Is a company pension scheme worthwhile? Your guide for 2025
12 Apr 2025
8
Minutes
Katrin Straub
CEO at nextsure
Company pension schemes (bAV) promise a better pension, but are they truly beneficial for everyone? Many employees wonder whether bAV is worthwhile considering taxes and social contributions in retirement. This article explores the facts and shows you when and how a company pension scheme can be valuable for your future.
The topic in brief and concise terms
The occupational pension scheme (bAV) offers tax benefits and additional retirement income through deferred compensation and employer contributions (at least fifteen percent in the case of employer savings on social security contributions).
In old age, occupational pensions are fully subject to tax and social security contributions (health and long-term care insurance), which reduces the net payout.
There are five implementation options (e.g., direct insurance, pension fund) whose choice impacts security and returns; an individual assessment is essential.
Understanding the Basics: What is occupational pension provision (bAV)?
Company pension schemes (bAV) represent a commitment by your employer to provide additional support in retirement, in cases of disability, or for dependents. Since 2002, every employee in Germany has had the statutory right to convert parts of their gross salary into a bAV (§ 1a BetrAVG). This often occurs through salary conversion, where contributions are deducted directly from the gross salary. The government encourages this by ensuring that, up to certain limits, contributions are exempt from taxes and social security contributions. For the year 2024, for instance, contributions up to 7,248 euros are tax-free and up to 3,624 euros are exempt from social security contributions. Thus, the bAV forms the second pillar of the German retirement provision system, complementing statutory and private pensions. The exact regulations and scope of benefits may vary depending on the implementation method and agreement. A significance of the company pension scheme also lies in employee retention. This introduction provides the basis for a closer examination of the financial aspects.
Optimising Financial Benefits: Taxes and Social Contributions during the Accumulation Phase
A key argument for occupational pension schemes is the saving of taxes and social contributions during the contribution phase. For example, if you convert 200 euros of your gross salary each month, you save a substantial portion of it depending on your tax class and social security rates. Assuming a marginal tax rate of thirty percent and social contributions of around twenty percent, the monthly net savings are approximately 100 euros. Your actual net expenditure for the 200 euros contribution would therefore only be around 100 euros. The contributions flow directly from your gross salary into the pension contract, reducing your taxable income and the assessment basis for social contributions. For the year 2025, up to eight percent of the contribution ceiling of the statutory pension insurance (West) can be paid in tax-free; contributions up to four percent of this ceiling are free of social contributions. These savings can significantly increase the return on your pension scheme. How you can deduct occupational pension schemes from taxes is an important aspect. But what investment forms are actually available?
Overview of Implementation Methods: The Five Options of Occupational Pensions
Employers have five different ways to implement occupational pension schemes, which vary in terms of security, return opportunities, and administrative effort. The choice of implementation method is usually made by the employer. 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 method.
Pension fund: A legally independent pension institution supported by one or more companies.
Pension fund: Often offers more flexible investment opportunities and higher return chances, but also entails higher risks.
Support fund: Also a legally independent pension institution, often established by larger companies or corporations.
Direct commitment (Pension commitment): The employer directly commits to providing the pension benefits and sets up pension provisions.
Each of these methods has specific advantages and disadvantages of occupational pensions. Direct insurance and pension funds are particularly popular among small and medium-sized companies due to their simpler handling. Understanding these options helps to better understand the employer's role.
Employer Contribution Benefit: Added Value through Boss Participation
A significant advantage of occupational pensions is the mandatory employer contribution. Since January 2019 for new contracts and since January 2022 for all existing contracts, employers must contribute a flat rate of fifteen percent of the converted salary if they save on social security contributions through salary conversion. This contribution applies to the implementation routes of direct insurance, pension funds, and pension schemes. If an employee, for example, pays 100 euros monthly through salary conversion, the employer must contribute at least 15 euros, resulting in a total of 115 euros into the contract. Some employers voluntarily provide higher contributions to make occupational pensions more attractive and retain employees. This advantage for employers through occupational pensions can therefore also benefit the employee. It is advisable to inquire about the exact amount of the contribution in your own company. With these contributions as a foundation, the question arises about long-term development.
