Is a company pension scheme worthwhile? Your guide for 2025
12.04.25
3
Minutes
Katrin Straub
Managing Director at nextsure
The occupational pension scheme (bAV) promises a better pension, but is it really worthwhile for everyone? Many employees wonder whether the bAV is worth it in later life, given taxes and social security contributions. This article looks at the facts and shows you when and how an occupational pension scheme can make sense for your future.
The topic in brief and concise terms
The occupational pension scheme offers tax advantages and additional retirement income through salary conversion and employer contributions (at least fifteen per cent where the employer saves on social security contributions).
In retirement, occupational pensions are fully subject to tax and social security contributions (health and long-term care insurance), which reduces the net amount paid out.
There are five implementation routes (e.g. direct insurance, pension fund), and the choice affects security and returns; an individual assessment is crucial.
Understanding the Basics: What is a company pension scheme (bAV)?
Occupational pension provision (bAV) is a commitment from your employer to provide additional benefits in retirement, in the event of disability or for surviving dependants. Since 2002, every employee in Germany has had a statutory right to convert parts of their gross salary into a bAV (§ 1a BetrAVG). This often happens through salary sacrifice, whereby contributions are deducted directly from gross salary. The state supports this by exempting these contributions from tax and social security contributions up to certain limits. For 2024, for example, contributions of up to 7,248 euros are tax-free and up to 3,624 euros are exempt from social security contributions. bAV therefore represents the second pillar of the German retirement provision system, complementing statutory and private provision. The exact rules and scope of benefits may vary depending on the implementation route and agreement. The importance of occupational pension provision also lies in employee retention. This introduction forms the basis for taking a closer look at the financial aspects.
Optimising Financial Benefits: Taxes and Social Contributions in the Accumulation Phase
A key argument for occupational pension provision is the saving on tax and social security contributions during the contribution phase. If you, for example, convert €200 of your gross salary each month, you save a considerable portion of it, depending on your tax bracket and social insurance rates. With an assumed marginal tax rate of thirty per cent and social contributions of around twenty per cent, the monthly net saving is around €100. Your actual net cost for the €200 contribution would therefore be only around €100. The contributions flow directly from your gross salary into the pension contract, reducing your taxable income and the assessment basis for social security contributions. For 2025, up to eight per cent of the contribution assessment ceiling for the statutory pension insurance scheme (West) can be paid in tax-free; contributions of up to four per cent of this ceiling are exempt from social security contributions. These savings can significantly increase the return on your retirement provision. How you can claim this occupational pension provision against tax is an important aspect. But which investment options are actually available?
An Overview of the Implementation Routes: The Five Options for Occupational Pensions
Employers have five different ways of implementing an occupational pension scheme, which differ in terms of security, return potential and administrative effort. In practice, the employer usually decides which route to take. Here is an overview of the options:
Direct insurance: The employer takes out a pension insurance policy on the employee’s life; this is the most common route.
Pension fund: A legally independent pension provider supported by one or more companies.
Pension fund: Often offers more flexible investment options and higher return potential, but also carries greater risk.
Support fund: Another legally independent pension provider, often established by larger companies or corporate groups.
Direct commitment (pension commitment): The employer undertakes directly to provide the pension benefits and sets aside pension provisions for this purpose.
Each of these routes has specific advantages and disadvantages of occupational pension schemes. Direct insurance and the pension fund are particularly common among smaller and medium-sized companies because they are easier to manage. Being familiar with these options helps you better understand the employer’s role.
Employer Subsidy Benefits: Added Value through Employer Contributions
A key advantage of occupational pension provision is the mandatory employer contribution. Since January 2019 for new contracts and since January 2022 for all existing contracts, employers have had to contribute a flat fifteen per cent of the converted salary, provided they save social security contributions through salary conversion. This contribution applies to the implementation methods direct insurance, pension scheme and pension fund. For example, if an employee contributes €100 a month through salary conversion, the employer must add at least €15, so that a total of €115 is paid into the contract. Some employers also make higher voluntary contributions to make occupational pension provision more attractive and retain employees. This advantage for employers through occupational pension provision can therefore also benefit employees. It is advisable to ask your own company for the exact amount of the contribution. With these contributions in place, the question of long-term development arises.
Assessing Long-term Return and Payout: What Remains in the End
The return on occupational pension provision depends on various factors, including the implementation route, the costs of the contract and the performance of the capital markets. While some models offer guaranteed benefits, others rely more heavily on opportunity-oriented investments. When benefits are paid out in retirement, tax is due on the bAV benefits and, as a rule, full contributions to health and long-term care insurance are payable. This reduces the net payout. However, there is an allowance for health insurance contributions on occupational pensions, which in 2024 is €176.75 per month (value for 2024, may change annually). Full contributions apply to amounts above this. Taxation is at the personal tax rate, which is usually lower in old age. Payment options typically include a lifelong monthly pension, a one-off capital payment or a combination of both. A unit-linked pension insurance policy can serve as a comparison here. Flexibility when changing careers is another important point.
