02 December 2021

Moving to Switzerland - Do pension instruments serve to save taxes?

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In Switzerland, pension contributions into the pension systems are tax deductible in the year of the payment. In contrast, pension benefits are subject to taxation in the year of payout.

In Switzerland, pension contributions into the pension systems are tax deductible in the year of the payment. In contrast, pension benefits are subject to taxation in the year of payout. Contributions can therefore be quite attractive from a tax perspective:

  • There is a shift of the tax burden into the future.
  • The tax progression can be broken if the total income at or around retirement age is lower than at the peek of the career.
  • Pension benefits are often subject to privileged taxation.
  • Assets parked in the pension system and income related to those assets (e.g. interest) are not taxed until they are paid out.

However, as there are two sides to every coin, pension instruments do not only offer tax advantages. This article aims to provide an overview of the taxation of pension benefits in Switzerland.

General

The pension scheme in Switzerland is based on the so-called "three-pillar principle":

1st pillar - State Social Insurance (AHV/IV/EO)

It comprises the statutory old-age and survivors' insurance (AHV), the disability insurance (IV) and the compensation for loss of earnings (EO). Contributions to the 1st pillar are compulsory. They are generally paid in periodically and eventually paid out in in the form of a monthly pension.

Pillar 2 - Occupational Pension Benefits (BVG)

Contributions to the 2nd pillar are compulsory and set by regulations. As a rule, the contributions are made periodically. In addition to these periodic contributions, however, there is also the possibility of additional payments to close existing gaps. Benefits are paid out in the form of a monthly pension or a capital payment.

Pillar 3 -Tied Voluntary Retirement Savings (Pillar 3a)*

Contributions are paid on a voluntary basis. The amount of contributions per year is limited and can be determined individually up to the specified maximum. Payments can be made periodically, aperiodically or as a one-off payment. Benefits are usually paid out in the form of a capital payment, rarely in the form of a monthly pension.

* Voluntary Retirement Savings also include the so-called Pillar 3b, which is not discussed in this article.

 

Taxation and tax planning options

Pillar 1 - State Social Insurance (AHV/IV/EO)

The 1st pillar is completely regulated in Switzerland and for this reason cannot be used for tax planning purposes. It should be mentioned that AHV benefits do not necessarily have to be drawn at the point of retirement, but that there is the option of early or late withdrawal (with corresponding increases or reductions of the monthly payments). Despite this marginal freedom of withdrawal, the 1st pillar in Switzerland is not suitable for tax planning.

The contributions made are tax deductible. The pension benefits are subject to ordinary income taxation at the time of payment. Anyone who leaves Switzerland either retains their pension entitlement or can partially reclaim the contributions paid in. A pension payment is taxed in the country of residence; contribution refunds are subject to withholding tax in Switzerland, which may be reclaimed according to the respective double taxation agreement, if any.

Pillar 2 - Occupational Pension Benefits (BVG)

The periodic contributions to the 2nd pillar are regulated by law and set out by regulations. There is some room for action if a pension gap exists, which usually is the case when moving to Switzerland. Individuals who move to Switzerland at a very young age (benchmark: age 25) may have no or a smaller pension gap than individuals moving to Switzerland at a later stage of their lives.

Pension gaps can be closed by additional payments into the pension fund. However, the possibility of such payments is limited for people moving to Switzerland who have never been affiliated with a Swiss pension fund before: Purchases per year may not exceed 20% of the respective salary in the first five years after joining a Swiss pension fund. After these five years, the full pension gap (if any) can be closed.

The additional payments are tax deductible in the year of the payment. The same applies to contributions made periodically. The current income generated by the saved capital (e.g. interest) is not subject to income tax. Nor is the capital parked in the pension fund subject to wealth tax. The capital is basically blocked until retirement age is reached.

The withdrawal of the saved capital can be done in two ways, and the tax treatment is correspondingly different. In any case, the respective pension fund regulations must also be observed:

1. Monthly pension:

The accumulated capital can be drawn monthly in the form of a lifelong pension benefit. In the case of monthly pension payments, the pension is subject to ordinary taxation.

2. Capital payment:

All or part of the accumulated capital may be drawn as a capital payment before reaching retirement age. Justified reasons for early withdrawal of a capital payment are the following:

  • Financing of self-occupied residential property
  • Start of a self-employment
  • Emigration
  • Early retirement

Purchases made in the three years prior to an early withdrawal will be reversed, i.e. the tax saved will have to be paid at the time of the withdrawal.

The capital payment is taxed separately from other income. At the level of direct federal tax, there is a tax rate reduction for the taxation of the capital payment (1/5 of the ordinary tax rate). The cantons apply the privilege in different ways. The canton of Zurich also applies a tax rate reduction for the taxation of the capital payment (1/10 of the ordinary tax rate; from 2022 there will be a further reduction to 1/20 of the ordinary tax rate).

Pillar 3 – Tied Voluntary Retirement Savings (Pillar 3a)

Employed persons have the option of paying a certain amount per year into the retirement savings account 3a at their bank or insurance company. The maximum contributions are determined annually. In 2022, employees who are affiliated with a pension fund may pay a maximum of CHF 6,883 into pillar 3a. Self-employed persons who are not affiliated with a pension fund may pay in 20% of their annual income in 2022, up to a maximum of CHF 34,416. The form in which the payment is made is at the individual's discretion. It is not possible to "fill in the gaps" for past years in which no contributions were paid.

The contributions made are tax deductible up to the stated limits in the year of payment. The income generated by the saved capital (e.g. interest) is not subject to income tax. Nor is the capital parked in the retirement savings account subject to wealth tax. In principle, the capital remains blocked until five years before the official retirement age.

The accumulated capital is usually drawn as a capital payment. It can also be withdrawn in full or in part before reaching retirement age. Justified reasons for early withdrawal of a capital payment are the following:

  • Financing of self-occupied residential property
  • Start of a self-employment
  • Emigration
  • Receipt of an invalidity pension

The capital payment is taxed separately from other income. At the level of direct federal tax, there is a tax rate reduction for the taxation of the capital payment (1/5 of the ordinary tax rate). The cantons apply the privilege in different ways. The Canton of Zurich also applies a tax rate reduction for the taxation of the capital payment (1/10 of the ordinary tax rate; from 2022 there will be a further reduction to 1/20 of the ordinary tax rate).

Conclusion

The tax advantages (i.e. deductibility, late and partially reduced tax burden on withdrawal) are obvious. Nevertheless, the disadvantages should be considered before making any voluntary payments: The capital may be tied up for many years and the yield is modest at best. The payments as well as the withdrawal should be carefully considered. It is also worth considering spreading payments and withdrawals over several tax years.

Our Private Clients experts will be happy to advise you on all matters relating to your move to Switzerland. We look forward to hearing from you.