Rmann (@Epi) on getquin

Company pension plans - capital leverage, compound interest effect and tax savings?

Like hopefully many of you, I have built up my retirement provision in various ways: B&H, GTAA, shares, precious metals, brokers, private pension insurance - and, to a small extent, a company pension scheme (bAV). I took a closer look at the latter recently and asked myself how much I actually want to pay in and for how long in order to get the most out of it. I'm not yet sure whether my calculations are correct, but in the end they could well mean a considerable(!) advantage over a normal broker ETF savings plan. So watch out!

The idea

I'll assume that you know the basics of the occupational pension scheme, I'll spare you that part here, everyone can read that and the many details for themselves on the Internet. However, the main feature of the occupational pension scheme is that payments are made from the gross salary. Up to 302€pM (as of 2024) are completely tax-free (approx. 50%), up to 604€pM are tax-free (approx. 25%). So I pay approx. 300€pM/600€pM into the occupational pension scheme, but I only have 150€pM (=300€x0.5)/ 375€pM (=150€+300€x0.75) less net. Or to put it another way: I pay 150€pM and save 300€pM. Sounds too good to be true? That's right. At least in part. Because in the payout phase, the state takes everything back, i.e. the taxes and social security contributions saved are deducted directly from the payout amount (deferred taxation).

But wait! The shrewd Getquinler suspects hidden possibilities here. If, in the end, only the SSV contributions saved have to be repaid, then this portion could be understood as an interest-free loan from the state for old-age provision. Capital leverage - I hear you tapsen!

Then there is the tax exemption on profits during the down payment phase. Compound interest effect - ick hör dir schneller loofen!

And don't forget: the tax relief in the payout phase (partial exemption, marginal tax rate, 50% tax exemption). Example: € 200,000 profit x 0.85 (15% partial exemption) x 0.5 (50% of profits tax-free) x 0.3 (tax rate) = € 25,500 in taxes, i.e. only 12.75% tax. Tax savings are still running!

Capital leverage, compound interest effect and tax savings - let's do the math and compare a standard broker savings plan with my occupational pension scheme.

My bAV

My occupational pension plan is from mylife (fondsrente), a net policy without commission via a fee-based advisor. The costs: 36€pa, 1% on each deposit amount, 0.2%pa on the fund assets. There are 200 ETFs/ funds to choose from, you can buy and sell them yourself via the online portal like a broker (once a month free of charge).

The assumptions

Let's take a middle-aged person who still has 20 years until retirement. She saves 150€pM or 375€pM from her net salary into an ACWI with an expected 7%pa return incl. TER. For the sake of simplicity, I leave the deposits constant. I also let this person spend the saver's lump sum on other investments (e.g. dividend shares). I also assume that the capital is paid out in full at retirement, so that all applicable taxes can be taken into account. I create the calculations with https://www.zinsen-berechnen.de/ and https://www.finanzfluss.de/rechner/sparrechner/ Of course, everyone can adapt the calculations to their own circumstances.

The comparison

Scenario 1: 150€ savings rate

bAV (€150 net deposit):

Deposits 2024-2044 (240 installments of €300 each/ net: €150): €72,000

Savings capital: €149,700

bAV costs: 36€x20 + 1% of 72,000€ + 0.2% TER = 4900€

Gross capital: €144,800

Taxes on lump-sum settlement 2044:

50% of contribution share (€72,000) = €36,000

13% of income share (€72,800) = €9,500

Net capital: €99,300

Broker:

Deposits: 240 installments of €150 each: 36.000€

Broker costs: -

Interest income: €42,100

Taxes (incl. 30% partial exemption, capital gains tax, without lump sum): 7.800€

Net capital: €70,300

Advantage bAV: €29,000 (+41%)

Scenario 2: €375 savings rate

bAV (€375 net deposit):

Deposits 2024-2044 (240 installments á 600€/ net: 375€): 144.000€

Savings capital: €306,400

bAV costs: 36€x20 + 1% of 144,000€ + 0.2% TER = 9,200€

Gross capital: €297,200

Taxes on lump-sum settlement 2044:

37.5% of contribution share (€144,000) = €54,000

13% of income share (€153,200) = €18,400

Net capital: € 224,800

Broker:

Deposits: 240 installments á 375€: 90.000€

Broker costs: -

Interest income: € 105,400

Taxes (incl. 30% partial exemption, capital gains tax, without lump sum): 19.400€

Net capital: €175,900

Advantage bAV: €48,900

Conclusion

With 150€pM savings rate in 20 years with ACWI after all costs a capital of almost 100,000€ and thus almost 30,000€ more than with a broker savings plan? With a savings rate of €375pM, almost a quarter of a million by the time you retire? You'd have to do the math with 10%pa! The advantage of the occupational pension plan quickly goes into the six-figure range. I would say that this compensates for some of the undeniable disadvantages of the occupational pension scheme: Employer-linked, payment option only on retirement, dependence on insurance.

