Employment based retirement plans

What is it?

Employment-based retirement plans is a collective term for all financial benefits that an employer can provide to his employees for pensions, survivor’s benefits in the event of death or invalidity benefits.

Nobody denies the fact that the pension provided by the public retirement plan will no longer be sufficient to maintain the standard of living during retirement. The main reason for that is the demographic change. That means that more and more older people receive a public pension and fewer and fewer younger people pay for said pensions.

By 2030, the ratio of pensioners to contributors will be 1: 1. This means that every single employee must finance one retiree.

In order to enable people to maintain a high and secure standard of living in old age, the state provides a “three-tier model” (formerly a three-pillar model) for retirement plans:

Tier 1: Basic pension(including the public retirement plan)
Tier 2: Supplementary pension (including employment-based retirement plans and “Riester pension”)
Tier 3: Investment products (including life insurances and annuity insurances)

What are the benefits?

Every employee that pays the regular social security taxes is eligible to invest in employment-based retirement plans through something called “Entgeltumwandlung”. It means that parts of your salary will automatically be paid into a retirement plan.

Other variation do not have to be supported by the employer. However, since the employer also has advantages, many companies decide to offer such a plan in one way or another.

There are five types of employment-based retirement plans that are subsidised by the government:

Direct insurance: The employer takes out an insurance for and on the employee’s name and directly pays the premiums from the wage into the plan.
Pension plan: The employer pays the premium into an independent pension plan, which manages the funds and guarantees the employee a pension.
Pension fund: Very similar to the pension plan, but the premiums are primarily invested in funds.
Direct/pension pledge: The employer pays the employee an agreed benefit upon retirement, usually in the form of a pension or a one-off payment.
Benefit fund: The employer is the bearer or part of a legally independent institution that takes care of pension provision and deducts the contributions directly.

The contributions can be paid in three ways:

The employer pays the entire premium.
The employee converts parts of his gross salary and thus the premium are paid (the above-mentioned “Entgeltumwandlung”). The employer can subsidy the employee.
Employees and employers share the cost of the premiums.

Who is it for?

To be make a long story short: anyone who thinks that the public retirement plan will not be enough for him / her.

If the employer pays the entire premium, the advantage is immediately obvious: you receive an additional pension and “your boss pays”.

But the other variants are also worthwhile, especially as there are extensive tax reduction benefits.

The premiums paid by the employee is directly reduced from your gross income. That means, that you do not pay taxes on this income, up to a certain limit of course. Therefore, your income after taxes is usually only minimally reduced while your payment into your retirement plan is substantial.

As employers also benefit from these kinds of plans, they are often willing to provide a subsidy. This is the optimal case, the employee gets the full tax-free options and the employer provides a little bonus.

There are of course several conditions that must be met in order to receive full government subsidies. Furthermore, not every form of pension plan makes sense for every employee.

At this point a good consultation and a careful consideration of all possibilities are of absolute importance. There are many factors that need to be considered so that you can safe the maximum amount for your retirement with minimum costs.