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Capital-Forming Payments

Definition, Explanation Tips, Checklist

Definition, Explanation

What is called capital-forming payments is money that is an optional, contracted part of the salary and is paid by the employer to employees, but going some special ways. In Germany, the amounts are 6.45 up to 40 Euros a month. The employer pays the money onto a separate savings-plan of the employee. The option of cash payment is not given. The capital-forming payments, just as the salary, are taxed and liable social-insurance-contributions.

Originally, capital-forming payments were intended to stimulate acquisition of personal assets. Today, they serve the employees' financing of private or company pensions. They are even called “old-age-provision-forming” payments (altersvorsorgewirksame Leistungen, AVWL). Depending on the form of the savings-plan, the state of Germany subsidizes such payments by the employer.

The collective agreement or employment contract defines whether an employee is entitled to capital-forming payments, and also sets the amount paid by the employer himself. Normally, the following workers are entitled:

  • Clerks
  • Judges
  • Soldiers
  • Apprentices
  • Employees
  • Part-time workers (pro-rata)

A prerequisite for being entitled to capital-forming payments is to have contracted a capital-forming savings-plan. Different methods of investment are possible, here:

  • Regular savings plan
  • Building-loan contract or its being paid off
  • Company old-age provision
  • Equity fund savings plan
  • Life insurance

A savings plan is paid into for 6 years. Subsequently, there is a retention period of up to one year within which the saved money including the bonus is not accessible.

The state of Germany partly subsidizes the capital-forming payments through the employees-savings bonus. Prerequisite for subsidization is an income of less than 20,000 Euros (married couples 40,000) counting taxed parts a year, during the saving-years and the retention period (state of 2009). The bonus amounts to annual 20 % for investment saving lasting for maximum 6 years. In result, there is a maximum subsidization amount of 80 Euros a year, that is 432 Euros in total for a saving amount of maximum 400 Euros. For building loans, the bonus is 8.8 %.

You will even receive the bonus if the employer does not pay any capital-forming extra income but you have contracted a savings plan.

Those 7 years having expired, the revenue pays the respective subsidization sum corresponding to the form of investment. There is no government subsidization for bank savings plans and life insurances. That is why those forms of saving are reasonable for persons who are not entitled to employees-savings bonus.

If you use the capital-forming payments for a company old-age provision, then the capital-forming payments are free from tax and social-insurance contributions. That applies for up to 2.520 Euros of savings a year. Since 2009, social-insurance contributions are also to be paid.

In April of 2009, the following will change:

  • Employees-savings bonus from 18 to 20 %
  • The income limits from 17,900 to 20,000 Euros (married couples from 35,000 to 40,000)
  • The maximum subsidization amount from 72 to 80 Euros a year

Tips, Checklist

  • Get informed whether you are entitled to capital-forming payments
  • For details of the conditions, ask your personnel department or works council
  • Contract a savings plan at your bank
  • Hand in a copy of the capital-forming payments savings-plan to your employer, respective to the personnel department
  • The personnel department will initiate the monthly payments into the savings-plan
  • In cases of need, when your employer does not pay or pay the full amount in time, compensate for it, adding the missing amount yourself, as a loan
  • Annually apply, along with your tax declaration (attachment N), for the employees-savings bonus, respective the building bonus at your building society
  • Regard potential minimum saving amounts in the capital-forming savings plan contracts. In case your employer does not pay that full amount, you will have to pay the rest on your own
  • Capital-forming financial products are taxed and liable to social-insurance contributions
  • If you are unemployed or unable to work for longer than 1 year, or get married or self-employed, you can access the savings before the 7-years retention period
  • If you are entitled to employees-savings bonus, possibly make them be paid by compensating the amounts up to the threshold
  • Compare the different investment offers of the banks, savings banks, insurances and building societies
  • Be sure to choose am investment that is subsidized. No subsidization for annuity funds, real-estate funds are not subsidized in contrast to equity funds
  • The capital-forming savings account is opened for the individual employee. There is no common account possible, say for married couples
  • In case of early cancellation of the savings-contract, the employee is not entitled to employees-savings bonus
  • After the capital-forming-savings contract having expired, you can contract a new one, repeatedly being subsidized
  • Be sure to choose a fund that is free of assets-based fees
  • As a starter in working life, you should be careful with paying into any company annuity fund. When you change employers, such payments will possibly be hard to re-contract



Last update: 01/18/2010
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Copyright: Angela Bauer