2ND PILlAR : QUESTIONS & ANSWERS
The questions asked most frequently are listed below.
If you don’t find the answer to your question, don’t hesitate to contact-us !
One needs to distinguish two things.
The Federal Council sets a minimum LPP interest rate (1% in 2021) which applies to the mandatory portion of an insured person’s retirement savings capital. All occupational benefits institutions are required to pay it.
For the extra-mandatory part of the savings capital, pension funds set the interest rate in function of their performance.
At the end of each year, the retirement savings capital accumulated by the insured person must be remunerated by the pension funds. In the autumn, the Federal Council sets the minimum interest rate for the coming year based on the recommendations of a group of experts. Since the LPP was created in 1985, and up to 2003, this interest rate remained unchanged at 4%. Given the expected growth in incomes and inflation, the rate then fluctuated before settling at 1.25% in 2016, then at 1% since 2017.
As the name suggests, this is the minimum rate. Pension funds are free to set it higher, or even significantly higher, depending on returns during the past year, but also on their liabilities, which mainly comprise the pension capital of active members and pension recipients. At CIEPP, for example, the Board of Trustees has set higher interest rates than the minimum LPP rate since 1996. This rate is applied to the whole of the savings capital (mandatory and extra-mandatory portions).
This interest rate has a major impact on future pensions. An average performance of 1% per year over a working lifetime improves retirement pensions by 30%.
We should first mention that there are two conversion rates. First, the minimum conversion rate for the mandatory portion of the LPP, which is set by law. Originally it was 7.2%, and is currently 6.8%. The conversion rate for the extra-mandatory portion is set by the Board of Trustees of the pension fund. This rate is often much lower than the rate for the mandatory portion. Lastly, some institutions, such as the CIEPP, do not make this distinction and apply a single conversion rate, regardless of gender and marital status. On retirement, the portion resulting from mandatory pension plans (statutory retirement savings capital) is treated in the same way as the extra-mandatory portion of the savings account.
The conversion rate plays an important role in the 2nd pillar. It is used to determine the annual pension amount based on the retirement savings capital accumulated at retirement age. In other words, the conversion rate is used to calculate the amount that can be taken each month from the piggy bank of retirement savings, funded by the employer, the employee and the interest paid, to serve as a retirement pension for life and, at death, to pay an annuity to any beneficiaries (spouse, LPart partner, partner and orphans).
Lastly, it should be noted that once the annuity is opened, it is guaranteed for life. It is fully secured. Pensioners receives a fixed amount each month until their death. Thus adjustments to the conversion rate no longer have any impact on the amount of the pension.
Remember that the minimum legal conversion rate is set at 6.8% for both men and women, but only applies to the mandatory portion of the 2nd pillar. The rate used for the extra-mandatory portion may differ from that provided for in the LPP; it is left to the discretion of each pension fund.
Thus the rate for the mandatory portion is set by law and the rate for the extra-mandatory portion is set by the pension fund’s Board of Trustees.
At CIEPP, the conversion rate, applied to the entire amount of capital, is set at 6.2% (for 2021). In the event of early retirement or postponement, the conversion rate is reduced or increased accordingly.
Imagine a piggy bank. During an insured person’s professional life his retirement account is funded by his monthly contributions, those of his employer if he is an employee, by the interest allocated year on year by the pension fund, and also by buy-ins, i.e. voluntary contributions to fill any gaps in contributions during the forty years of a professional career. In a defined contributions system, when retirement age arrives - 64 for women and 65 for men - the piggy bank is broken and the accumulated assets are counted up.
To calculate the retirement benefits for the pension, the amount of the accumulated assets is multiplied by a percentage known as the conversion rate, forming part of the institution's regulations. At CIEPP it is set at 6.2% for all assets (for 2021). With this conversion rate, retirement savings of CHF 100,000 will provide an annual pension of CHF 6,200. In many institutions, unlike CIEPP, two conversion rates are applied: one which is defined by law (LPP) at 6.8%, for the mandatory portion, and the other, set at a lower rate (up to 5% by some funds), for the extra-mandatory portion.
