VWL pension: How to optimise your retirement provision with capital-forming benefits
22.04.25
10
Minutes
Katrin Straub
Managing Director at nextsure
Many employees leave money on the table that could boost their retirement provision. Vermögenswirksame Leistungen (VWL) offer an attractive way to save for the future with support from your employer and the state. Discover how to optimise your VWL pension.
The topic in brief and concise terms
VWL are an employer subsidy of up to 40 euros per month that can be used for retirement provision and is often state-subsidised.
Converting VWL into a company pension scheme can save tax and social security contributions.
The employee savings allowance (e.g. 20 per cent for equity funds) increases the return; note the income limits.
VWL pension: Understanding the basics of building your wealth
Capital-forming benefits are payments from your employer that can amount to up to forty euros per month. These amounts flow directly into a savings contract of your choice and serve long-term asset building, especially for your retirement provision. Many employees are entitled to this benefit, often governed by a collective agreement or employment contract. The term of a VL contract is typically seven years, with payments made for six years and the money left dormant in the seventh year. This structured savings scheme helps you steadily accumulate capital for your VWL pension.
The state additionally supports asset building through VL with the employee savings allowance. This subsidy depends on your taxable income and the chosen type of investment. For single persons, the income limit is, for example, twenty thousand euros for unit-linked savings plans. This makes your VWL pension even more attractive. You should check the exact conditions for entitlement to capital-forming benefits.
Investment options for your VWL pension: options and their benefits
There are various options available for investing your capital-forming benefits, each offering different return opportunities and risk profiles. A popular option is paying into an occupational pension scheme (bAV). In some cases, contributions can be converted directly from gross salary free of tax and social security contributions. This results in a noticeable net advantage during the accumulation phase.
Other common forms of investment are:
Bank savings plans: A secure but often lower-yield option.
Home savings contracts: Useful if you are planning to buy your own home in the future; here, there is often a nine per cent employee savings allowance.
Fund savings plans (e.g. with ETFs): Offer higher return opportunities with correspondingly higher risk; up to twenty per cent employee savings allowance is possible here.
Repayment of a construction loan: Existing property loans can be repaid faster with VL.
VL life insurance: Combines saving with survivor protection, with payout often as a lump sum or annuity.
Choosing the right form of investment is crucial to the success of your VWL pension and should take your personal situation and risk tolerance into account. A private pension insurance can also be an option.
Government subsidies and taxes: How to maximise your VWL pension
The state subsidy provided by the employee savings allowance makes the VWL pension particularly attractive for low and average earners. The allowance for capital participation (e.g. equity funds) amounts to twenty per cent of annual payments, up to a maximum of eighty euros for single people for contributions of up to four hundred euros. For home savings contracts, there is nine per cent on a maximum annual contribution of 470 euros. Note the income thresholds: for the employee savings allowance for shares, it is a taxable annual income of forty thousand euros for single people (eighty thousand euros for married couples) since the 2024 adjustment.
Contributions to capital-forming benefits are generally subject to tax and social security contributions unless they are made as part of an occupational pension scheme by salary conversion. In the case of occupational pension schemes, contributions are tax- and social security-free up to certain upper limits (e.g. in 2025 up to 7,728 euros per year tax-free for contributions to a direct insurance policy). The later payout of the VWL pension from an occupational pension scheme is then subject to deferred taxation, often at a lower tax rate in retirement. Information on whether unit-linked pension insurance policies are tax-deductible can be relevant here.
Practical examples and calculation methods: making your VWL pension tangible
Assuming you receive the maximum amount of forty euros per month from your employer as VWL. That amounts to 480 euros per year. If you invest this amount in an equity fund savings plan and remain below the income threshold, you receive an additional eighty euros in employee savings bonus (twenty per cent of four hundred euros). Your annual savings contribution thus rises to 560 euros, without you having to contribute any additional money yourself.
Another example concerns using the VWL for occupational pension provision. If you pay the forty euros VWL into a direct insurance policy, these contributions can be exempt from social security contributions and tax. Assuming a marginal tax rate of thirty per cent and social security contributions of around twenty per cent, you save around twenty euros in tax and contributions on a forty-euro contribution. The net cost for forty euros of additional retirement provision is then only around twenty euros. This illustrates the leverage effect of the VWL pension. You can find out more about the 3 pillars of retirement provision.
