37,873 Euros was the average amount earned in 2018 (Germany). Those who attain this average, are statistically in the middle of society, and they receive a small bonus for it - they are at a threshold with their pension, where they will be receiving 30 Euros more per month.
Although 37,873 Euros is a lot of money, it is difficult to amass savings when earning this amount. Especially in large cities, this amount is insufficient to provide for retirement or to invest in a property of your own. However, there are capital efficient benefits (vermögenswirksame Leistungen) that make saving a little easier. Find out more here.
What are capital building benefits (vermögenswirksame Leistungen)?
VL or Vwl are abbreviations meaning "vermögenswirksame Leistungen". They are of particular interest to any employees interested in accumulating wealth. Employers are usually keen to jump on board with these projects, to which they are able to contribute up to 40 Euros per month.
Support is down to the individual. However, in many collective agreements (Tarifverträgen) the financial injection is secured. There are a variety of invaluable ways to invest the money:
The investments could be deployed in any of the following ways:
- Construction financing (Baufinanzierungen)
- Building loan contracts (Bausparverträgen)
- Equity savings plans (Aktienfondssparplänen)
- Bank purchase plans (Banksparplänen)
Employees and Employers pay together
In the first instance, the employee forms a contract that supports capital-building benefits (vermögenswirksame Leistungen). Then, the manager pays out the pre-determined amount. These contracts mostly run for a duration of seven years, with a one-year respite. (The exception to this is a savings contract with a building society). Once these benefits have been paid for six years, so the contract can be concluded in the year of retirement. If the contract has expired, the benefit money can then be invested, for example, in a pension plan.
The state also participates
In addition to the employer paying a certain amount, the state also contributes. This serves as a further contribution to asset accumulation. This is the so-called employee savings bonus (Arbeitnehmersparzulage), an amount that is based upon taxable income. The state promotes mortgage lending, fund savings plans and home contracts (Baufinanzierungen, Fondssparpläne and Bausparverträge).
State allowance as determined by income:
- Building society savings contracts (Bausparvertrag): the employee can save up to 17,900 euros net where 9% of the sum is paid (maximum 43 euros); Housing premium (Wohnungsbauprämie) up to 25,600 euros net where 8.8% of the sum is paid (maximum 45 Euros)
- Construction loans (Baukredit): employees save up to 17,900 euros (Arbeitnehmersparzulage) net where 9% of the sum is paid (maximum 43 euros)
- Equity fund savings plans (Aktienfonds-Sparplan): employees can save up to 20,000 euros (Arbeitnehmersparzulage) net where 20% of the sum is paid (maximum 80 euros)
Note: Those saving from a home can benefit additionally from a housing premium (Wohnungsbauprämie).
Tax and social contributions are also included in capital building benefit plans (vermögenswirksame Leistungen)
If an employer pays for capital contributions, these are also subject to tax and other social expenses (steuerabgabenpflichtig and sozialabgabenpflichtig). The gross salary therefore increases accordingly. The employer will transfer the VL (vermögenswirksame Leistungen) to an established savings account; in return, the employee pays taxes and social security contributions (Sozialabgaben). This means at the end of the month, the net amount of tax is reduced, though it is worth noting that income incurred through investment is also taxable.
Note: In this situation, it is advisable to submit an exemption request (Freistellungsauftrag) to the bank.