Company pension explained: Understanding retirement provision in the company

For many people, a secure financial foundation in retirement is an important factor in planning for the future. Especially in times of economic uncertainty, the need for comprehensive retirement provision is becoming increasingly clear. One way of providing for a well-earned retirement is the company pension. This concept plays a key role in the German pension system and offers you additional retirement provision for later years.

Company pension overview

The company pension, also known as the occupational pension scheme, is an option for additional retirement provision offered by employers to their employees. It is used to top up the statutory pension and thus secure the standard of living you are used to in retirement. The company pension is organized by your employer. It is subsidized by the state, which means you can benefit from tax advantages. The company pension is a generic term for various pension models. The options for a company pension are

• direct insurance
• the pension fund
• the pension fund
• the relief fund

The most commonly used form is direct insurance. The company pension offers advantages for both you as an employee and your employer. You benefit from an additional source of income in retirement, which helps you to maintain your standard of living. Your employer can use the company pension as a benefit to strengthen employee loyalty and attract new employees.

How the company pension for employees works in Germany

Setting up a company pension is easy for you:

• Pension commitment: At your request, your employer concludes a corresponding company pension contract for you and issues you with a pension commitment. Your employer then undertakes - depending on the contract - to provide you with old-age, disability or survivors' benefits in the event of old age, disability or death.There is a commitment rule that regulates your entitlement to payment. To ensure that your entitlement does not lapse, you must be able to prove that you have been with the company for at least five years
• Deferred compensation: With the help of deferred compensation, part of your gross salary is used to make contributions to a company pension. The best thing is: with deferred compensation, your employer is obliged to pay you a contribution of at least 15 percent. This gives you the opportunity to make comprehensive provision for your retirement without having to pay the contributions alone
• Payment: When you retire, i.e. currently at the age of 67, the so-called company pension will be paid out to you. There are generally three payment options. With a lifelong pension, you receive monthly payments and with a one-off lump-sum payment, you receive the money you have saved in one go. The partial payout combines both options, where you receive part of the money as a one-off payment and the rest as a monthly pension

Why a company pension makes sense

A company pension offers you various advantages:

• Financial security: a company pension makes sense as it provides additional financial security for your well-earned retirement. The statutory pension alone is often not enough to maintain your accustomed standard of living in old age. With a company pension, you can close this pension gap and create a financial basis for the future
• Take it with you if you change jobs: The company pension scheme is not tied to one employer, so you can take your contract with you if you change jobs. This can then be continued by your new employer. You can continue to make the payments privately
• Flexible: If your financial situation changes, you can adjust the contribution amount to suit your circumstances. If you are currently unable to afford the contributions, you can also make the contract non-contributory
• Additional benefits: Depending on the contract, you can also insure survivors' cover or disability benefits. So you and your loved ones are protected for every eventuality

Differences to private pension provision

Occupational and private pension plans have a few differences. Probably the biggest difference is that you have to organize your private pension yourself, while your employer takes care of your occupational pension. In addition, you do not benefit from an employer subsidy with a private pension, but pay the contributions yourself. One advantage of private pension provision is that you do not have to pay contributions to the statutory health insurance fund later on.

Tax aspects of the company pension

With a company pension, you benefit from a state subsidy. Here are the most important aspects you need to know about company pension contributions:

• Save taxes: With deferred compensation, you save on taxes because only the payout is taxed. The payment is tax-free up to the contribution assessment ceiling. In 2025, you can pay 644 euros tax-free into your company pension scheme every month
• Save on social security contributions: You also save on social security contributions during the savings phase. The contribution assessment ceiling here is 176.57 euros
• Low tax rate: The taxes due on the payouts are generally subject to a lower tax rate than your income during employment

Bear in mind, however, that deferred compensation reduces your entitlement to a statutory pension. This is because the calculation of your pension entitlement is based on your gross income that remains after the deduction of contributions to the company pension scheme. As the deferred compensation reduces your gross income, you pay lower contributions to the statutory pension insurance, which in turn reduces your statutory pension.

Company pension for the self-employed and freelancers

The company pension scheme primarily applies to employees. However, if you are self-employed or work as a freelancer for a company on a permanent basis, you can also benefit from a company pension or continue an existing contract. However, you must observe certain requirements. That's why you should definitely seek advice from an expert.

Company pension as an important component of retirement provision

At a time of increasing economic uncertainty, the need for comprehensive retirement provision is becoming ever more important. The company pension is proving to be an important option in the German pension system that can offer you financial security in retirement. It enables you to maintain your accustomed standard of living in old age and protect you from financial bottlenecks. The company pension is therefore a sensible supplement to the statutory pension. To avoid a pension gap in old age, you should consider occupational pension provision as early as possible. Talk to your employer and get advice from experts to find the best way for you to provide for your well-earned retirement. That way, you can look to the future with peace of mind.