Does a company pension plan make sense for Employees in Germany?

Company vs. Private Pension Plans: Choosing Right is Real Important

As an employee, you can choose a company pension plan (bAV) or decide to invest in a Private Pension Plan. Employers must offer to divert 4 % of your income into a company pension plan (§ 1a BetrAVG). Contributions up to 4 % are tax and social security-free, and employers typically contribute 15 % of the overall cost. However, some downsides can more than offset any benefit and leave you with very little extra income in retirement:

• Reduced Public Pension

  Your public pension may be reduced by the equivalent of ⅓ of the company pension because contributions from both you and your employer are diverted away from the public pension.

• Taxable Payouts: Your bAV payout in retirement is fully taxable, and you'll need to pay health insurance and long-term care charges (currently 10,35 %). This takes out another ⅓ of your bAV pension for monthly incomes of 2k and more for higher incomes.

• Low Returns: Contributions yield low returns (2,5–3,5 % before costs) as guarantees required by law mean investments are mainly in fixed-interest products. This means the gross company pension you build up is very low compared to your contributions.

• High Costs: High costs reduce returns by 1,5–2 % if held for a long period. High upfront costs can imply fees of up to 20 % of the invested amount in the first five years.

• Lack of Continuity: You cannot continue your old contract with a new employer unless they offer the same contract.

On balance, we estimate the annual return after costs, taxes, and public pension loss to be much less than inflation and, for many, even negative for a direct company pension plan offered through an insurance company. The main exception occurs when your employer pays a really high percentage of your contribution.

A proper Private Pension Plan is flexible and should yield a return of about 7 % after costs and taxes. This means the value of your assets doubles every ten years.

Pensionfriend's Private Pension Plan (PPP) is better in nearly all circumstances. The main exception we see is if you are really close to retirement and have virtually no taxable income in retirement, or if your employer pays the bulk of your contribution. We can calculate the expected outcomes for you.

In any case, Pensionfriend's Private Pension Plan offers:

• Investments by professionals with an unbiased, high-return, low-fee approach

• Flexibility to withdraw funds at no cost

• You the ability to set key risk and choice parameters (such as maximum loss)

• Easy change of beneficiaries with no capital gains tax for survivors

We understand that navigating bAV information can be confusing. We are here to review your contracts or offers and provide an honest opinion. If you have an old-fashioned pension plan (e.g., pension fund), your returns may be higher, but it's essential to check the actual investment returns and implications for your pension.