If you’re looking at taking a job in Germany, one of the benefit schemes to look into is the degree to which your would-be employer will top up your pension.
So called “occupational pensions” are an important element of Germany’s “three-pillar” pension system.
The first pillar – or a state pension – is financed mainly through mandatory joint employer and employee contributions that automatically come off your payslip every month. If you’ve worked in Germany for at least five years, you’re entitled to one once you reach retirement age.
The third pillar is entirely privately financed if someone chooses to put away extra money through such a fund.
The second pillar, however – or extra employer contributions to a separate occupational pension (betriebliche Altersvorsorge, or bAV) – can both provide you with more in your nest egg and some attractive tax benefits.
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How common is occupational pension insurance in Germany? How does it work?
About 18 million people working in Germany - just under 40 percent of the total labour force - are currently eligible to contribute to an occupational pension scheme. That's on top of what they pay into their state pension and alongside any private pension provision they may have.
In these arrangements, employers typically make extra pension contributions into an account with an established pension insurance fund. Some employers may even run their own fund. The employer pays into the employee’s pension account with this fund until the employee either retires or leaves the company.
Almost all large companies in Germany have a relationship with an occupation pension fund or have their own plan, with more and more smaller SMEs coming onboard all the time.
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How much will the employer top my pension up by?
This varies.
That’s because management will typically agree to the terms of occupational pension contributions with the employee works council via a collective agreement – which requires both sides to negotiate and agree on the terms, including voluntary contribution amounts.
If the company doesn’t have a works council, management typically negotiates these terms with each employee individually. The company then in turn makes an agreement with the pension fund - if they have a relationship to one. Any agreement between a pension fund and a German company must also, by law, have a provision for what happens to the dependents of an occupational pension recipient – for example, if partners are entitled to a widow’s pension.
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Are there tax benefits for me?
Employees also have the option of making an additional contribution on top of that made by their employers, typically to a maximum of €520 a month.
If you choose to do this, this money flows into the pension fund tax-free. You of course, pay tax on income you draw from the pension fund when you draw it out, either when you leave the company or reach retirement age.
What happens if and when I leave the company?
Occupational pension plans may not end up making sense for people who change jobs a lot, as any money that is saved ends up sitting around until you reach retirement age. You can request it to be returned to you - provided the amount is modest. However, if you do so, you'll need to pay tax on what's paid out to you.
EXPLAINED: Do your pension contributions abroad count in Germany?
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