What is it?

Betriebliche Altersvorsorge, often abbreviated as bAV, refers to the company pension schemes in Germany – it is essentially the USA 401k equivalent with some modifications. This model has been a part of the German social security system since the 19th century and aims to provide employees with financial stability in retirement.

One of the main reasons people opt for bAV is to ensure a steady income during their retirement years. The state pension often falls very short of meeting the full range of financial needs and expectations, forcing many to lower their standard of living during retirement

Not only does the bAV help you secure your future financial plans with great returns, but it also has great tax incentives in the present.

There are essentially three main pillars of bAV: Direct insurance (“Direktversicherung”), pension funds (“Pensionskasse”), and direct commitments (“Direktzusage”). Each has its nuances, tax implications, and benefits.

It is crucial to dive deep into the details of each policy to understand how each option fits into your long-term financial planning.

What are the benefits?

Unlike health insurance, the benefits of bAV can be highly individualized, based on agreements between the employer and employee. Standard features may include lifelong pension payments, surviving dependents’ benefits, and the option to convert the capital into a one-time payment upon retirement.
One of the main attractions of the bAV are the present tax benefits that it offers, so let’s break down the numbers:

Social security benefits: The maximum amount for social security benefits is €292 per month (in 2023). This means that up to this amount, your contributions are not only tax-free but also exempt from social security contributions like pension insurance, unemployment insurance, and health insurance. This gives you a dual advantage: you save on taxes and also reduce the overall social security contributions, maximizing your take-home salary.

Tax savings: You can contribute up to €584 per month to benefit from tax savings. Beyond the €292 mentioned before, up to an additional €292 (making it €584 in total) can still be contributed pre-tax, although it won’t be exempt from social security contributions. This means you’ll still get tax benefits on this portion, just not the social security contribution benefits.

To put it plainly:

Contributions up to €3,504/year: Save on both taxes and social security contributions.

Contributions above €3,504 and up until €7,008/year: Save even more on income tax.

‍

This tax benefit structure encourages employees to save more for retirement by providing significant financial incentives. Tax-free growth of the investments within the scheme further sweetens the deal.
It’s a win-win for employees: save now, pay fewer taxes, and ensure financial stability in retirement.

Other benefits include:

• Financial security in retirement: A primary motivation for choosing bAV is to secure a consistent income stream in retirement, especially since state pensions frequently fail to cover all financial necessities.
• Employer contributions: If your employer saves on their social security contributions due to you lowering yours ‘(which is almost always the case), they have to add 15 % of your contributions into the plan. Meaning that if you decide to pay 100 € / month into such a plan, your employer adds another 15 € on top.
• Flexibility: Different types of bAV options offer varying levels of flexibility, allowing individuals to choose a plan that suits their financial situation and risk tolerance.
• Portability: Employees can either continue the plan even if they switch employers, ensuring continuity in their retirement planning, or their new employer has to open a new plan with the same amount that you saved. Either way, you have full portability.
• Ease of management: Since contributions are often directly deducted from the salary, it’s a hassle-free way of long-term saving.

Who is it for?

The Betriebliche Altersvorsorge is especially beneficial for full-time employees who aim for financial security in their retirement years while also having better financial and tax management in the present.

We recommend it to almost everyone because of it’s two main advantages: a substantial tax break in combination with a minimum 15 % employer contribution. If there ever was a system that offers free money, this is as close as it gets.

Did you know?

~60%

Estimate percent of the population in Germany which participates in Company pension schemes. [1]