What happens tax-wise if I pay my severance package into a company pension scheme?
June 12, 2022 | 50,00 EUR | answered by Edith Hartmann
Dear tax advisor,
My name is Edith Krause and I am faced with the decision of what to do with my severance payment. I recently terminated my employment and will therefore receive a severance payment of 30,000 euros. Now I am considering whether it would be advantageous from a tax perspective to contribute this severance payment to a company pension scheme.
My current situation is as follows: I am 55 years old and already have a private pension plan in place. My severance payment would significantly increase my current income and therefore also my tax burden. Therefore, I am considering whether it would be wise to contribute the severance payment to a company pension scheme in order to benefit from tax advantages and at the same time provide for my retirement.
My concerns are that I may not be able to properly assess the tax implications of contributing to a company pension scheme. I want to ensure that I make the best decision to secure my financial future and optimize my tax burden.
Could you please explain to me what happens from a tax perspective if I contribute my severance payment to a company pension scheme? What are the tax advantages or disadvantages that result from this? Are there possibly other alternatives that I should consider to invest my severance payment in a tax-efficient manner?
Thank you in advance for your assistance.
Kind regards,
Edith Krause
Dear Mrs. Krause,
Thank you for your inquiry regarding the tax implications of depositing your severance payment into a company pension scheme. I am pleased that you are thinking about your financial future and taking care of optimizing the tax structure of your severance payment.
In principle, it is possible to deposit a severance payment into a company pension scheme. This is known as salary conversion, where parts of the wages or additional payments such as severance payments are invested in a company pension scheme. These deposits are tax and social security free within certain limits. This means that the severance payment you deposit into the company pension scheme is not added to your taxable income. This can help you reduce your tax burden.
However, there are also some points to consider. Firstly, there are maximum limits for tax and social security-free deposits into a company pension scheme. Secondly, you should be aware that the deposited amounts will only be taxed again in retirement. Depending on your personal tax situation, it may be beneficial to deposit the severance payment into a company pension scheme to take advantage of tax benefits.
It is important to mention that the company pension scheme is just one of many options for tax-optimized investment of your severance payment. There are also other forms of retirement savings, such as the Riester pension or a private pension insurance, which can offer tax advantages. It is advisable to seek individual advice and compare the various options to make the best decision for you.
Overall, depositing your severance payment into a company pension scheme can be tax advantageous, but you should also consider other alternatives and seek comprehensive advice to make the best decision for your financial future.
I hope this information is helpful and I am happy to answer any further questions you may have.
Best regards,
Edith Hartmann
Tax Advisor
