Capital-forming benefits retirement provision: Your path to a higher pension through the clever use of capital-forming benefits
23.04.25
4
Minutes
Katrin Straub
Managing Director at nextsure
Many employees in Germany are entitled to capital-forming benefits (VWL), but do not know how to use them optimally for their retirement savings. With up to €480 a year from their employer and state bonuses, you can build up considerable wealth. Discover how to use VWL for retirement savings to secure a worry-free future.
The topic in brief and concise terms
VWL retirement provision uses employer contributions of up to €40 per month and government subsidies to build wealth effectively for later life.
Investing in a company pension scheme (bAV) with VWL often offers tax and social security contribution advantages during the savings phase.
The employee savings allowance and, where applicable, Riester allowances can significantly increase the return on your VWL investment; income limits must be observed.
VWL retirement provision: understanding the basics and opportunities
Capital-forming benefits, often abbreviated to VWL, are monetary benefits from your employer of up to €40 per month. You can use these specifically for your occupational pension scheme or private pension provision. Many collective agreements provide an entitlement to VWL; in the metal and electrical industry, for example, full-time employees receive €319.08 per year as retirement-related capital-forming benefits (AVWL). This additional funding is an important building block for your financial future. The Fifth Capital Formation Act (VermBG) forms the legal basis for VWL and the associated state subsidies. The right strategy for VWL retirement provision can significantly reduce your pension gap. In the following, you will find out which investment forms are suitable and how you can benefit from state grants.
Optimal investment strategies for your VWL retirement savings
For investing your capital-forming benefits for retirement, several options are available to you. A popular option is paying into an occupational pension scheme (bAV), for example a direct insurance policy. In this case, contributions of up to eight per cent of the pension insurance contribution assessment ceiling (in 2025: EUR 7,728) can be paid in tax-free and up to four per cent (EUR 3,864 in 2025) free of social security contributions. This leads to direct savings on tax and social security contributions. Alternatively, VWL can be used for unit-linked savings plans, building society savings contracts or to repay property finance. With unit-linked savings plans, employees can receive a savings allowance of 20 per cent on contributions of up to EUR 400 per year, provided your annual taxable income does not exceed EUR 40,000 as a single person (EUR 80,000 for couples). The choice of the right form of investment depends on your individual situation and risk appetite.
Government incentives: How to maximise your VWL returns
The state supports VWL retirement provision through various grants, especially for low and middle earners. The employee savings bonus mentioned above is a key support measure. For building savings or repaying a construction loan, the bonus is nine per cent on annual payments of up to EUR 470. To receive the full state subsidy, it is often worthwhile to top up the VWL payments from your employer out of pocket if they fall below the maximum eligible amount. Please note the income limits of EUR 40,000 (single people) and EUR 80,000 (couples) of taxable annual income for most forms of support since 2024. Another option is to use VWL as part of a Riester contract, allowing you to benefit from basic and child allowances, which can be particularly attractive for families with several children. A careful review of your entitlements secures the maximum state support for your VWL pension.
Practical examples: VWL retirement provision calculated in detail
To make the benefits of VWL retirement provision tangible, we consider two scenarios. Scenario one: an employee (single, taxable income of EUR 30,000) receives EUR 40 in VWL from their employer each month and invests it in an equity fund savings plan. He receives the employee savings bonus of 20 per cent on EUR 400 of annual contributions, i.e. an additional EUR 80 from the state. Over seven years (six years of contributions, one year of dormancy), this adds up to a significant sum. Scenario two: an employee uses their EUR 40 in VWL for occupational pension provision through salary conversion. These EUR 480 a year are tax-free and exempt from social security contributions. Assuming a marginal tax rate and social security contributions of around 40 per cent, they save around EUR 192 directly per year. These examples illustrate the potential of VWL for building wealth. The exact calculation depends on many individual factors, such as tax class and the specific contract. A detailed analysis of your entitlement is therefore recommended.
Expert tips: avoid pitfalls and maximise potential
When using VWL for retirement provision, there are a few aspects to bear in mind in order to get the best possible outcome. Our expert tip: check carefully whether your employer pays the VWL in addition to your salary or whether salary conversion is taking place. When converting it into a company pension scheme (bAV), the contributions are tax-free and exempt from social security contributions, but in later life the payouts are subject to deferred taxation and full health and long-term care insurance contributions (less an allowance). Weigh up the advantages and disadvantages of the various implementation routes carefully. When it comes to investment savings plans, pay attention to the costs; ETFs are often a cost-effective alternative here, with annual fees of sometimes only 0.2 per cent. Also clarify what happens to your VWL contract if you change employer; it can often be continued privately or taken over by your new employer. [2] The three pillars of retirement provision provide a useful frame of reference here. Observe the statutory basis, such as the Fifth Capital Formation Act and relevant sections of the Income Tax Act (e.g. § 3 No. 63 EStG for bAV). [4,6]
You should take the following points into account when making your decision:
Long-term nature of the investment: VWL contracts often have a term of seven years, but retirement provision requires a much longer horizon.
