5 Types Of Company Pension In Germany
A company pension (betriebliche Altersvorsorge) will help employees in Germany to save for their retirement with free money from their employer & the government.
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Introduction: Company Pension In Germany
Do you love saving taxes? Do you love free money even more? Then you will absolutely love German company pensions (bAV for “Betriebliche Altersvorsorgung” in German). That is why the company pension, which comes in 5 different types in Germany, can be a great way to fund your retirement. And if you are an employee in Germany you have the legal right to get a company pension for yourself. Your employer cannot deny it.
But sometimes it might not even be worth it to get a company pension. As financial advisors, we see a lot of different contracts. About 90% of company pensions live below their potential for various reasons. A company pension can be great, but only if the pension scheme is structured in the right way. Employers seem to not understand the topic in great detail and that is why most German company pension schemes can be improved greatly.
This article will PerFinExplain everything about company pensions in Germany. So you can see if your very own company pension can be improved as well if you already have one. And if you are thinking about getting a company pension from your employer, you will also know what to look out for.
5 Facts About German Company Pensions
When it comes to financial products, it is key to understand a decent amount of them before signing the contract. That is especially true for pensions as they are meant to be for the very long term over decades. You will probably never understand everything in great detail (nor do you want to if we are being honest 😉). So here are the 5 important facts about company pensions in Germany that you should know before getting one.
1. Every employee has a legal right to a company pension
Every employee in Germany has a legal right to a company pension, even if your employer is not offering a pension scheme (yet). As soon as you ask your boss or HR department for it, they have to start offering a company pension scheme from 1 of the 5 types. Do not let them tell you otherwise because your employer does not like the extra work that is associated with setting up a company pension scheme. If your employer does not want to deal with it or tells you that you should get a company pension on your own, we can help you either on WhatsApp or in a free 1-on-1 meeting.
2. the employer can decide the type of company pension
As your employer is the legal owner of your company pension (you are only the insured person), he can also decide which type of company pension he offers. For you, as the employee, it is kind of a take-it-or-leave-it scenario as you have no saying in the way your employer is setting up his company pension scheme. That is also why it is sometimes recommended to avoid a specific company pension entirely. Even if the fundamental idea behind is great.
3. the employer will give you 15%
When you secure a company pension for yourself and save taxes and social security payments with it, your employer will save social security contributions as well as German social security is split always 50/50 between company and employee. By German law, your employer is not allowed to save money when you invest in a company pension. That is why every employer has to give you a match of at least 15% when you invest in a company pension. Most employers pay that 15% and others can pay more voluntarily.
4. you can save tax-free money
How much can you save exactly in taxes and social security contributions? 🤔 In 2022 the maximum threshold that you can invest free of any social security payments, as well as taxes, is 284€/month. Additionally, you can save even more and up to the maximum tax-free allowance of 568€/month. While 568€ is a lot of money to invest in any pension scheme, the good news is that it will cost you a lot less in terms of net income, thanks to the structure of the German payslip (further details in company pension type 1).
5. You can invest your money within the pension
Lastly, let us support the statement why 90% of all company pensions are set up below their potential with more facts. A myth that seems to be inherent when talking about German company pensions seems to be that employees and employers seem to believe that company pensions cannot invest in ETFs and mutual funds. That is completely and utterly wrong! Saving in terms of taxes and social security is nice but the real power of pensions is the tax-deferred growth over decades that needs investments in ETFs and mutual funds in order to make the most of your money. All company pension schemes that we set up together with employers have the power to invest freely in whichever way the employee sees fit.
Avoid Getting A German Company Pension If ...
As the guaranteed interest rate of pensions in Germany has been set to a minimum of only 0,9% by the German Federal Ministry of Finance at the beginning of 2022, you should consider carefully if a company pension is right for you if it does not allow you to invest your contributions in ETFs and mutual funds. Other pensions from level 1 (Base pension), level 2 (Riester pension), or level 3 (private pensions) may be better for you. As the German pension market can feel overwhelming very quickly, this article might help you to find the pension that is right for your individual financial situation.