The mandatory scheme is based on the provisions and rules set by the LPP, covering insured annual incomes of between CHF 21,510 and 86,040 in 2021. Annual incomes exceeding CHF 86,040 can be insured within the framework of the extra-mandatory pension plan, but only up to a certain limit. The law sets the ceiling at CHF 860,040, i.e. ten times the basic amount of CHF 86,040. According to experts, only 10 to 15% of all those insured in the second pillar fall within the minimum LPP bracket.
Since 2005, the Federal Law on Occupational Old Age, Survivors’ and Disability Plans (LPP) has stated that retirement benefits are paid in the form of pension, and introduced the possibility for an insured person to request receipt of a quarter of his benefit in the form of capital. Such is the rule for the mandatory coverage, that is to say the minimum framework of provisions set in the law that must be respected by all pension funds.
In the case of extra-mandatory coverage, where pension funds are free to offer more generous benefits or to be more flexible, withdrawal of the whole capital is possible if this option is included in their pension regulations.
In practice, retirement benefits are now overwhelmingly paid out in the form of a pension. Two preliminary steps are necessary before making such an important decision: you must first re-read your pension fund’s regulations to make sure you understand the options available. Then ask yourself: do I prefer the security of a pension or the freedom of taking all or part of the capital? More broadly, you should examine your family and asset situation, your life expectancy, your financial obligations, your tax burden and your ability to invest and manage the capital you withdraw.
A final formality: if the insured person is married, capital can only be paid out with the written consent of the spouse. At CIEPP, as with many pension funds, three options are offered at the time of retirement: a guaranteed retirement pension for life (‘lifelong’), the capital in full, or a combination of an annuity and capital.
It is increasingly the case that the pension funds of private companies oblige employees whose insured annual salary exceeds CHF 100,000 to choose benefits in capital when they retire. In this way the company unburdens itself of risks and provisions related to the health of its pension fund.
If the insured person does not leave the pension fund or receive a pension (invalidity, partial retirement), unless they withdraw capital to buy a home in the context of encouragement of home ownership (EPL), or in the event of divorce if part of the assets have been transferred following a court order, the accumulated retirement savings capital - or retirement assets - cannot decrease from one year to the next.
Remember that in funds with defined contributions, this retirement capital comprises the employee and employer savings contributions, the annual interest and the vested benefits contributed by the insured person, plus buy-ins with interest. Even if the interest rate occasionally drops to 0%, the capital will have grown over the past year, funded by contributions paid in by the employee and the employer.
The origin of such a question is probably to be found in the insurance certificate. This certificate is issued to insured persons at the beginning of each year and contains a lot of interesting information. It includes the projected retirement capital at the time of retirement. Many pension funds establish this projection by using the minimum LPP rate set each year by the Federal Council after consulting the sixteen members of the Federal LPP Commission. This is why, from one year to the next, with equal pay and unchanged activity rates, if the minimum LPP rate used for the projection is reduced, the projected capital at retirement will be lower than that shown in the previous certificate.
The aim of the 2nd pillar is to guarantee long-term occupational pension benefits in the event of death, disability and old age. What happens in the event of death of an insured person?
From the outset we must remember one crucial point. The law (LPP) may state one thing, but the regulations of the pension fund may state another. Not all pension funds offer the same benefits. Hence the importance of reading the regulations of your pension fund.
First situation: death occurring before retirement age. The law states that the surviving spouse, or same-sex partner in the case of a registered partnership (according to the LPart partnership law; hereinafter the registered partner), is entitled to a pension if he/she has at least one child in their charge or if he/she has reached the age of 45 and the marriage has lasted at least five years. If none of these conditions is met, the surviving spouse or registered partner will be entitled to a single payment equal to three annual pensions. For children, the law guarantees an orphan's pension for children (and foster children) under the age of 18, or under 25 if they are still in education.
The law also states that a fund’s regulations may provide for other benefits for survivors in the event of the death of the insured person before retirement age. Conditions may vary from one pension fund to another. Some funds, including CIEPP, provide benefits in the event of cohabiting partnerships and additional capital in the event of death, etc. To benefit from cohabiting partner benefits, at least five years cohabitation must have been declared to the fund. Whatever the form of partnership, you should announce cohabitation to your fund so that the spouse or registered partner can benefit from certain benefits! The fund’s regulations as well as daily practices ensure that it carefully examines the successive options listed in its regulations and that, at the end of this examination, except in special cases, the benefits are paid out to one or more beneficiaries in the form of an annuity or a lump sum, even if it takes several years to identify distant relatives living abroad.
