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What are capital-forming benefits?

Capital-forming benefits (in German: Vermögenswirksame Leistungen – VWL/VL) are intended to help employees build up assets. They form part of the employee's salary and, in accordance with the Fifth Capital Accumulation Act (Fünftes Vermögensbildungsgesetz), they are channeled directly into one of the legally specified forms of investment, such as investment fund savings plans, home ownership savings plans or company pension schemes. 

Capital-forming benefits have the following characteristics:

• Entitlement to capital-forming investment:
  Employees can require their employer to channel part of their net salary into a capital-forming investment.
  
  
• The following groups have this entitlement:
  In addition to employees, workers and trainees, civil servants, judges, soldiers and other groups are also entitled to capital-forming benefits. 
  
  
• Decision on investment form:
  Employees are free to choose the form of investment themselves.
  
  
• Investment period:
  Capital-forming benefits are generally invested for around seven years. Home ownership savings plans are the exception here as they usually have a much longer term.

What types of capital-forming benefits are there?

Employees are free to choose which of the various forms of investment their contributions to capital-forming benefits should be paid into. The most common investment forms are:

Unallocated savings	Construction and housing	Retirement provision
Fund savings plan Exchange-traded funds (ETFs) Bank savings plan	Home ownership savings plan Building loan repayment Cooperative shares	Capital-forming benefits for retirement provision Riester pension Company pension scheme Life insurance

These are explained in more detail below.

 

Capital-Forming Benefits for Unallocated Savings

Fund savings plan 

One investment option for capital-forming benefits is an investment fund savings plan. Here, contributions are paid into an investment fund for six years. After this, the contract remains inactive until the end of the calendar year, with no further payments being made. The accumulated shares in the fund can then be sold. 

A fund may only be considered a suitable investment for capital-forming benefits if its assets are made up of at least 60% equities. As equities and other securities can significantly fluctuate in value, fund saving plans can often offer the chance of higher returns. However, at the same time there is a risk of making a loss, for example due to price collapses. 

If the employee has a relatively low income, the state supports investment in a fund with an employee savings bonus. 

Saving instruments	Risk	Savings goal
Fund savings plan	moderate	free and flexible saving

 

Exchange-traded funds (ETFs)

ETFs are exchange-traded index funds. Just like equities, they can be bought and sold on the stock exchange at any time. Their main function is to replicate the performance of a well-known index, such as the DAX, Dow Jones or MSCI World, as precisely as possible. This is achieved by investing in the securities of all or many of the companies that appear in the index in question. 

ETFs are another option for the investment of capital-forming benefits and are suitable for long-term capital accumulation. ETF shares are purchased every month. This is done using the capital-forming benefits paid by the employer. Contributions are paid into an ETF savings plan for capital-forming benefits over a term of six years. The capital remains in the fund during the seventh year. At the end of the term, the employee can either withdraw the money or save for another six years.

Note
What is known as withholding tax is due on capital gains, dividends and interest income. This amounts to a flat rate of 25% of the income generated and is paid to the tax authorities. Standard deductions are also made for the solidarity surcharge and church tax.

As with the classic fund savings plan for capital-forming benefits, ETFs are supported by the state with an employee savings bonus.

Saving instruments	Risk	Savings goal
ETFs	moderate	free and flexible saving

Bank savings plan 

A bank savings plan can make sense if the employee prefers a secure form of investment with no possibility of capital loss. Here, the capital-forming benefits are paid into a savings account over a period of six years. This is followed by a dormant phase in which no further payments are made until the end of the calendar year. Afterward this, the savings and interest earned, plus any contractually agreed bonuses, can be paid out. The interest rate can be fixed or variable.  

The employee is not entitled to a savings bonus from the state with this type of savings plan. 

The bank savings plan is covered by statutory deposit insurance, which means that balances of up to €10,000.00 per customer and bank are secured.

