1Yr·

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 tax 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 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.

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72 Comments

All-in-or-nothing@All-in-or-nothing

1Yr

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

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View all 11 further answers

Felix E.@FreshFelix

1Yr

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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Epi@Epi

1Yr

@FreshFelix Yes, unfortunately that is often the case. But this means that the employers are missing out on real benefits for their employees! Perhaps one or the other can be convinced?

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Golden Boy@randomdude

1Yr

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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Epi@Epi

1Yr

@randomdude Thank you!
Re 1: I deducted the 1% from the deposit amount. The compound interest effect is limited, probably less than 10€. I calculated the 0.2% costs by working out the difference between 7%pa and 6.8%pa. No flat rate.

Re 2: 50% on the contribution share, because the SSV contributions saved have to be repaid in full. There are sample calculations on the net. The 13% is the rounded up 12.75% tax on the payment of the earnings share/profits. The assumptions are given in the text, e.g. 30% personal marginal tax rate for pensioners. These parts can vary. The allowances and partial taxation should remain fairly fixed.

Incidentally, the greater legal certainty also speaks in favor of occupational pension plans because the tax conditions apply from the start of the contract (grandfathering). ETF savings plans are much more exposed to tax changes.

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Golden Boy@randomdude

1Yr

@Epi All right, thanks for the clarification!

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Mr Grumbold@Lino2501

1Yr

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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Epi@Epi

1Yr

@Lino2501 The taxation and repayment of the saved social security contributions is actually included in full.
The reduction in pension points is an important point that I have not taken into account. What would that roughly amount to for €150/€375 per month?

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Nils@fischit

1Yr

Well, if you're above the income threshold anyway, you won't lose any pension points. And otherwise it's difficult to calculate because it depends on your earnings.

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All-in-or-nothing@All-in-or-nothing

1Yr

@fischit would in any case reduce the imputed return on the occupational pension, but due to the expected excess return on the occupational pension in the structure described, even compared to the statutory pension insurance, it would probably always bring more additional capital to the pension than what is "lost" in the statutory pension. I once read a very interesting article on the return on statutory pension insurance, but unfortunately I don't have it to hand, but it was in a range between 2 and 3% (best case, worst case was less than 2% calculated return).

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Timo@TimoWess1

1Yr

@Epi However, the taxation is incorrect. You do not pay tax on the profit but on the entire payout. Half of the profit share is only taxed for private insurance.

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Epi@Epi

1Yr

@TimoWess1 Yup, I have corrected this in part 2. The calculation of the social security contributions was also wrong and the loss of pension points is also not insignificant.

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Timo@TimoWess1

1Yr

@Epi saw it afterwards too 🙈

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devnerd_daddy@devnerd_daddy

1Yr

@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.

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Deleted User

1Yr

Comment was deleted

Adel;.@tAdel

1Yr

@hero333 yo but 100% subsidy (as in the example) vs 15% makes the calculation quasi uninteresting... (I work for an insurer ;))

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NEWT@SteelAnacott

1Yr

Thank you for the very readable article!

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Epi@Epi

1Yr

@SteelAnacott Thank you! I wonder if it does anything. 🤷

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Olaf@Olaftheheino

1Yr

@Epi ?

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Epi@Epi

1Yr

@Olaftheheino?

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ETFKing@ETFKing

1Yr

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...

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Epi@Epi

1Yr

@ETFKing Thank you!
Regarding taxation: of course nobody knows what our politicians will come up with in 20 years' time However, there is greater legal certainty in the pension insurance sector. In other words, the tax laws that applied when the contract was concluded should apply. Before the politicians tackle the occupational pension scheme, it's time for ETF savings plans.

Freedom of choice: It depends on the insurance company. Mylife is quite free in its choice of products. After more than a year, I've now paid in around €5,000 and the securities account stands at around €6400. Do you call that profitable?

Regarding the employer: there are two possibilities: you have a reasonable employer or you become an employee yourself. The 3% policy you mentioned with probably around 3%pa administration costs is real rubbish from the early 2000s. I had something like that and canceled it. Maybe your employer will let you talk to him if you show him my invoice? 🤷

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WorldInvestor@WorldInvestor

1Yr

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.

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AlexanderS@AlexanderS

1Yr

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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Epi@Epi

1Yr

@user6690f4ba438a4f50 I have now learned what that means. Let me make a correction.

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Epi@Epi

1Yr

@user6690f4ba438a4f50 The argument with the pKV is often mentioned. Formally it is true, but de facto you do pay the money, as you take over the employer's shares. It's just a different pot.

