VWL Pension Planning: Your Path to a Higher Pension Through Smart Use of Employee Savings Schemes
23 Apr 2025
9
Minutes
Katrin Straub
CEO at nextsure
Many employees in Germany are entitled to capital-forming benefits (VWL) but are unsure of how to best use these for their retirement provision. With up to 480 euros annually from the employer and government subsidies, a considerable wealth can be built up. Discover how you can use VWL retirement provision for a worry-free future.
The topic in brief and concise terms
VWL retirement planning takes advantage of employer contributions of up to 40 euros per month and government subsidies for effective asset accumulation in old age.
Investment in an occupational pension scheme (bAV) with employee savings schemes (VWL) often offers tax and social security advantages during the savings phase.
The employee savings allowance and, if applicable, Riester allowances can significantly increase the returns on your VWL investment, but income limits must be observed.
VWL Retirement Planning: Understanding Basics and Opportunities
Employee savings schemes, often abbreviated as VWL, are monetary contributions from your employer of up to 40 euros per month. You can use these specifically for your occupational pension or private pension provision. Many collective agreements include an entitlement to VWL; for instance, in the metal and electrical industry, full-time employees receive 319.08 euros annually as retirement savings contributions (AVWL). These additional funds are an important building block for your financial future. The Fifth Asset Accumulation Act (VermBG) forms the legal basis for VWL and the associated state subsidies. The right strategy in VWL pension planning can significantly reduce your pension gap. Below, you will learn which investment forms are suitable and how you can benefit from government allowances.
Optimal investment strategies for your VWL retirement planning
When setting up investment options for your capital-forming benefits towards retirement, you have several choices. A popular method is paying into an occupational pension scheme (bAV), such as a direct insurance policy. Contributions up to eight percent of the pension insurance contribution ceiling (in 2025: 7,728 euros) can be made tax-free, and up to four percent (3,864 euros in 2025) can be made free of social security contributions. This results in direct savings on taxes and social security contributions. Alternatively, capital-forming benefits can be used in fund savings plans, building savings contracts, or even to repay a mortgage. Fund savings plans may qualify for an employee savings bonus of 20 percent on deposits up to 400 euros annually, provided your taxable annual income as a single does not exceed 40,000 euros (80,000 euros for couples). The choice of the appropriate investment form depends on your individual situation and risk tolerance.
State Subsidies: How to Maximise Your VWL Returns
The state supports the VWL pension provisions through various allowances, particularly for low and middle-income earners. The previously mentioned employee savings allowance is a key funding instrument. For building savings or repayment of a construction loan, the allowance is nine percent on annual payments up to 470 euros. To receive full state support, it is often sensible to supplement the VWL payments from the employer out of your own pocket, if they fall below the maximum subsidizable amount. Note the income limits of 40,000 euros (singles) and 80,000 euros (couples) in taxable annual income for most subsidies since 2024. Another option is to use the VWL within the framework of a Riester contract, allowing you to benefit from basic and child allowances, which can be particularly attractive for families with multiple children. A careful review of your entitlements will ensure you receive the maximum state support for your VWL pension.
Practical Examples: Economics Retirement Provision Specifically Calculated
To make the benefits of VWL retirement provision tangible, we look at two scenarios. Scenario one: An employee (single, taxable income of 30,000 euros) receives 40 euros VWL per month from the employer and invests this in an equity fund savings plan. He receives the employee savings bonus of 20 percent on 400 euros of the annual contribution, which means an additional 80 euros from the state. Over seven years (six years of contributions, one year of inactivity), this results in a significant amount. Scenario two: A female employee uses her 40 euros VWL for an occupational pension through salary conversion. These 480 euros annually are free from tax and social security contributions. Assuming a marginal tax rate and social security contributions of around 40 percent, she saves directly about 192 euros 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 specific contract. A detailed analysis of your entitlement is therefore recommended.
Expert tips: Avoid pitfalls and unlock potential
When using savings plans (VWL) for retirement planning, there are several aspects to consider to get the most out of it. Our expert tip: Check carefully whether your employer pays the VWL in addition to your salary or if a salary conversion is taking place. When converting to an occupational pension scheme (bAV), the contributions are tax and social security-free, but later in life, the payouts are subject to deferred taxation and full health and long-term care insurance contributions (minus an allowance). Carefully weigh the advantages and disadvantages of the different implementation methods. Pay attention to the costs of fund savings plans; ETFs are often an inexpensive alternative here, with annual costs sometimes as low as 0.2 percent. Also, find out what happens to your VWL contract if you change employers; it can often be continued privately or taken over by the new employer. [2] The three tiers of retirement planning provide a good framework for orientation. Pay attention to the legal regulations such as the Fifth Wealth Building Act and relevant sections of the Income Tax Act (e.g., § 3 No. 63 EStG for bAV). [4,6]
Consider the following points when making your decision:
Long-term nature of the investment: VWL contracts often have a term of seven years, but for retirement planning, a much longer horizon is essential.
