Are company pensions in Germany worth it?
Alongside the state pension and private pension plans, company pensions (betriebliche Altervorsorge) are one of the three pillars of the German pension system. Seamus Wolf from fintech company Horizon65 explains what you need to know about company pensions, and whether they’re worth investing in.
Imagine you've just received an email from your company's human resources department inviting you to join their company pension scheme, which is known in German as a "betriebliche Altersvorsorge" or bAV.
You skim through the email, which is full of financial jargon and obscure references to the German tax code. The question in your mind is simple: is this offer worth considering, especially if you are not sure whether you will stay in Germany? Here's what you need to know:
What is a company pension?
The “betriebliche Altersvorsorge” is part of the three-pillar pension system in Germany, which is made up of the public state pension, company pensions and private pension plans. Company pensions are typically offered as an incentive to keep employees happy and to help them secure a comfortable retirement, as the state pension on its own is generally not sufficient to ensure your subsistence after retirement.
Fundamentally, a company pension is an investment contract where the employer contributes an amount of money and you can decide whether you would also like to have a portion of your gross (pre-tax) salary contributed towards it. The contract stipulates that your employer is then bound to invest these contributions into funds which you select. Generally, these are restricted to managed funds.
Company pensions are tax-deferred compensation, subject to some limitations. In a nutshell, this means that while you don’t pay any tax on your contributions, you do pay income tax on any income you derive from your investments during retirement (hence why the tax is “deferred”). In German, this is called “Entgeltumwandlung”.
How does the mandatory employer matching work?
Company pensions can be a very efficient way to save, as for every 100 euros you put into a company pension, you can actually save up to 190 euros (assuming you are in the highest tax bracket). Around 66 euros of that additional saving is realised due to income tax savings and the other 24 euros is realised from mandatory employer matching - which means your employer is bound to match up to 15 percent of your contribution.
This employer contribution is not really a gift from your employer, as it does not cost them anything. Instead, it represents their savings on social security contributions they would have to pay anyway if you did not contribute salary into the company pension.
Should you take it?
If the employer is contributing to the company pension and it is not coming out of your salary then the answer is basically yes. You may not like the costs and the fund selection but in this case, it doesn’t matter because it’s free money.
Should you contribute from your pre-tax salary?
As an expat the answer here is that it depends. First off you have to realise that the 190 vs 100-euro contribution makes a big difference in the final outcome. Generally, I recommend to my clients to go for company pensions, but there are some very good reasons not to.
What are the reasons not to contribute to a company pension?
Here are some of those reasons:
Your company pension doesn’t have ETFs
Most company pensions offered today have ETF options but there are still providers that do not allow you to select them.
You don’t plan to stay in the company
If the contract contains commission payments (Abschlusscourtage) then you should plan to contribute to the plan for at least five years, otherwise your gains will be eaten up by the fees.
It’s also worth bearing in mind that some company pensions cannot be continued if you leave the company. However, if yours is a Direktversicherung then you can continue privately or have your next company continue to invest in it. However, if the next company has their own mandatory company pension scheme, then you will have to transfer your balance.
Continuing privately is also an option, but you will not get any of the tax benefits in that case.
If your company pension is net-asset-value based then this is not an issue as you can just stop contributing without any negative impact.
The costs are high
When ETF investment options are available, the effective costs are often reasonable but it’s important to weigh up these costs against savings - and how long you plan to stay at the company - to see whether you’d have to contribute for at least five years for it to be worth it.
If effective costs are above 1,2 percent then the company is not offering a competitive company pension to you.
You don’t want to lock up your money
It may be the case that you know you will need the money at some point, or you are not prepared to lose access to the money until you retire. Not everybody is comfortable with the long-term aspect of pension investments and it’s important to remember that you will not be able to access this money until you officially retire.
You want to buy a house instead
Unlike with some private pensions, you cannot use the balance of a company pension as a security to convince the bank to give you a higher mortgage. If this is your intermediate aim then you should not do it.
You prefer to manage your own investments
Company pensions are passive investments and require no active management, but many people prefer to actively manage their investments. If that is you, then company pensions are not for you.
You want to select individual stocks
It is simply not possible to select individual stocks with a company pension. Due to regulatory restrictions, you can only select highly diversified investments such as ETFs or mutual funds.
You intend to retire in a country with no double taxation agreement
If there is no double taxation agreement between Germany and the country where you plan on retiring, then you can be taxed twice on the income. Fortunately, Germany has the most double-taxation agreements in the world, so this is very unlikely to occur.
In fact, for many countries, you will find this double-taxation agreement to be in your favour.
Even though the German government gives you tax advantages while you are working in Germany, it often does not have an agreement in place where it can tax company pensions when they are being paid out abroad. This enables so-called “pension tourism” in places like Portugal, where people are able to draw their pensions with very low levels of taxation.
This is a loophole that can be very beneficial for expats, but you need to check the double-taxation agreement between Germany and the country in which you intend to retire. It’s also important to bear in mind that there is no guarantee that this loophole will still exist when you retire.
If you’re ever in doubt, when it comes to planning your future finances, it makes sense to consult with an expert, who can give you unbiased advice on what makes the most sense for your personal situation.
If you have been offered a company pension and would like a second opinion, then feel free to get in touch with Horizon65. They are offering a free initial consultation to IamExpat readers. As independent experts, they are able to give you an unbiased opinion and select appropriate company pension solutions for you and your company.