Assessing Long-Term Returns and Payout: What Remains at the End
The yield of an occupational pension scheme depends on various factors, including the mode of implementation, the costs of the contract, and the performance of the capital markets. While some models offer guaranteed benefits, others focus more on growth-oriented investments. When benefits from the occupational pension scheme are paid out at retirement age, taxes and usually full contributions to health and long-term care insurance are due. This reduces the net payout. However, there is an exemption amount for health insurance contributions on company pensions, which in 2024 is set at 176.75 euros per month (value for 2024, may change annually). Full contributions apply to amounts above this. Taxation is based on the personal tax rate, which is usually lower in retirement. Payout options typically include a lifelong monthly pension, a one-off capital payment, or a combination of both. A unit-linked pension insurance can serve as a comparison here. Flexibility during changes in one's professional life is another important aspect.
Ensuring Flexibility: Occupational Pension Schemes during Job Changes and Contract Termination
A common criticism of occupational pension schemes is the perceived lack of flexibility, especially when changing jobs. In principle, your acquired entitlements (vesting) are secured if the employment relationship has existed for at least three years and the commitment was made after January 1st, 2018, or if the employee is at least 21 years old (older regulations may differ). When changing jobs, there are several options for your occupational pension scheme portability:
The new employer takes over the existing contract.
The accrued capital is transferred to the new employer's pension scheme provider (portability).
The contract is continued privately with personal contributions (often only with direct insurance or pension funds).
The contract is made contribution-free; the capital accumulated so far remains and is paid out in old age.
Termination with immediate payout of capital is generally not possible. This serves to protect the retirement character. What happens if you can't or don't want to take the occupational pension scheme with you upon resignation is clearly regulated. However, the occupational pension scheme is not the optimal solution for everyone.
Weighing Risks and Alternatives: When is Caution Advised?
Although occupational pension schemes offer many advantages, they are not unconditionally sensible for everyone. For low earners, the reduction in gross salary can result in lower savings on taxes and social contributions, while also significantly reducing entitlement to a state pension. For employees with frequent job changes and only short periods of employment, administrative burdens may outweigh the benefits. High contract costs or unfavourable conditions can reduce the yield. In addition, the later payout is fully subject to contributions for health and care insurance (for those with statutory insurance), which reduces the net pension. It is important to carefully examine the individual situation and compare alternatives such as a private pension insurance or other investment forms within the three pillars of retirement provision. An option, if dissatisfied, might be to terminate and withdraw from the occupational pension scheme, although this is only possible in exceptional cases. An informed decision often requires expert knowledge.
Consulting Experts: Individual Assessment for Your Optimal Care
More useful links
Wikipedia provides a comprehensive overview of occupational pensions.
The Federal Ministry of Labour and Social Affairs (BMAS) offers detailed information on occupational pensions.
The German Pension Insurance offers an informative brochure on occupational pensions.
The Federal Statistical Office (Destatis) publishes press releases and statistics on occupational pensions.
The Working Group for Occupational Pensions e.V. (aba) provides statistics on the prevalence of occupational pensions.
The Consumer Advice Centre provides information on when salary conversion for occupational pension schemes is worthwhile.
The Federal Government offers publications on occupational pensions.
The Federal Ministry of Finance provides information on the tax aspects of pensions.
FAQ
Is a company pension scheme always sensible?
No, not always. The suitability depends on individual factors such as income, contract terms, employer contributions, and personal life planning. A thorough examination is important.
What taxes and social contributions apply upon the payout of the occupational pension scheme?
Payouts from occupational pensions are subject to income tax (at the individual's personal tax rate in retirement) and full contributions to statutory health and nursing care insurance (for those with statutory insurance). 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 with you (portability), continue it privately, or suspend contributions. The exact options depend on the contract and the new employer.
How much can I contribute to the occupational pension scheme tax-free?
In 2024, up to €7,248 can be contributed tax-free and up to €3,624 free from social security contributions into certain implementation paths of occupational pensions. These limits may change annually.
Does my employer have to contribute to the occupational pension scheme?
Yes, if you pay into a direct insurance, pension fund, or pension scheme through salary conversion and your employer saves social security contributions as a result, they must contribute at least fifteen percent of the converted amount.
What implementation methods of occupational pensions are there?
There are five implementation methods: direct insurance, pension funds, pension funds, support funds, and direct commitments (pension commitments). The employer chooses the implementation method.
