Staff pension scheme and direct insurance

The staff pension scheme is a provisioning organisation with independent legal existence. The employee or his survivors have a legal entitlement to the promised guaranteed benefit.

The staff pension scheme functions as an insurance company and can be supported by one or more employers. It is therefore subject to regulation by the insurance supervisory authority. The scheme’s investment rules are regulated accordingly.

In principle, the employer’s contributions are tax deductible as operating expenses. Regardless of whether the financial burden of the contribution payment lies with the employer or the employee via salary sacrifice, the Pension Reform stipulates that contributions to the staff pension scheme up to 4% of the income threshold are tax free. Contributions paid into a staff pension scheme by employees are eligible for incentives under AVmG. In addition, since January 2005 it has been possible to pay in an additional sum of up to EUR 1,800.00 per year tax-free.As one of the most widespread forms of occupational pension in the past, many people will remember direct corporate insurance because of the 20% flat rate tax charge. This was still the case until the end of 2004. Since January 2005, however, such insurance has enjoyed the same tax and social security privileges as a staff pension scheme. As a result, for both the employer and the employee, like a staff pension scheme, it is now a much more flexible and lucrative form of occupational pension. In addition to the financing of the provisioning benefits by the employer, the benefits can be financed through salary sacrifice. In any case, contributions of up to 4% per year of the income threshold of the pensions insurance are free from tax and, at least until January 2009, from social security payments under Section 3 No. 63 of the German Income Tax Act (EStG). Moreover, a further EUR 1,800.00 can be invested each year tax-free.

In addition to the usual retirement benefits, which start when the employee retires, additional risks such as occupational disability can be included. The retirement benefits can be drawn on retirement either as a regular annuity or in the form of a one-off capital payment.

The impact on the balance sheet of this form of provisioning is neutral and employer contributions are tax deductible as operating expenses. Moreover, this form of provisioning is attractive because of the low level of administrative expenses involved. The flexibility as regards contribution payments and the option introduced in January 2005 of taking the pension to a new employer in the event of changing jobs, make direct insurance and staff pension funds a very good form of provisioning.

Alongside these usual “simple” structures, there is also a demand for tailored corporate solutions. Retirement provisioning based on overtime and retirement provisioning instead of contributions towards capital formation are just two of the options indicated. Interested? Why not contact us.