The effect of conversion of earnings into pension contributions
If earnings are converted into pension contributions, this means that the employee allocates some of their gross income direct to the occupational pension scheme. The employer subsidizes the amount by at least 15 % if they make a saving on social insurance contributions as a result. The employer then pays the total amount into the occupational pension scheme.
Within certain limits, no social insurance contributions or taxes are payable on that part of the salary that is waived. What this means in specific terms is that up to 4 % of the contribution assessment ceiling of the Deutsche Rentenversicherung (West) pension organization can be paid in exempt from social insurance. In 2023 this is EUR 292 p.m. or EUR 3,504 p.a.
Up to 8 % of the contribution assessment ceiling of the Deutsche Rentenversicherung (West) pension organization can be paid in tax-free. In 2023 this is EUR 584.00 p.m. or EUR 7,008 p.a.
The favorable tax and social insurance treatment and the employer’s allowance have the advantage for the employee that their own costs can – depending on their particular situation – be just 40-60 %.
Treatment of the benefits on disbursement
As the premiums were treated favorably in the paying-in period, the benefits are subject to charges on disbursement. This applies for both the tax and the health insurance or nursing care insurance of the pensioners.
The situation is that the tax rate when drawing the pension is lower than it is during working life. This means that while tax is payable, it is less than it would otherwise have been.
- For pensioners’ health insurance, there is a tax-exempt amount that is adjusted each year. Only the amount in excess of that limit is subject to health insurance tax.
- Nursing care insurance has a tax-exempt limit after which the care rate is to be paid.