Company Pension/bAV. How do they work? (Hamburg)
Yes it’s me again with what I hope is a helpful bit of information about company pensions; who is eligible to take part in one and how they actually work.
Before I actually go into details about how a company pension works (or should work), the law actually states (BetrAVG §1) that the employer is actually obliged to offer its employee’s an opportunity to enter into a Company Pension, in whatever way, shape or form that may be. Now, to say that employers in this country are breaking the law, by not offering its employees the opportunity to enter into a company pension would be a pushing the boundaries slightly, but EVERY employer should offer one (many companies/employers out there just don't know that they actually should) and EVERY employer should at least inform you that this is available to you…and then make sure that you are advised properly about what your options are.
Company pensions are available to Employee’s only ( for the most part, employees employed in Germany who are on the German payroll and are taxed in Germany). Company pensions are not available to self-employed people or freelancers, although as director of your own company, you could theoretically be classed as an employee IF you paid yourself an official salary.
There are about 5 different ways an employer can offer its employees a company pension. These include contributions by employee AND employer. The one I really want to concentrate on though is the simplest and easiest way, and the way, many many employers choose to take. That is the Brutto Entgeltumwandlung. (Basically translated, that means Gross Salary Exchange).
Here’s how it works:-
At the moment, the current earnings threshold (Beitragsbemessungsgreze) in the German Public Pension has been set at € Protected content Protected content threshold may potentially increase in Protected content . This basically means that if you are earning, let’s say € Protected content . then your public pension contributions would be capped at 18.9% of € Protected content . Anything that is earned over that amount isn’t taken into consideration for the public pension. For those of you with a salary over this BBG limit, this isn’t a reason to start jumping up and down with joy……don’t forget taxes are much higher in that earnings threshold, so they will get you one way or another :o).
The law states that each individual employee can replace up to 4% of the 18.9% total paid into the public pension limit of € Protected content a company pension. Thus effectively only then paying a total of 14.9% of your gross annual salary into the German public pension. That means €2904p.a. (or €242per month) can be invested each year into a pension for your retirement. Now here’s the good bit. Taking the maximum amount as our example:- €242pm, that €242 is deducted from your Gross monthly Salary. That means that you are reducing your taxable income by €242pm. Now, because you are reducing your taxable income, you are effectively earning less, and therefor pay less tax and less social welfare (unemployment tax etc.).
You also then have the right, according to Income Tax law (EstG § Protected content , to invest a further €150 gross, on top of the €242, bringing that up to a total maximum investment of €392per month.
N.B. Whereas you save on tax and social welfare contributions up to the €242 limit, for the extra €150 per month, you only save further on income tax. The extra €150 doesn’t affect the social welfare payments anymore.
Depending on what Tax class you are in etc. it would mean, for example, that someone in Tax Class I. who has decided to use that maximum of €392gross per month, will roughly only see a NETT Salary reduction of around about €212per month. BUT €392 is actually being invested per month into a company pension. (This is an example only and doesn’t reflect an actual salary reduction…although it comes close)
That’s basically how it works. It would be impossible for me to actually give you an end calculation of what you would actually get at retirement age, as that is all dependent on a number of factors:- How old you are, how long the pension should run to, exactly just how much per month you want to put in to the pension etc.
Also, here are a couple of answers to questions I often receive when talking about company pensions:-
Q. What if I move employers. Will I lose my pension fund?
A. NO. Company pensions are portable. If you have started a company pension with one employer, and then move somewhere else, you can simply take your company pension with you and your new employer HAS to accept it.
Q. Am I the insurance policy holder?
A. NO. Your employer is the Policy Holder. You as the employee are the insured person. If you move to another employer, then the new employer simply becomes the new policy holder and you remain the insured person.
Q. What if I leave my employer and become a freelancer.
A. The whole policy is written over to you. However, please be aware that you are then responsible for the whole monthly premium. This also automatically changes the status of your company pension into a so called private pension and with that change comes another set of rules and tax advantages.
I could go on and on about the bAV (betriebliche Alters Vorsorge-Company Pension) for ages, but I think it wise to stop there.
It is quite hard to try and pack as much info into a message like this, without it becoming boring or too detailed. So, if any of you need any help or simply have questions about this, then just ask, and I will, as usual, help wherever I can
All the best