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Created on 12.11.2018

Pension fund – what you need to know

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 ambitions you will be able to accomplish. Pension funds, which are part of occupational pension schemes, are vital to your retirement planning. We will explain 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.

What happens when you retire? Where does the money you need to live come from? In Switzerland, there is a system known as the three-pillar system. This is how this works:

  • The 1st pillar (state pension) consists of old-age and surviving dependants insurance (AHV), disability 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 2nd 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 3rd pillar (private pension) consists of optional savings. The payments you make into the 3rd pillar supplement the provisions of the 1st and 2nd pillars so that, even when you’re older, you can still do the things you want or guarantee yourself a standard of living that corresponds to 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. 

Let’s take a closer look at the pension fund in the context of the 2nd 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 surviving dependants insurance (AHV) and earns over CHF 21,150 (as of 2018) is insured by their employer’s pension fund. Self-employed individuals can decide to join a pension fund if they wish. A person enters a pension fund on 1 January at the end of their 17th year. 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 this amount. If you start a new job, pension funds you have saved up previously from the 2nd pillar are 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 1st 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). Also, do bear in mind the 2nd pillar isn’t solely for employees. Self-employed people can decide themselves whether they would like insurance. 

A vested benefits account for your pension funds

If you should ever work on a self-employed basis, your salary is under the minimum wage or you give up work either permanently or temporarily, you will no longer be insured by your previous pension fund. 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 multiple vested benefit account providers. What’s more, in the current market environment, investing vested benefits in funds is a return-oriented alternative. If you start a new job before retirement, these vested benefits must be paid into the new employer’s pension fund. 

Pension or lump-sum capital payments – that is the question

Before you retire, you will have to decide whether you would like to withdraw your capital as a one-off payment, as a lifelong pension or whether you would like to withdraw a portion of it and have 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 2nd 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 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 1st and 2nd 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 3rd pillar, you can supplement the payments in the 1st and 2nd 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 personally when you are older or if you suffer a disability, 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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