When a person insured with CIEPP dies before retirement age, the first examination determines whether there are one or more beneficiaries (surviving spouse, divorced surviving spouse, cohabiting partner or registered partner) and if there are children eligible for an orphan's pension (child under 18 or child in education until the end of their studies, until the age of 25 at most). The beneficiary may receive the pension or, if he so wishes and no over-compensation is involved, the pension may be converted to capital. With this option, the capital paid out will not be less than the retirement savings capital accrued by the insured person on the day of death.
If there are no beneficiaries or orphans within the meaning of the LPP, i.e. children under 18 or 25, CIEPP will widen the search for beneficiaries and examine whether there is a certificate of cohabitation or if the deceased has dependents. In the absence of beneficiaries, CIEPP (according to its regulations) will examine the case of other possible beneficiaries – now in the form of lump-sum benefits and not annuities: children of the deceased not receiving orphan’s pensions, parents, brothers and sisters and other legal heirs. The evolution of choices and lifestyles (in addition to the nuclear family come single-parent families, homo-parental families, step-parent families, cohabiting partnership, etc.) sometimes require pension fund staff to enter the private sphere of the person insured in order to determine precisely the rights of the beneficiaries.
Second situation: what happens if an insured person dies after retirement age? The answer is easier in this case. When an insured person dies, the spouse, registered same-sex partner or cohabiting partner will be entitled to 60% of the deceased person's pension. In concrete terms, if insured person X received an annuity of CHF 5,000 per month, his spouse Y will receive an annuity of CHF 3,000 (5,000 x 60%) after his death. The orphan's pension (child under 18, or 25 if still in education) amounts to 20% of the deceased person's pension.
These pensions cease upon the death or remarriage of the surviving spouse, and at the age of 18, or 25 at most, for orphans. At CIEPP, the surviving spouse is given the option of receiving the actuarial equivalent of 60% of the pension in the form of capital. An orphan's pension, on the other hand, cannot be capitalized.
Lastly, if an insured person receiving a retirement pension dies without leaving a spouse, partner or child (orphan), no benefits are due.
The obligations of employees with regard to contributions depend on their age and their salary.
All employees over the age of 17 who receive a salary of more than CHF 21,510 per year (limit in 2021) from the same employer are required to contribute to coverage for the risks of death and disability from the 1st of January following the date they turned 17.
All employees over the age of 24 who receive a salary of more than CHF 21,510 per year from an employer are also required to contribute to building retirement capital from the 1st of January following the date they turned 24.
Employees who do not meet these conditions, as well as the self-employed, can also contribute on an optional basis.
The contribution to the second pillar has four components:
Yes, as long as the amount received from a single employer for part-time work reaches CHF 21,510 per year (limit in 2021). This work must also be their main activity (1).
If the employee earns this amount through an activity which is not his main one, and/or if he earns CHF 21,510 from several jobs with different employers, he has the right to join the second pillar on an optional basis. Each employer will then have to reimburse to him half of the contributions relating to the salary they paid. Depending on the case, a salary-based solution may also be found (additional salary, 3rd pillar) to avoid the administrative burden of calculating and collecting contributions, both for the employer and for the employee.
(1) This aspect is determined using a series of criteria: activity rate, income, seniority and the relationship of the activity to professional interests.
You do not make second pillar contributions based on your entire annual salary. The first CHF 25,095 is not included (1). This is called the coordination deduction. Neither are contributions deducted from the portion of the salary exceeding CHF 86,040. Contributions are therefore only collected on the portion of the annual salary lying between CHF 25.096 and CHF 86,040. This bracket is called the coordinated salary. Therefore, for an annual salary of CHF 95,000, the coordinated salary will be CHF 60,945 (86,040 minus 25,095); for a salary of CHF 60,000, it will be CHF 34,905 (60,000 minus 25,095).
Please note that the coordinated salary cannot be less than CHF 3,585.