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AlexanderS@AlexanderS

1Yr

@Epi as far as I know, the German pension insurance also pays a subsidy for private health insurance (instead of the previous employer) ... but can't speak from experience ... I'm a youngster 🙃

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Michael Wolfsteiner@Moggwolf

1Yr

@Epi That is not correct. If you are privately insured, you do not pay any contributions during the benefits phase.

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Epi@Epi

1Yr

@Moggwolf You don't pay contributions via the occupational pension scheme. On the other hand, private health insurance is unspeakably expensive in retirement. My parents pay around 900-1000€pM. That's what I mean by another pot. I don't think it's a good calculation.

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Max@MaxlvomDach

1Yr

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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Epi@Epi

1Yr

@MaxlvomDach It also depends very much on the contract offered by the employer. Most of them are no good. But maybe your future employer will talk to you if you present him with the arguments?

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sodium@TomCOR

1Yr

Thank you for doing so much work so that we can also benefit from your thoughts and math games, very few people do that. 👍

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Pope Donkey XXI@DonkeyInvestor

1Yr

@TomCOR take a look at #gqevergreens. You'll find lots of posts like this there

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Felix@G30G43BR4

1Yr

Your "error in reasoning" (which may not be one if you have enough income) is that your calculation examples only work for ~5% of Germans. If you do not earn above the BBG, you will lose pension points due to deferred compensation. From that point on, the calculation example is somewhat more complex and depends on your actual age.

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Rudolph@1999-topeuro

1Yr

I now believe that these models only have two winners: the tax office and the providers (AI and insurance companies). Invest the money yourself, in a world ETF if you like. Use your tax-free allowances (KEtSt) and dispose of the total sums as you wish in old age (even in the case of inheritance and gifts!). You pay the increased marginal tax rate (on the entire amount and not just 25% withholding tax) on these pensions in the relevant pension plan, the double health/nursing care insurance wherever they go I am completely out of it mentally and I advise my friends to do the same, especially if the bet on a long life seems very optimistic to me and who is then the winner should be clear to everyone!

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Thomas@ThomasGumpp

1Yr

BAV is 100% taxable in the payout phase and fully subject to contributions to statutory health and long-term care insurance (not applicable for privately insured persons)

KV can be calculated here -> https://www.test.de/Betriebsrente-Entlastung-bei-Krankenkassenbeitraegen-fuer-Betriebsrenten-5147958-0/

Pension loss can be calculated here -> https://n-heydorn.de/bav-rechner.html

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Show answer

Topper H.@TopperHarley

1Yr

Brilliant article. I have been feeding my occupational pension scheme with additional deferred compensation for over a decade and have realized that the occupational pension scheme, in my case the chemical pension fund, is simply a lousy pipe-dream with high costs and minimal appreciation. I withdrew this year with private contributions and put the savings into the portfolio. The occupational pension scheme continues to run purely with the company share. I didn't know that there was a pension plan with real ETF savings. GENIUS. At least you have the advantage that the unpaid taxes that are due later in the payout phase can at least work ORDERLY beforehand. Thanks for this tip, I will discuss it with my employer.

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Alfred E.@Papiertiger

1Yr

If you do not opt for a one-off payment:

Is the baV also inheritable or can it be deferred to either a spouse/life partner or children?

I don't want to tell you this, but I saved 30k in the Allianz Klassik pension from my first employer and then closed it down 200 times. In my early 20s I had no plan and simply closed it 🫣☺️. There was no real internet back then... 🤓

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Noob S.@Noobster

1Yr

Great contribution. I'm also wondering whether I should pause my current contract (not a fee-based plan) or let it continue. I've already paid in for 15 years and still have 20 to go.

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View all 4 further answers

Michael Wolfsteiner@Moggwolf

1Yr

Thanks for the mega contribution!
In addition, if you are interested:

1. the minimum 15% employer subsidy is not to be sneezed at. A small return turbo!

2. social insurance is not only shifted but is actually reduced (e.g. unemployment insurance contributions)

3. a possible exemption from contributions in the event of occupational disability is not possible with a normal investment in ETFs and FONDS,.... In the case of occupational pension schemes, often without health information and better occupational groups 💪🏽

4. the VL are also in very good hands here!
-VL in company pension: tax and social security exempt
-VL on building society savings/ VL deposit: compulsory social insurance

5. unbeatable: Lump sum or lifelong pension 🤩

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