In-depth expertise: legal foundations and tips for structuring your VWL pension
The legal basis for capital-forming benefits is the Fifth Capital Formation Act (5th VermBG). This Act regulates entitlement, investment options and state support. Employers are not always obliged to pay VWL; often, however, the entitlement arises from collective agreements, works agreements or the employment contract. Our expert tip: Ask your HR department proactively whether you are entitled to VWL and, if so, to what amount.
For the optimal design of your VWL pension, note the following tips:
Check support: Clarify whether you are entitled to the employee savings allowance and make use of it.
Choose an investment option: Tailor the investment to your risk appetite and objectives (e.g. occupational pension scheme for tax advantages, equity funds for return potential).
Observe contract terms: VL contracts usually have a lock-in period of seven years; early termination can lead to loss of the support.
Check top-up: If the employer pays less than forty euros, making up the difference yourself can be worthwhile in order to receive the full support.
Regular review: Adjust your VL strategy to changing life circumstances if necessary.
The question of whether a company pension insurance is tax-deductible also plays a role here. Think long term in order to fully realise the potential of your VWL pension.
VWL pension also in retirement? Options and what to bear in mind
In principle, entitlement to employer-funded capital-forming benefits ends on entering retirement, as VL are treated under employment law like wages. However, the existing savings contract continues. Retirees then have several options: they can terminate the contract (possibly losing the subsidy if it is closed early during the lock-in period), continue paying the contributions privately, or leave the contract dormant until the end of its term. Our expert tip: continuing to pay in can make sense in order to benefit from interest or capital gains until the regular end of the contract.
If you take on a side job in retirement, you may still be able to receive VWL from your new employer and even apply for the employee savings allowance, provided the income limits are not exceeded. The earnings limits for the standard state old-age pension have largely been abolished, so this usually does not result in a reduction in the statutory pension. A endowment life insurance policy or other forms of investment may also be relevant in retirement.
The VWL pension offers an excellent opportunity to build an additional financial cushion for retirement with relatively little personal effort and government support. Thanks to employer contributions, which can amount to up to €480 a year, and the potential employee savings allowance, your assets grow faster. The various investment options, from secure bank savings plans to return-oriented equity funds or tax-advantaged occupational pension schemes, allow you to tailor the plan to your needs. Take advantage of this opportunity to close your retirement income gap. Find out from your employer whether you are eligible and choose the investment strategy that suits you. Careful planning today lays the foundation for a more relaxed financial future.
Request your individual risk analysis now: Have your insurance situation reviewed free of charge and receive concrete suggestions for improvement.
More useful links
Wikipedia provides a comprehensive overview of employee savings schemes (VL) and their significance.
The Federal Ministry of Finance provides official information on the employee savings allowance, including eligibility requirements and funding levels.
The German Pension Insurance provides information on various aspects of retirement provision and pension benefits.
The Federal Statistical Office (Destatis) provides current data and statistics on population trends in Germany.
The Federal Ministry of Labour and Social Affairs (BMAS) provides official information and policy frameworks relating to retirement provision.
FAQ
What are capital-forming benefits (VWL)?
VLWs are savings contributions that your employer pays in addition to your salary, up to 40 euros per month. They are used to build wealth and can be used for the VLW pension.
Who is entitled to VWL?
Employees, civil servants, judges, soldiers and trainees are entitled to capital-forming benefits, often regulated in the employment or collective agreement. Ask your employer.
How much is the government funding for economics?
The employee savings allowance is, for example, 20 per cent on up to EUR 400 of annual contributions to equity funds (max. EUR 80 for single persons) or 9 per cent for home savings contracts (max. EUR 42.30), depending on income.
What investment options are available for VL for retirement provision?
Popular options are occupational pension schemes (e.g. direct insurance), fund savings plans (ETFs), building savings contracts or special VL life insurance policies as a building block of the VWL pension.
Are VWL taxable?
Yes, capital-forming benefits are generally subject to tax and social security contributions. An exception applies when they are converted into a company pension scheme; in this case, contributions can be exempt from tax and social security contributions up to certain limits.
What is the lock-in period for VL contracts?
Most VL contracts have a lock-in period of seven years (six years of contributions, one year of dormancy). Early termination can lead to the loss of government subsidies.