Flexibility: Some investment forms are more flexible than others if you need to access your capital early (which often has disadvantages with retirement products).
Cost structure: Compare the upfront, administrative, and ongoing costs of the different products.
Risk profile: Choose an investment that suits your risk tolerance. Equity funds offer higher return opportunities but also higher risks than, for example, bank savings plans.
Government incentives: Check carefully which allowances you are entitled to and how to make the most of them.
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 largely depends on the chosen form of investment. If VWL are saved in the traditional way, for example in a bank or fund savings plan (outside of occupational pension schemes), they increase the gross salary and are therefore generally subject to tax and social security contributions. [4] The employee savings allowance itself is tax-free. It is different if you pay your VWL into an occupational pension scheme (bAV). Here, the contributions are exempt from taxes and social security contributions within the statutory limits (up to 7,728 euros annually tax-free in 2025, up to 3,864 euros free of social security contributions). This advantage during the savings phase leads to a higher net contribution for your retirement provision. However, the benefits from the bAV must be taxed in retirement age (deferred taxation), and contributions to health and long-term care insurance are required, with an allowance of currently 187.25 euros (as of 2025) applying. [4] Specific tax regulations apply to unit-linked pension insurance or direct insurance, which you should examine in detail.
Long-term perspective: VWL as a component of your retirement planning
The VWL pension plan is more than just a short-term savings plan; it is a strategic component for your long-term financial security in retirement. Even with small monthly contributions of, for instance, 40 euros, a substantial capital can be accumulated over decades, especially through compound interest and government subsidies. [4] Do not consider the VWL in isolation, but integrate it into your entire pension strategy. It can sensibly complement a private pension insurance, a Riester pension, or a Rürup pension. Our expert tip: Regularly review your contracts and adjust your strategy if necessary to accommodate changing life circumstances or new legal frameworks. Taking advantage of the VWL pension plan early and consistently pays off in retirement with a higher pension and more financial freedom. Remember that the payout of the accumulated amount or the pension payment occurs according to the contract only upon retirement. [3] This underscores the long-term nature of this pension measure.
Your next step towards an optimal VWL pension plan
More useful links
Bundesfinanzministerium provides a definition of the employee savings allowance.
Verbraucherzentrale offers comprehensive information about capital-forming benefits and how to use them optimally.
Bundesfinanzministerium supplies an official document regarding the application of the Fifth Capital Formation Act.
Bundesfinanzministerium offers a document on the tax incentives for private retirement provisions.
Bundesministerium für Arbeit und Soziales (BMAS) publishes statistics on Riester contracts and additional retirement provisions.
Bundesministerium für Arbeit und Soziales (BMAS) provides information on retirement income and additional pension options.
Deutsche Rentenversicherung offers an overview of various retirement provision options.
Publikationen der Bundesregierung provides an official publication on the topic of retirement provisions.
FAQ
What exactly are employee savings schemes (VWL)?
Asset-building benefits are additional monetary benefits from the employer, intended for wealth accumulation or retirement planning. They amount to up to 40 euros per month and are paid directly into a savings contract chosen by the employee.
Who is eligible for VWL for retirement provision?
Employees, trainees, civil servants, judges, and soldiers are entitled to VL (Vermögenswirksame Leistungen). Whether and to what extent VL are paid is often specified in the employment contract, a company agreement, or a collective agreement.
How can I best use VWL for my retirement planning?
A very effective use is contributing to an occupational pension scheme, as this often saves taxes and social contributions. State-subsidised mutual fund savings plans can also be attractive. Individual advice helps to find the best solution.
What happens to my VWL contract when I change employers?
When changing employers, there are several options: The new employer may take over the contract and continue paying the capital-forming benefits (VWL), you can continue the contract privately with your own contributions, or you can leave it dormant without further contributions. Clarify this early on.
Can I use VWL for purposes other than retirement savings?
Yes, VWL can also be used for other saving forms such as building society savings contracts (also for the later financing of home ownership) or bank savings plans. However, for retirement planning, they are particularly suitable due to the long-term perspective and support options.
What role does the employee savings allowance play in the VWL pension scheme?
The employee savings bonus is a government incentive for low and middle-income earners. When invested in eligible products (e.g., equity funds, home savings contracts) and adhering to income limits (€40,000 for singles / €80,000 for married couples since 2024 for most investment forms), the government provides a subsidy that enhances returns.
