Company pension schemes in Germany

By Abi CarterPublished on Apr 8, 2025
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The second pillar of the German pension system is company pension schemes (betriebliche Altersvorsorge or bAV), sometimes also referred to as occupational pension schemes. Thanks to the tax benefits they offer, company pension schemes are relatively popular pension products in Germany, with around 60 percent of the population participating in one.

What is a company pension scheme (betriebliche Altersvorsorge)? 

Company pension schemes are a kind of collective pension scheme in Germany that are financed by employers, employees, or both together. Since the benefits offered by pension insurance are rarely enough to maintain one’s standard of living in retirement, company pensions are designed as a way for employees to improve their retirement provision together with their employer, and are usually either managed by companies themselves, or pension associations operating on behalf of multiple companies. 

While employees are not obliged to contribute to a company pension scheme, it is compulsory for employers to offer one, if requested by their employees. 

The different types of company pension schemes

There are five common types of company pensions in Germany. As an employee, you generally do not have any control over what type of pension scheme your company offers; that decision rests with your employer. It is therefore important to carefully consider what’s on offer (perhaps together with a financial advisor) before deciding whether to join your employer’s scheme.  

Direct insurance (Direktversicherung)

The most common type of company pension scheme in Germany is the direct insurance plan. Under this, the employer arranges a life insurance and pension policy for the worker. The pension is then paid by the life insurance company when the employee retires or dies. The contributions can be financed by the employer, by the employee, or both together. 

Pension company (Pensionskasse)

Under a pension company, the company takes out pension insurance for its employees via a legally independent pension fund, managed by a board of trustees. The pension company will pay the employee or their surviving dependents benefits at the expiry of the contract. The contributions can be financed by the employer, by the employee, or both. 

Pension fund (Pensionsfonds)

Similar to a pension company, a pension fund is established as a separate legal entity from the employer, and is also managed by a board of trustees. The main difference is that Pensionsfonds benefits are usually paid in the form of lifelong pensions. The contributions can be financed by the employer, by the employee, or both together. 

Pensionfonds also differ from other options by investing a higher portion of the capital in shares, which generally improves their performance (but also increases risks). 

Support fund (Unterstützungskasse)

A relief fund is a legally separate entity run by one or several sponsoring companies. It is bound by fewer rules when it comes to investment strategies, meaning it has more flexibility.

Direct grant (Direktzusage)

Once a popular option but now less common, the direct grant sees the employer pledge to pay their employees (or their surviving dependents) a set pension when they retire, become disabled, or die. 

Contributing to a company pension

Company pension schemes can be financed by employers, by employees, or by a mixture of the two. 

For employee-financed schemes, employees contribute a portion of their gross monthly salary towards the pension. As the contribution is paid before income tax, you save on both income taxes and social security contributions, as the pension contribution reduces your taxable income. Currently, you pay no social security contributions on pension contributions up to 302 euros per month, and no income taxes on contributions up to 604 euros per month. 

This kind of tax advantage is known as “deferred compensation”, as the pension then becomes taxable during the retirement phase. Deferred compensation pension schemes are the most common types of company pension schemes in Germany. 

Some companies also offer pension schemes that are financed solely by the employer (i.e. the employee receives a pension upon retirement without having to contribute towards it). 

Does my employer contribute to my company pension scheme?

As of January 1, 2018, all employers in Germany are obliged to contribute at least 15% of your contribution towards your company pension scheme, since they are making savings on social security contributions via your salary reduction. 

Some employers will offer to pay more than 15%, with some even matching their employees’ contributions or (as outlined above) paying the whole contribution entirely. 

What happens to my company pension plan if I change jobs? 

If you leave your company, what happens to your pension depends on whether you have a pension contract that is entirely financed by your employer (employer-financed), or by you as an employee (deferred compensation). 

For deferred compensation plans, you have the right to transfer the capital you have accumulated up to that point to your new employer, provided that:

If you don’t meet these criteria, your new employer may still allow you to transfer the capital to their pension scheme or allow you to continue your contract with the previous pension scheme. Otherwise, the contract can be suspended (meaning no new contributions are added, but you retain a right to the pension), or you can continue to contribute privately. 

If you are part of an employer-financed pension scheme, certain exclusionary periods apply before you become entitled to the pension (the pension becomes non-forfeitable), even if you leave the company. This is known as a statutory vesting period and varies depending on your age when you leave the company, and how long you had a contract with the pension scheme:

You and your employer may also agree on a vesting period that differs from the statutory vesting periods. This will be put in your work contract or your pension contract. 

Whatever the rules, transferring a company pension from one supplier to another can be a laborious process. For this reason, it is worth carefully considering whether a company pension scheme is the right choice for you if you are planning on changing jobs soon, or if you are not planning on staying in Germany long-term. 

Company pension benefits

The amount of company pension you withdraw when you retire depends on how long you have been contributing and what your salary was. The German federal government has legislated that all contributions to company pension schemes are protected, even in the case of company insolvency.

Your company pension benefits can be paid out in one of a few different ways:

In most cases, you can only draw your company pension when you reach retirement age. It is not possible to have the pension paid out before the end of the contract term, even if you terminate the contract early. 

Taxes and social security contributions on your company pension

Since contributions to company pensions help you save on your tax bill during the saving phase, they are subject to taxation once you hit retirement age and start withdrawing your pension. Currently, 84 percent of the pension is recognised as taxable income; this will rise to 100 percent by 2040. 

Your company pension benefit, like your state pension benefit, will also be subject to contributions to social security, namely health insurance and long-term care insurance. As of January 1, 2020, company pensions benefit from an allowance of 159,25 euros per month, meaning social security contributions only have to be paid on the portion of the pension benefit that exceeds that allowance. 

Can I draw my company pension abroad?

In principle, you can also withdraw your company pension abroad by having it transferred to a foreign bank account. However, if there are fees incurred during the international transfer, these will be borne by you, so the amount you receive might be less. 

Is an occupational pension worth it?

Occupational pensions in Germany offer several advantages, most obviously the chance to boost your retirement income while benefiting from tax advantages during the savings phase. However, your benefits are taxed once you retire. 

One major downside is that there is no guarantee of the level of payout you will receive when you do retire, and since company pensions are bound by relatively strict rules on investments - and often come with high upfront costs - there is a chance that you might get back less than you put in. 

On top of this, company pensions can be inflexible when it comes to changing jobs, so if you are not planning on staying in Germany (or with your current company) long-term, a different pension product like a private pension might be more suitable. A financial advisor can help walk you through your options and give you impartial advice on what suits you best. 

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