Providing pension contributions to the German state pension scheme instead of making severance payments can be an attractive alternative for the employer and employee. Employees benefit by longevity risk coverage for early retirement, and employers enjoy a significant tax exemption.

Little known and therefore little used in Germany is the option of providing pension contributions instead of severance pay. If an employee has plans to retire early, or if a mutually agreed termination of the employment relationship is intended specifically to facilitate an early transfer to retirement, voluntary contributions to the German state pension scheme instead of a severance payment can be an attractive alternative.

Employees aged 50 and above who plan to retire early can take advantage of considerable tax benefits in this way, in addition to reducing pension reductions.

The basis for this practice is the social insurance law provision § 187a SGB VI. This provision allows for the possibility of compensating for pension reductions incurred as a result of early retirement by making voluntary payments until the standard retirement age is reached. If the payments are made directly by the employer, they are tax-free to a considerable extent.

Legal Background

If employees plan to take early retirement, for example in the course of a mutually agreed termination of employment or after partial retirement or bridging unemployment, they face lifelong deductions from their pension...

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