Direct insurance or Unterstützungskasse: comparing the funding routes
Mikhail Iankovski, M.Sc.
Published in July 2026
Reading time 7 min
Setting up a company pension scheme starts not with a product but with a funding route. Direct insurance (German "Direktversicherung") and the Unterstützungskasse, a German support-fund pension vehicle, are two of these statutory routes. Each follows its own logic. This article compares the two at a conceptual level so that you know the differences before going into detail with your tax advisor.
The funding routes under Section 1b of the German Company Pensions Act (§ 1b BetrAVG)
The German Company Pensions Act recognises five funding routes for occupational pensions. Section 1b BetrAVG sets them out: the direct pension promise, the Unterstützungskasse, direct insurance, the Pensionskasse and the Pensionsfonds (two further German pension institutions). Each route describes the legal and organisational structure through which the pension is promised and later paid out. The route determines how contributions are treated for tax purposes, whether and how they appear on the balance sheet, and which limits apply to the amount.
In practice, two routes matter most for small and mid-sized companies: direct insurance as the lean solution for the workforce, and the Unterstützungskasse as the instrument for higher contribution levels, typically for the shareholder-managing director. The two can be compared without judging any provider or product. This is about the mechanics, not the market.
Direct insurance: simple and built for the workforce
With direct insurance, the company takes out a pension contract for the benefit of the employee. The employer is the policyholder, the employee is the insured person and the beneficiary. This route is considered the most straightforward because administration stays lean and the promise is easy to document. That is exactly what makes it attractive for workforces, especially when many employees are to be included with manageable effort.
For tax purposes, the law draws a clear line. Under Section 3 No. 63 of the German Income Tax Act (§ 3 Nr. 63 EStG), contributions of up to 8 % of the statutory contribution assessment ceiling (German: Beitragsbemessungsgrenze) in the general statutory pension scheme are tax-free, and part of that amount is additionally exempt from social security contributions. This tax privilege is the route's great strength, but it also marks its limit. Anyone who wants to build up more than this framework allows hits a ceiling with direct insurance. For the basic provision of a workforce, the framework is usually sufficient; for a high individual pension it is not.
Direct insurance is typical where many employees are to be included under the same system. The promise can be standardised, contributions are predictable, and the employer contribution can be communicated as a clear additional benefit. For building broad-based company pension provision, that is an advantage. The price of this simplicity is the fixed funding limit, which restricts the route where individuals want a very high level of provision.
The Unterstützungskasse: no contribution limit, balance-sheet-neutral
The Unterstützungskasse is a legally separate pension provider that the company funds with contributions. In the reinsured variant, the fund backs its benefit promises with an insurance contract. The decisive difference from direct insurance lies in the contribution level. The Unterstützungskasse has no fixed contribution ceiling like the 8 % threshold. What matters instead are appropriateness, the requirement that the pension can still be earned before retirement, and the rules of Section 4d of the German Income Tax Act (§ 4d EStG) for deducting the contributions as business expenses.
Just as important is the balance-sheet impact. The obligation sits with the fund, not with the company. With proper structuring, the pension remains off the company's balance sheet; no pension provision has to be recognised, unlike with a direct pension promise. That makes the Unterstützungskasse attractive where the shareholder-managing director wants a high level of provision while keeping the balance sheet clean. Because higher amounts and the personal position of the managing director come together here, this route is more demanding to set up and requires careful review.
Direct insurance is the lean route within the tax-privileged framework of up to 8 % of the statutory contribution assessment ceiling, ideal for the workforce. The Unterstützungskasse removes the contribution limit and stays balance-sheet-neutral, which makes it suitable for the higher contribution levels of a shareholder-managing director. Which route fits is decided by the individual situation, not by a blanket rule.
Direct insurance and Unterstützungskasse at a glance
The following comparison summarises the conceptual differences. It does not replace a review of the individual case; it shows the structure a decision is based on.
| Feature | Direct insurance | Unterstützungskasse |
|---|---|---|
| Contribution limit | Tax-privileged framework of up to 8 % of the statutory contribution assessment ceiling (§ 3 Nr. 63 EStG) | No fixed upper limit; appropriateness and remaining service are decisive |
| Balance-sheet impact | No pension provision, lean accounting treatment | Balance-sheet-neutral with proper structuring; the obligation sits with the fund |
| Tax anchor | Section 3 No. 63 of the German Income Tax Act (§ 3 Nr. 63 EStG) | Section 4d of the German Income Tax Act (§ 4d EStG, business expense deduction of contributions) |
| Administration | Low, quick to set up | Higher, requires careful structuring and review |
| Typical target group | Workforce, broad inclusion | Shareholder-managing directors, higher contribution levels |
Which route typically fits which situation
Two typical patterns follow from the structure. They are not automatic, but they are a good starting point for the conversation.
- Direct insurance: You want to include your employees in a company pension scheme with manageable effort, the applicable funding limits are sufficient for the intended level of provision, and the solution should be quick to get up and running and easy to administer.
- Unterstützungskasse: As a shareholder-managing director you want to provide for retirement beyond the tax-privileged framework, the balance sheet should stay clean, and factors such as the age of your GmbH and your tenure as managing director support a higher, appropriate contribution level.
The two routes are often not mutually exclusive. A company can cover its workforce through direct insurance and additionally use an Unterstützungskasse for the managing director. Whether that is sensible and permissible in a specific case depends on your situation. This assessment is general in nature. The decision is made only after an individual review and in coordination with your tax advisor, who is responsible for the tax structuring.
Frequently asked questions
Can I combine direct insurance and the Unterstützungskasse?
In principle, both funding routes can be used side by side. In practice, direct insurance often covers the workforce within the tax-privileged framework, while the Unterstützungskasse allows higher contributions for the shareholder-managing director. Whether a combination makes sense is determined by an individual review in coordination with the tax advisor.
Does the Unterstützungskasse really have no contribution limit?
The Unterstützungskasse has no fixed upper limit like the 8 % threshold of direct insurance. What matters instead are the appropriateness of the pension promise, the requirement that it can still be earned before retirement, and the rules of Section 4d of the German Income Tax Act (§ 4d EStG). The permissible amount is therefore determined case by case.
Which funding route is better?
There is no generally better route. Direct insurance and the Unterstützungskasse serve different purposes. Suitability depends on the target group, the desired contribution level, the balance-sheet impact and the tax situation of the company, and can only be assessed after an individual review.
Further reading
- The Unterstützungskasse for shareholder-managing directors: balance-sheet-neutral provision beyond the contribution assessment ceiling
- Company pension schemes as an employee retention tool in the German Mittelstand
Want to know which route fits your company? In an initial consultation we assess your starting position and clarify which funding route fits your case. I coordinate the tax structuring with your tax advisor.
This content is general information and no substitute for individual advice. Tax structuring is carried out in coordination with the client's tax advisor.