There are always questions about pension fund buy-ins and the pros and cons. The most important key information is analysed below.
How is a pension gap calculated?
A pension gap is calculated as the difference between what you would have saved in the pension fund if you had been insured under the same conditions since the age of 25 and the amount you actually saved as retirement assets in the pension fund.
This means that the following factors, among others, create a pension gap:
Salary increases
Breaks in employment/ later commencement of employment
Different pension plans due to job changes, for example
Inclusion in a management plan
Increase in the workload
As a pension gap is not a static figure, it can also decrease. If you wish to make a pension fund buy-in, the following factors should be taken into account if you are planning on
Reducing the level of employment,
Changing jobs and are subsequently affiliated to a less favourable pension fund, or
Career changes that might lead to salary reductions
It is then also possible that there is no longer a pension gap, provided that the actual retirement assets are at least equal to what would have been saved in the pension fund under the same conditions since the age of 25.
General information
According to the textbook, the recommendation would be to invest your money profitably and to start buying into your pension fund from the age of 50-55 so that you can make the most of the tax savings shortly before withdrawing the money. This is also with the ulterior motive that the income is higher at this age and the money is not blocked in the pension fund for so long.
We would like to share a few thoughts on this:
Most of our clients leave Switzerland again before they reach retirement age, which is why the money can be withdrawn earlier and a pension fund buy-in while living in Switzerland might be worthwhile.
Some of our clients work part-time during the years leading up to retirement or change careers during their career, which is why the tax savings would usually have been higher when they were working full-time or before the career change took place.
If you do not invest your money in shares, ETFs etc., but in an account with very little or no interest, a pension fund buy-in can also make sense, as there is at least a slight interest rate, which should be slightly above the inflation rate.
Pension fund buy-in and contribution towards the pillar 3a
In principle, it can be said that the tax savings from a pension fund buy-in are analogous to the payment into the pillar 3a. However, as you are not allowed to pay more than the maximum amount into the pillar 3a, we generally recommend paying into the pillar 3a first and then into the pension fund. For example, if you want to pay in CHF 30,000, you should first pay around CHF 7,000 into pillar 3a and then the remaining CHF 23,000 into the pension fund. This allows the full potential of the savings opportunities to be utilised.
Two main points come into play when it comes to tax savings. Firstly, you save tax on the additional payment into the pension fund, and secondly, this reduces the average tax rate at which the remaining income is taxed.
Pay-outs of vested benefits
Under certain conditions, vested benefits can be withdrawn before reaching retirement age. These are
Taking up self-employment
Purchase of a property for your own use
Moving abroad
The interesting thing here is that taxes are due when the vested benefits are paid out. This is a capital tax that is levied by the canton in which you are a tax resident at the time of pay-out. The only exception is if you move abroad. If the vested benefits (as well as the pillar 3a balance) are paid out after taking up a new tax residency abroad, the capital tax is levied by the canton in which the financial institution is headquartered. It may therefore be worthwhile transferring the assets to a financial institution headquartered in a low-tax canton before leaving Switzerland.
Special provisions when moving abroad
If a person leaves Switzerland and moves to an EU/EFTA country, only the over-mandatory portion of the vested benefits may be paid out at the time of departure. The mandatory portion must remain on a vested benefits account until reaching retirement age.
If you move to a third country, the entire vested benefits may be paid out.
It is important to clarify if and how the pay-out of vested benefits is taxed in the country of residence. To avoid unpleasant situations, the consequences should be clarified in advance with a tax advisor.
US filing requirement
Persons who also have to file a tax return in the US should clarify pension fund buy-ins and pillar 3a contributions with their US tax advisor in advance, as these tax saving measures may ultimately not be worthwhile.
Finally, it should be noted that this blog does not replace an individual tax advice. Whether and to what extent a pension fund buy-in makes sense depends on a number of factors and personal future planning, which is why the recommendation can vary greatly from case to case.
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