The BAV is an occupational pension scheme which is coupled to employment. The BAV has numerous advantages as a vehicle to save for retirement. However, there are also disadvantages that you should be aware of.
Company pension schemes are open for employees – more precisely: salaried employees, wage earners, trainees and (non-)controlling shareholder-managers of a GmbH – as well as members of the board of directors of a corporation. Furthermore, company pension schemes can be promised to external persons in the event that they act solely for one company.
Company pension schemes in brief
- All employees have the right to a self-paid company pension scheme.
- Employees can instruct their employer not to pay out part of their salary but instead to convert it into a company pension scheme (“deferred compensation”). If you choose a BAV then your employer is obliged by law to convert up to 8% of your salary (up to a maximum of €6,240/year) to be used as direct payments into a BAV. 4% are taken away from your salary before you pay taxes and social security contributions. A possible further 4% may also be taken away before you pay taxes, which effectively lowers your income and reduces the amount of tax and social security contributions you have to pay.
- It is of course possible to take your savings into a company pension scheme with you, should you change your employer.
- Occupational pension schemes are also based on the same principles as private pension insurances.
- Your employer can choose the insurance provider used for the BAV scheme.
- As the employer will also save his half of the social security contributions, he is obliged to pay the saved amount (15%) into the scheme as well.
- The money saved may be paid out either in the form of:
- A lifelong pension – Here you will receive a certain amount every month until the end of your life, dependent on the saved capital sum.
- A full lump-sum pay-out – The entire saved retirement capital is paid out in one go.
- A partial lump-sum pay-out – A part of the capital is paid out – often around 30 percent. The rest of the capital is paid out as a lifelong pension.
- Tax and social security will be liable when the benefits are payed out (during retirement or whenever they are received).
- If a contract for a BAV has been signed after 2012 then earliest the benefits can be claimed is the age of 62, however, normally it is to be taken when you first claim your full German state pension.
- Beware, by reducing social security contributions you are effectively lowering the amount that you are contributing to the German state pension. This then means that the pension that is received for retirement from the state will be slightly lower.
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