Flexibility: Some forms of investment are more flexible than others, should you need access to the capital early (which usually has disadvantages for retirement provision products).
Cost structure: Compare the entry, administration and ongoing costs of the different products.
Risk profile: Choose an investment that matches your willingness to take risk. Equity funds offer higher return potential, but also higher risks than, for example, bank savings plans.
State support: Check carefully which allowances you are entitled to and how you can make the best use of them.
Making a well-informed decision today lays the foundation for your financial security tomorrow.
Economics and Taxes: What You Need to Know
The tax treatment of capital-forming benefits depends heavily on the chosen investment vehicle. If VWL are saved in the conventional way, for example in a bank or fund savings plan (outside occupational pension schemes), they increase gross pay and are therefore generally subject to tax and social security contributions. [4] The employee savings allowance itself is tax-free. The situation is different if you pay your VWL into a company pension scheme (bAV). Here, the contributions are exempt from tax and social security contributions within the statutory limits (up to EUR 7,728 per year in 2025 tax-free, up to EUR 3,864 free of social security contributions). This advantage during the accumulation phase leads to a higher net contribution for your retirement provision. However, benefits from the bAV must be taxed in retirement (deferred taxation), and contributions to health and long-term care insurance are payable, with an allowance of currently EUR 187.25 (as of 2025). [4] Specific tax rules apply to unit-linked pension insurance policies or direct insurance policies, which you should review in detail.
VWL retirement provision is more than just a short-term savings plan; it is a strategic building block for your long-term financial security in retirement. Even with small monthly amounts of, for example, 40 euros, a considerable sum can be built up over decades, especially through the compounding effect and state subsidies. [4] Do not view VWL in isolation, but integrate it into your overall retirement planning strategy. It can usefully complement a private pension insurance, a Riester pension or a Rürup pension. Our expert tip: review your contracts regularly and adjust your strategy if necessary to reflect changing personal circumstances or new legal conditions. Early and continuous use of VWL retirement provision pays off in later life through a higher pension and greater financial freedom. Bear in mind that the payout of the accumulated sum or the pension payment, depending on the contract, only takes place when you retire. [3] This underlines the long-term nature of this provision measure.
Your next step towards the ideal VWL retirement provision
You now have a comprehensive overview of the possibilities of VWL retirement provision. The key to success lies in tailoring it to your personal and financial situation. Make use of the potential offered by your employer and the state to actively shape your retirement provision. With a well-thought-out strategy, you can close your pension gap and look forward to retirement with greater peace of mind. Do not hesitate to seek professional support.
Request an individual risk analysis now: Have your insurance situation reviewed free of charge and receive specific recommendations for optimisation.
More useful links
Federal Ministry of Finance provides a definition of the employee savings allowance.
Consumer Advice Centre provides comprehensive information on capital-forming benefits and how you can make the most of them.
Federal Ministry of Finance provides an official document on the application of the Fifth Capital Formation Act.
Federal Ministry of Finance provides a document on the tax incentives for private retirement provision.
Federal Ministry of Labour and Social Affairs (BMAS) publishes statistics on Riester contracts and supplementary retirement provision.
Federal Ministry of Labour and Social Affairs (BMAS) provides information on retirement income and additional pension provision options.
German Pension Insurance provides an overview of various retirement provision options.
Publications of the Federal Government provides an official publication on retirement provision.
FAQ
What exactly are wealth-building benefits (VWL)?
Capital-forming benefits are additional payments made by the employer that serve to build assets or provide for retirement. They amount to up to 40 euros per month and are paid directly into a savings contract chosen by the employee.
Who is entitled to VWL for retirement provision?
Employees, trainees, civil servants, judges and soldiers are entitled to VWL. Whether VWL is paid, and at what amount, is often set out in the employment contract, a works agreement or a collective agreement.
How can I best use VWL for my retirement savings?
A very effective option is making contributions to an occupational pension scheme, as this often saves on tax and social security contributions. Fund savings plans with government support can also be attractive. Individual advice helps to find the best solution.
What happens to my VWL contract if I change employer?
When changing employers, there are several options: the new employer takes over the contract and continues to pay the VWL, you continue the contract privately with your own contributions, or leave it paid up. Clarify this at an early stage.
Can I also use VWL for purposes other than retirement provision?
Yes, VWL can also be used for other forms of saving such as building society savings contracts (also for the later financing of home ownership) or bank savings plans. However, they are particularly suitable for retirement provision due to the long-term outlook and subsidy options.
What role does the employee savings allowance play in VWL retirement provision?
The employee savings allowance is a state subsidy for low- and middle-income earners. When investing in eligible products (e.g. equity funds, building society savings contracts) and meeting the income limits (EUR 40,000 for singles / EUR 80,000 for married couples since 2024 for most types of investment), the state pays a subsidy that increases the return.