Saving instruments	Risk	Savings goal
Bank savings plan	low	free and flexible saving

 

Capital-Forming Benefits for Construction and Housing

Home ownership savings plan

The home ownership savings plan is a combination of a savings plan and a loan. The aim here is to gain access to a low-interest home loan after the savings period. The interest rates for the savings and the loan are fixed when the contract is agreed and thus remain stable over the investment period. The earliest point at which the employee can access their savings is after a seven-year savings period. They may generally use the savings for any purpose. The exception is if they received a building subsidy for a home ownership savings plan contract agreed in or after 2009. 

In contrast, the home loan may only be used for residential property. For example, this could be: 

• the construction or renovation of a residential building 
• the purchase or modernization of an owner-occupied apartment 
• the acquisition of a plot of land for future house construction
• the discharge of land or mortgage debts 

If the employee has a relatively low income, they may under certain circumstances benefit from state support.

Saving instruments	Risk	Savings goal
Bank savings plan	low	saving capital for real estate

Building loan repayment

In contrast to home ownership or investment fund savings, building loan repayment as a form of capital-forming benefit does not require a new contract. In this case, the contributions and the agreed monthly loan installment are both used to repay an existing construction loan.

If an employee is considering this type of capital-forming benefit, they should first consult their bank or savings and loan association as using a capital-forming benefit for this type of unrestricted repayment is not always possible. With savings and other banks, it will depend on the contractually agreed conditions. If the loan is from a savings and loan association, this type of additional repayment is usually approved without any issues.

If approved, the final step is for the employee to provide the employer with written confirmation of the capital-forming benefit. After that, repayments can begin.

There are two options for this:

• The employer can transfer the employee's contributions directly to the specified loan account when they run their payroll.
• The employee can have the capital-forming benefit contribution paid into the same account as their salary and then transfer the contribution to the loan account themselves. In this case, they will need to provide written confirmation from the bank that the contributions received were used exclusively to repay the loan.

State support may also be possible here for employees with a low income.

Saving instruments	Risk	Savings goal
Building loan repayment	none	pay off an existing loan more quickly

Cooperative shares

If tenants join a housing cooperative, they do not acquire ownership of their apartment itself but become shareholders in the cooperative once they have the minimum required number of shares. There is also an upper limit for members' deposits, which are used to finance the cooperative. This capital is used to build, buy and renovate apartments. In return, members receive yearly dividends, affordable housing below the usual market price and lifetime occupancy rights. 

Capital-forming benefits in the form of housing cooperative shares are a relatively unknown form of investment, probably because housing associations do not advertise this additional service. However, employees should be aware that, in the case of insolvency, there is no equivalent of the statutory deposit insurance for banks; members are liable and can lose their savings. 

State support in the form of an employee savings bonus is not available with this type of capital-forming benefit. However, housing cooperative share owners are entitled to state building subsidies, which are also granted when investing in a home ownership savings plan. 

Saving instruments	Risk	Savings goal
Cooperative shares	moderate	free and flexible saving

Capital-Forming Benefits for Retirement Provision

What are capital-forming benefits for retirement provision?

In some sectors, what are known as capital-forming benefits for retirement provision (in German: Altersvorsorgewirksame Leistung – AVWL) have become established over time, rather than the conventional capital-forming benefits. This is currently the case in the textile, IT, chemicals, metals and electronics sectors, as well as in the wood and plastics industries.

The difference is that conventional capital-forming benefits are designed for short-term asset accumulation while capital-forming benefits for retirement provision involve targeted saving for additional retirement provision. This is also the reason why employees pay into their contract until they retire. The benefit they receive is additional retirement provision, which in the best-case scenario will pay out over many years. The employer's contribution must be used for the specific purpose of retirement provision. Any cash payout of the funds is thus excluded.

