Employment-based retirement plans are the collective name for financial benefits that can be provided by any employer to its employees. As a matter of fact, every employee in Germany has the legal right to engage in employment-based retirement plans to increase his or her pension.
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:
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:
The contributions can be paid in three ways:
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.
Amount that each employee is eligible to use for “Entgeltumwandlung”