Pensions are meant to be for the long term to support your living costs when you retire in decades. That is also the time horizon in which they offer many great benefits like tax-deferred growth of your investments, government bonuses, or other tax benefits along the line. If you plan to leave Germany in the short- or mid-term, maybe even without having any plans of ever coming back, pensions are probably not the right financial product for you. Especially the company pension as it most likely locks your money away until retirement age (at earliest 62 years of age in Germany).
Additionally, if you plan to leave your company within the next 5 years, you might also want to avoid getting a company pension from your current employer. The argument from many sleazy pension salesmen is always that a company pension can be transferred to your new employer. While that is true in theory, nobody can say that for certain. As determined earlier, every company can choose freely which of the 5 types of company pension it offers. If your current employer offers company pension type 1 and your new employer offers company pension type 3, you cannot transfer your company pension to your new employer. That is the reason why some people end up with 4 different company pensions over their career that will all pay them very little money in retirement.
5 Types Of German Company Pensions
Type 1: Direct insurance
Let us start with the most flexible company pension called direct insurance (“Direktversicherung“). This type of company pension may also be the most common type of company pension in Germany. Because of its flexibility, it will almost be the most favourite type of company pension for expats working in Germany. You basically get a regular level 2 pension from one of the +20 pension companies in Germany that all have their advantages and disadvantages. Company pensions type 1 are deducted directly from your monthly payslip:
- 284€ (maximum for social security) = 37€ employer bonus + 69€ tax benefits + 50€ social security savings = 128€ net saving
- 568€ (maximum for tax benefits) = 74€ employer bonus + 135€ tax benefits + 42€ social security savings = 317€ net saving
Type 2: Pension fund
The pension fund (“Pensiondsfonds“) seems a lot more popular in the United States than in Germany. Instead of signing a pension contract with a regular, already existing German pension company, your employer would establish a legally independent pension provider that is promising you a certain payout when you retire. A pension fund is very flexible in terms of investment possibilities. It should also guarantee at least your contributions because your employer has to join the pension insurance association (“Pensions-Sicherungs-Verein“).
Type 3: Support company
Your employer can also create a legally separate entity called support company (“Unterstützungskasse“) as the company pension scheme of choice. This is by far the oldest type of company pension in Germany. The more you earn in the company the greater the benefits will be (mainly tax benefits that come with a higher average income tax rate). The major downside of this type is that your pension contributions cannot be transferred if you quit your job at your current employer.
Type 4: Pension Company
Like the support company, the 4th type: pension company (“Pensionskasse“), is not the easiest to set up for your employer. As both company pension types are mainly set up by large corporations, small and medium-size companies mostly settle for company pensions type 1. When set up the right way, your pension contributions are, generally speaking, very secured (from a legal perspective). And also the return on investment can be higher compared to other types of company pensions.
Type 5: Pension Commitment
The fifth and last company pension type is the pension commitment (“Direktzusage“). It may very well be the type that you and your employer want to avoid setting up. In this type of company pension, your monthly pension will depend on the future earnings of the company, because they pay your contributions from operating assets. This brings not just a lot of uncertainty for you as the future retiree but also for the balance sheet of your employer. It is pressured for decades with committed pensions. It may be tax-efficient for your employer, but it is also not transferrable to a potential new employer.
Conclusion: Should You Get A Company Pension In Germany?
If you would like to secure a company pension for yourself now and your company is not offering a company pension scheme just yet, you might want to start with type 1: direct insurance, because it is the easiest to set up. If we can make it easier for you by helping you to select the best pension company & pension scheme for your individual situation, feel free to reach out either on WhatsApp or secure a free meeting with our pension experts here.
And if a company pension is not right for you based on the reasons mentioned earlier, the German pension market may offer other exciting pensions that suit your life better. 😉