There are three ways to invest in capital-forming benefits for retirement provision:

• Private pension provision, for example a Riester pension
  The employer pays monthly contributions into a Riester contract that the employee has arranged privately.
• Deferred compensation, for example a company pension scheme
  The employee uses part of their salary for deferred compensation. The employer must subsidize the employee's contributions by 15%.
• Company pension

Example Calculations for Capital-Forming Benefits

Example 1: The employer pays for all the capital-forming benefits

Prerequisites

• Employee with tax class 1, no children, resident in Bavaria
• Monthly gross salary of €3,000.00
• The employer pays the entire €40.00 contribution for the capital-forming benefits
  Average additional health insurance contribution 1.60%

Result

The employee does not pay for any of the capital-forming benefits. As the employer's contribution is fully subject to tax and social security contributions, it is first added to the gross salary and then the statutory deductions are made. After that, the employer deducts the full €40.00 from the net salary and transfers this amount to the corresponding savings plan.

Gross salary + employer contribution to capital-forming benefits = total gross salary		€3,000.00 + €40.00 €3,040.00
Tax: Income tax (Lohnsteuer) Solidarity surcharge Church tax = total taxes	€346.58 €0.00 €27.73 €374.31	- €374.31
Social security contributions: Health insurance (7.3% + 0.8%) Pension insurance (9.30%) Unemployment insurance (1.3%) Long-term care insurance (1.7% + 0.60%)  = total social security contributions	€246.24 €282.72 €39.52 €69.92 €638.40	- €638.40
Net earnings - transfer to savings plan = payout amount		€2,027.29 - €40.00 €1,987.29

Example 2: The employee and employer share the cost of the capital-forming benefits

Prerequisites

• Employee with tax class 1, no children, resident in Bavaria
• Monthly gross salary of €3,000.00
• The employer pays a monthly contribution of €26.00 to the capital-forming benefit
• The employee pays the remaining €14.00 themselves.

 

Result

In this case, it is only the employer's contribution of €26.00 that is fully subject to tax and social security contributions. The €14.00 paid by the employee is not subject to tax or social security contributions because it comes from net income that has already been taxed and had social security contributions deducted. The employer's and employee's contributions are added together as deductions and the total amount is transferred to the savings plan. 

Gross salary + employer contribution to capital-forming benefits = total gross salary		€3,000.00 + €26.00 €3,026.00
Tax: Income tax (Lohnsteuer) Solidarity surcharge Church tax = total taxes €370.80	€343.33 €0.00 €27.47 €370.80	- €370.80
Social security contributions: Health insurance (7.3% + 0.8%)  Pension insurance (9.3%) Unemployment insurance (1.2%) Long-term care insurance (1.70% + 0.60%)  = total social security contributions	€245.11 €281.42 €39.34 €69.60 €635.47	- €635.47
Net earnings - transfer to savings plan = payout amount		€2,019.73 - €40.00 €1,979.73

Example 3: The employee pays for all the capital-forming benefits

Prerequisites

• Employee with tax class 1, no children, resident in Bavaria
• Monthly gross salary of €3,000.00
• The employer does not make a monthly contribution to the capital-forming benefit 
• The employee pays the full contribution for the capital-forming benefits themselves 

 

Result

Their gross salary does not increase as the employer is not contributing, but their net salary is reduced due to the employee's contribution to their own savings plan.

Gross salary + employer contribution to capital-forming benefits = total gross salary		€3,000.00 + €0.00 €3,000.00
Tax: Income tax (Lohnsteuer) Solidarity surcharge Church tax = total taxes	€337.41 €0.00 €26.99 €364.40	- €364.40
Social security contributions: Health insurance (7.3% + 0.8%) Pension insurance (9.30%) Unemployment insurance (1.30%) Long-term care insurance (1.70% + 0.60%)  = total social security contributions	€243.00 €279.00 €39.00 €69.00 €630.00	- €630.00
Net earnings - transfer to savings plan = payout amount		€2,005.60 - €40.00 €1,965.60

Related links

• Fifth Capital Accumulation Act (5.VermBG)
• Federal Financial Supervisory Authority (BaFin)