Securing Flexibility: occupational pension provision when changing jobs and when contracts end
A common criticism of occupational pension schemes is their supposedly limited flexibility, especially when changing employers. In principle, your accrued entitlements (vesting) are protected if the employment relationship has lasted at least three years and the commitment was made after 1 January 2018 or the employee is at least 21 years old (older rules may differ). When changing jobs, there are several options for your portable occupational pension scheme:
The new employer takes over the existing contract.
The accumulated capital is transferred to the pension provider of the new employer (portability).
The contract is continued privately with your own contributions (often only possible with direct insurance policies or pension funds).
The contract is made paid-up; the capital saved so far remains intact and is paid out in retirement.
Termination with immediate payout of the capital is generally not possible. This serves to protect the retirement savings nature of the arrangement. It is therefore clearly regulated what happens if you cannot or do not wish to take the occupational pension scheme with you when you leave. But bAV is not the optimal solution for everyone.
Although occupational pension provision offers many advantages, it is not universally suitable for everyone. For low earners, reducing gross pay can mean that the savings on tax and social security contributions are smaller, while at the same time the entitlement to the state pension is reduced more significantly. For employees who change jobs very frequently and are only employed for short periods each time, the administrative effort can also outweigh the benefits. High contract costs or unfavourable terms can reduce the return. In addition, the later payout is fully subject to health and long-term care insurance contributions (for those insured under the statutory system), which reduces the net pension. It is important to examine the individual situation carefully and compare alternatives such as a private pension insurance policy or other investment forms from the three tiers of retirement provision. One option in the event of dissatisfaction could be to cancel and cash out the occupational pension provision, although this is only possible in exceptional cases. A well-founded decision often requires expert knowledge.
Seek Expert Advice: Individual Review for Your Optimal Provision
The question of whether occupational pension provision makes sense cannot be answered in general terms. Too many individual factors such as income, marital status, existing pension contracts and the specific terms of the bAV offer play a role. A careful analysis of your personal situation is essential. Even small differences in the contract terms can have a major impact on your retirement pension over decades. Calculating the actual net savings during the accumulation phase and the expected net payout, taking taxes and social security contributions into account, requires specialist expertise. At nextsure, we will be happy to support you in developing the pension strategy that suits you best and in evaluating occupational pension offers in a well-founded way. Benefit from our expertise for your financial future.
More useful links
Wikipedia offers a comprehensive overview of occupational pension provision.
The Federal Ministry of Labour and Social Affairs (BMAS) provides detailed information on occupational pension provision.
The German Pension Insurance offers an informative brochure on occupational pension provision.
The Federal Statistical Office (Destatis) publishes press releases and statistics on occupational pension provision.
The Working Group for Occupational Pension Provision e.V. (aba) provides statistics on the распространение of occupational pension provision.
The Consumer Advice Centre explains when salary conversion for occupational pension provision is worthwhile.
The Federal Government provides publications on occupational pension provision.
The Federal Ministry of Finance provides information on the tax aspects of retirement provision.
FAQ
Is a company pension scheme always worthwhile?
No, not always. Whether it makes sense depends on individual factors such as income, contract terms, employer contribution and personal life planning. A careful review is important.
Which taxes and social security contributions apply when the bAV is paid out?
Payments from occupational pension schemes (bAV) are subject to income tax (at your personal tax rate in retirement) and full contributions to statutory health and long-term care insurance (for those insured under the statutory scheme). There is an allowance for health insurance contributions.
What happens to my occupational pension scheme if I change employers?
When changing employers, you can usually take your occupational pension provision with you (portability), continue it privately or make it paid-up. The exact options depend on the contract and the new employer.
How much can I pay into my company pension scheme tax-free?
In 2024, up to EUR 7,248 can be paid tax-free and up to EUR 3,624 free of social security contributions into certain bAV implementation channels. These limits may change annually.
Does my employer have to pay a contribution to the occupational pension scheme?
Yes, if you make contributions via deferred compensation into a direct insurance policy, a pension fund scheme or a pension fund, and your employer thereby saves on social security contributions, they must contribute at least fifteen per cent of the conversion amount.
What types of occupational pension scheme are there?
There are five implementation routes: direct insurance, pension fund, pension fund, support fund and direct commitment (pension commitment). The employer chooses the implementation route.