I have never seen a comparative calculation like the one I have made here. You probably haven't either. Why not? The reasons are, in my opinion, 1. that most ETF savers are not interested in such things as occupational pension schemes, especially as most occupational pension schemes have some kind of contribution guarantees without ETF choice and with horrendous commissions. And secondly, most people who are interested in occupational pension schemes only want to take the measly employer contributions, but are otherwise not interested in investing in the occupational pension scheme. Very few employers are also not interested in the investment options within the occupational pension scheme, which they only offer out of obligation and installed at some point 20 years ago. And thirdly, the variant with lump-sum settlement calculated here is unattractive for the insurance companies, who like to advertise with a guaranteed pension and its allowances. But which Getquin investor wants a "guaranteed annuity" of approx. 3%pa, where the remaining capital in the event of death goes completely to the insurance company?

So my calculation above completely misses the intentions of the inventors and the usual players in occupational pension schemes. Perhaps this is why the capital leverage, compound interest effect and tax savings of occupational pension schemes have so far been a blind spot on the investment map (and will remain one as soon as this article has disappeared into the infinite depths of the Getquin archive).

But perhaps I have made a mistake somewhere? If so, I would be grateful if someone could point it out to me. Because if not, I would probably soon increase my net savings rate in the occupational pension scheme to the maximum subsidy amount of €375pM, make full use of the capital leverage and make my occupational pension scheme a serious part of my investment strategy (and with GTAA and a bit of luck, collect an additional half a million in about 20 years).

So: if you are not yet taking advantage of these occupational pension opportunities - where is the fault: with me, with your boss or with you? I'm curious.

Your Epi

Edit: Please also note the 2nd part on occupational pension schemes, in which I have corrected important errors in this article.

Marcus@All-in-or-nothing

1Mon

For me, it definitely belongs in the #gqevergreens 👌🏻 Top contribution, thanks for that @Epi

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Felix E.@FreshFelix

Unfortunately, you still have to be lucky that your employer does not have any predetermined policies, as is the case with many large companies. Unfortunately, the money is often invested very unattractively with 90 or 100 % deposit protection and you pay high fees. Unfortunately, even the tax benefits and subsidies don't make up for this.

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Beat The Bank@randomdude

Once again a great contribution!
However, I still have a few comments and questions:
1. in my opinion, the 1% + 0.2% costs of the policy are not properly taken into account. The 1% fee on deposits must be deducted directly from the deposits and the 0.2% from the annual return. This has a different effect than the flat-rate deduction from the return at the end.
2. it is also not clear to me what the 50% and 13% charges on the policy for cash settlement are based on. Are they fixed or does the individual tax situation also have an impact?

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Mr Grumbold@Lino2501

However, Bav is taxed at 100% at your tax rate + any full statutory health insurance and long-term care.
In addition, you must calculate the fewer pension points you receive, as you are reducing your gross.
Lg

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devnerd_daddy@devnerd_daddy

@Lino2501 has already hinted at it. You have two problems with this story.
1. in the pension phase, you no longer have an employer, which means that you pay not only the employee's share of the SI, but also the employer's share. This can be partially compensated by private health insurance, because then the health insurance no longer applies.
2. you receive less basic pension in old age because you had less gross income. Of course, the contribution assessment ceiling must be taken into account here. However, very few people will even come close to it.
3. as far as I know, if you change employer, you may not be able to continue saving in the contract.

NEWT@SteelAnacott

Thank you for the very readable article!

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ETFKing@ETFKing

Great post - but as you write, there are some factors that are based on today's assumptions.
Will taxation remain the same in 20 years?
How free am I in my choice of provider/product and how profitable is this investment?
Will I stay with the same employer for the next 20 years?

My employer offers a pension fund, for example, which has yielded an average return of 3.x% in recent years. That's it for freedom.
An ETF basic pension with a tax refund is probably a more profitable investment, but of course it also involves more risk...

Burak58@WorldInvestor

1. an ETF custody account can be bequeathed or given away to children and compound interest continues to work
2. the further performance as a pensioner if, for example, 4% is paid out annually and the rest continues to work in the ETF.

That would then be opportunity costs of a payout plan vs. having all the money at once.

AlexanderS@AlexanderS

Please note that occupational pension schemes are not only taxed in the benefit phase, but are also fully subject to statutory health and long-term care insurance contributions. This applies to both annuities and lump-sum payments. This also applies to benefits from contributions above the contribution assessment ceiling in the savings phase. Private health insurance avoids this problem.

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Max@MaxlvomDach

Thanks for the effort! I'll take a closer look at the occupational pension scheme after my studies. Before my studies, I paid €100 into the occupational pension scheme but, as you say, it was more to take advantage of the employer contributions and I didn't give it any more thought 😊

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