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Created on 12.11.2018 | Updated on 23.07.2020

Pension fund – what you need to know

What happens when you retire? Where does the money you need to live come from? This article explains how the Swiss pension system works, what the purpose of a pension fund is, what happens to your pension fund money and what you can do to get the most out of your pension fund.

Retirement planning is something everyone needs to think about. After all, these are decisions that will determine your standard of living when you’re older and which dreams you will be able to fulfil. In Switzerland, there is a system for retirement planning known as the three-pillar system. It works like this:

  • The first pillar (state pension) consists of old-age and survivors’ insurance (AHV), invalidity insurance (IV), supplementary benefits and a fund for loss of earned income. The idea behind these provisions is to ensure that pensioners, disabled people and surviving dependants have enough money to live on and are not impoverished. This is why it is mandatory.
  • The second pillar (occupational pension) allows you to continue enjoying your usual standard of living when you retire. It consists of your occupational pension (under the Occupational Pensions Act (OPA)) and accident insurance (under the Accident Insurance Act (AIA)) and is mandatory for people in employment.
  • The third pillar (private pension) consists of optional savings. The payments you make into the third pillar supplement the provisions of the first and second pillars so that, even when you’re older, you can still do the things you want or guarantee yourself a standard of living that meets your own personal needs. If you pay into the fixed pension plan (pillar 3a), you can save on taxes or optimize how much tax you pay. Find out more about this in our article “Retirement savings 3a: save on taxes with these tips”. You can also calculate your potential tax saving with the PostFinance retirement fund calculator.

Let’s take a closer look at the pension fund in the context of the second pillar – as this is a vital part of your personal retirement funds.

A lifelong pension with the pension fund

In Switzerland, pension funds provide lifelong payments to women from the age of 64 and men from the age of 65 if they have contributed to a pension scheme. The pension amount depends on how much they paid into the scheme when they were working. Anyone who has to take out old-age and survivors’ insurance (AHV) and earns over CHF 21,150 (as of 2018) is insured by their employer’s pension fund. The self-employed can decide to join a pension fund if they wish. A person joins a pension fund on 1 January after they have reached the age of 17. At this point, only death and disability are insured by law. When a person turns 25, they actually start saving up for retirement. The amount they pay depends on their salary. The employer pays at least half of these contributions. If you start a new job, retirement capital you have accumulated previously from the second pillar is carried over. This means that your “vested benefits” are transferred to the new employer’s pension fund.

The payments in your pension fund and the payments from the first pillar combine to ensure your pension amounts to approximately 60% of your previous working income. If your new pension income is not enough for you to continue enjoying your usual standard of living when you retire, we recommend you accumulate additional funds by investing in a private pension (pillar 3a/3b).

Vested benefits account and the supplemental institution

What happens if you leave your pension fund?

There are three scenarios in which you will no longer be insured with your previous pension fund:

  • You become self-employed
  • Your salary falls below the minimum amount
  • You give up work either permanently or temporarily

What does this mean? Savings you have accumulated must be “parked” in a vested benefits policy or in a vested benefits account. It is well worth comparing the interest rates of various vested benefit account providers. What’s more, in the current market environment, investing vested benefits in funds is a return-oriented alternative. Find out more about the differences between a retirement savings account and a retirement fund in the article “How to get more from your retirement planning”.

If you start a new job before retirement, these vested benefits must be paid into the new employer’s pension fund.

If you found your own company, we recommend that you read the article “Setting up a company: which social and personal insurance is mandatory?”.

Pension or lump-sum capital payment – these are your options

Before you retire, you will have to decide how you would like to withdraw your capital. You can choose between:

  • A one-off payment
  • A lifelong pension
  • Withdrawing a portion of it and having the rest paid out as a regular pension

The regulations for each pension fund stipulate the conditions for taking out money. An advance withdrawal – in other words, a payout before you reach retirement age – is also possible in some instances that are regulated by law. For instance, if you emigrate, decide to sell a property you occupy or decide to set up your own company. 

Pensions for surviving dependants or in the event of disability

Widows, widowers, registered partners and orphans (and even cohabitants, in the case of some pension schemes) will also receive payments from the second pillar if a policyholder dies. The amount they receive depends on the amount of capital saved and the conditions set out in the pension fund’s regulations. In the event of disability, the pension fund also pays out a disability pension. Check your pension fund statement to see the total sum of all your insured benefits.

Purchasing additional pension benefits can pay dividends

Your pension certificate will tell you your current retirement savings and a projection of your pension amount. It will also inform you whether you have the option of actually purchasing voluntary additional pension benefits. This is possible if you have a gap in payments and if the maximum sum of money has not always been paid in to your pension fund. Whether you can buy additional pension benefits or not depends on the savings you have personally accumulated and the provisions of your pension fund. Buying additional pension benefits increases your retirement capital, and this in turn means higher payments when you retire or in the event of disability or death. This can also prove beneficial for tax reasons: any pension benefits you have purchased can be deducted from your taxable income on your tax return.

There are so many ways to plan for the future. Benefits under the first and second pillars are regulated by law, and are essentially based on what your income is when you are working. If you pay into a private pension as part of the third pillar, you can supplement the payments in the first and second pillars according to your own individual needs. By doing so, you will be able to close any pension gaps following retirement, death or disability. It is an excellent idea to think carefully about your own pension situation at an early stage and on a regular basis. This will pay off for you when you are older or if you become disabled, and for your partner or children if you pass away. One thing is sure, though: if you start paying into your pension early on, you will have a more financially independent future.

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