a limit of four percent of the contribution assessment ceiling (2025: expected 3,864 euros annually or 322 euros monthly).
What does deferred taxation mean in direct insurance?
Deferred taxation means that contributions are tax-free during the accumulation phase, but the benefits (pension or capital payout) must be fully taxed at the applicable personal income tax rate in retirement.
Are health insurance premiums due on the payout of direct insurance?
Yes, if you are legally insured in health care during retirement, you must pay contributions to health and nursing care insurance from the benefits of the direct insurance. The full contribution rate applies, but an allowance is taken into account (2025: approximately 187.25 euros monthly).
Is a direct insurance policy worthwhile despite taxes and contributions in retirement?
The value of a direct insurance policy depends on many individual factors such as the amount of tax and social security savings during the accumulation phase, the return on the policy, and the personal tax rate in retirement. A precise calculation and consultation is advisable. The employer's subsidy (at least fifteen percent in the case of salary conversion) further enhances its attractiveness.