(1) All values indicated here are those in force in 2021.
Since 1995, insured persons can benefit from full portability of their 2nd pillar accounts. This was not the case beforehand. From that date, in the event of a change of job, the retirement savings capital - this piggy bank financed by the savings contributions made by the employee and the employer plus the annual interest - must be transferred to the new employer’s pension fund. This obligation is intended to protect the insured person.
It may happen that between two jobs, the vested benefits have been paid to the Substitute Pension Plan or to one or two vested benefits accounts and that, after several years, the person cannot remember which one(s). In this case he can ask the Central Office of the 2nd pillar to search for his retirement savings capital. The Central Office is able to restore broken links between pension institutions and their members. If an employee has more than one job, he may have two 2nd pillar accounts active at the same time.
This may be the case for employees working part-time, e.g. 50% for company A and 50% for company B. According to the law, only the main activity can be insured. Objective criteria in calculating it include the salary level and activity rate, etc. Although the law states that only the main activity can be insured, it is possible to do better. A pension fund may provide in its regulations – as CIEPP does - for the possibility of an affiliated employer choosing to insure the ancillary activities of his employee through his own pension fund.
The question provides an opportunity to explain that the Swiss retirement system is based on three pillars.
The 1st pillar is state insurance, which includes AVS (old-age pension insurance), AI (disability insurance) and additional benefits. Compulsory contributions made by active people (employer and employee contributions) and non-active people are fed into a common pot used to finance pensions. AVS is financed according to the principle of distribution: it spends what it collects each year, that is to say that the sums received as contributions are paid back, for the same period, in the form of benefits to beneficiaries, i.e. they are "distributed" among them.
The 2nd pillar is the occupational pension insurance which mainly comprises the mandatory scheme and the extra-mandatory scheme of the LPP. It covers three risks: old age, disability, death. Unlike the 1st pillar, the 2nd pillar is a funded system. Each person contributes (with the employer contributing at least the equivalent) to their own benefits according to a plan chosen by their employer. Self-employed persons can choose their own pension plans, but, unlike employees, they must fund it alone. Regarding the mandatory part, the obligation to take out insurance begins at the same time as the employment relationship (contract for more than three months) and from the age of 17 at the earliest. Initially (until the end of the year during which the person's 24th birthday occurred) the contributions only cover the risks of death and disability. From 1 January of their 25th year and until retirement age, the contributions made by the insured person and his employer will increase, month after month, the capital which will serve to finance his retirement benefits (capital / pension / mixed).
In the 2nd pillar, the insured person can optionally add to his retirement capital through buy-ins if the pension plan allows this. Two advantages: increasing benefits and reducing the tax burden. Indeed, the law encourages this through tax benefits. The higher the person's marginal tax rate, the greater the tax savings.
The 3rd pillar is a voluntary individual pension plan. It can be broken down into tied pension insurance, known as 3a, and unrestricted pension insurance, known as 3b. Everyone is therefore free to subscribe individually to a plan with an insurance company or to open an account with a bank to add benefits to those of the AVS/AI and the occupational pension insurance when retirement comes. Here again, there are tax advantages, but they are more limited.
Contributions to the 3a scheme can be deducted from taxable income up to a maximum of CHF 6,883 per year (limit for 2021) for persons affiliated to an occupational pension fund, and up to 20% of income from gainful activity, but up to a maximum of CHF 34,416 per year for self-employed people who are not affiliated to the 2nd pillar. 3a tied pension insurance generally - but not always, depending on the canton - provides greater tax advantages than those of 3b pension insurance.
Yes, they have every right to do so. However, they must continue to contribute to certain social insurance schemes (AVS, AI, APG, AF and, in Geneva, maternity insurance), without this creating new entitlements. However, the first CHF 1,400 of the monthly salary is exempt from contributions; they will no longer need to contribute to unemployment insurance; contributions to the 2nd pillar will depend on the regulations of their social security fund. It should be noted that frequently loss of earnings insurance contracts no longer cover workers who have reached retirement age.
The Law on Occupational Insurance (LPP) makes no special provisions for cross-border workers. However, it includes several legal provisions that have important consequences for people who, because of their place of work and their place of residence, find themselves on both sides of the border between Switzerland and the European Union.
As we are reminded in a Bulletin about occupational insurance from the Federal Social Insurance Office (OFAS), there is one fundamental element: the agreements between Switzerland and the European Union (EU) establish that persons must be covered by the social security system of the country in which they carry out their gainful activity and not in the country in which they reside. Consequently, a cross-border worker who resides in the EU/EFTA and who works in Switzerland must be covered by Swiss social insurance, i.e. AVS/AI and the occupational pension insurance (LPP) 1. Therefore, someone working in Switzerland and subject to the AVS must also be covered by the Swiss occupational pension system for their main activity, when this exceeds three months in duration and when their annual salary is greater than 21,510 francs. Living outside Switzerland makes no difference. The conditions of the compulsory LPP insurance are identical for all employees in Switzerland, regardless of their place of residence or their nationality.
On the other hand, differences emerge in connection with the cash payment of vested benefits. Cross-border workers residing abroad (e.g. in France, Italy, Germany, etc.) meet the conditions for payment in cash (Article 5, paragraph 1, section a) under the Federal Law on vested benefits, LFLP) when they cease all gainful activity in Switzerland and, consequently, when they are no longer insured with a pension fund in Switzerland. For cross-border workers, the concept of permanent departure from Switzerland is equivalent to the cessation of employment in Switzerland. However, EU/EFTA cross-border workers who are compulsorily insured for old age, death and disability in their country of residence can only obtain payment in cash of the extra-mandatory portion. The mandatory portion, known as the LPP legal minimum, must be transferred to a vested benefits institution. Cross-border workers who cease gainful employment in Switzerland cannot transfer their vested benefits to a pension fund abroad unless they are going to work in Liechtenstein. The conditions for this country are special: similar to a change of employer in Switzerland.
Payment in cash
Requests for payment in cash by cross-border workers leaving salaried employment in Switzerland to become self-employed in the EU/EFTA are also subject to the terms of Article 5, paragraph 1, letter a) of the LFLP. Payment of the mandatory portion is excluded if the newly self-employed person is subject to compulsory insurance covering old age, death and disability in his country of residence (France, Germany, Italy, etc.). In short, when a person leaves Switzerland to set up on his own abroad, in an EU/EFTA State, the mandatory portion of the LPP can only be paid if the person is not insured on a compulsory basis under the legislation of the State in question.
With respect to encouragement of home ownership, cross-border workers are entitled to request advance payment of their 2nd pillar in order to become owners of their home. The fact that the home is located outside Switzerland does not constitute a reason for exclusion, provided it concerns a principal residence: as for a Swiss resident, the payment is exclusively intended for the main residence of the insured person and not a secondary or holiday home.
Can one receive benefits in the form of capital or LPP pension abroad? This is a question often posed by Swiss abroad and by cross-border workers. On several occasions, through its information sheet on occupational pension plans, the OFAS has recalled the rules of the game. As it states, ‘’The Agreement on the Free Movement of Persons provides for equality of treatment between Swiss and foreign nationals, just as it enshrines principle of assimilation of territories. These rules have been extended to the EFTA countries. With respect to both mandatory pension insurance and more extended insurance, the provisions of European law take precedence over national law. These texts stipulate in particular that pensions paid cannot be reduced or suspended on the grounds that the persons insured reside in a country different from the one providing the benefit. In other words, the benefit must be paid to a bank account in the EU/EFTA country where the beneficiary resides if the latter so requests. Thus the benefit will be paid to the beneficiary without being reduced by costs inherent to the transfer of amounts from a bank in Switzerland to a bank abroad’’.
With respect to buy-ins, special provisions apply to persons arriving from abroad and to cross-border workers who are insured for the first time with the LPP. The annual amount of buy-in paid by persons arriving from abroad who have never been affiliated to a Swiss pension fund in Switzerland must not exceed 20% of the insured salary during the five years following their joining the Swiss pension fund. After this five-year period a buy-in can be made up to the maximum in the regulatory provisions. This limit of five years also applies to cross-border workers from the time they begin to be insured for the first time with a 2nd pillar pension fund in Switzerland.
Lastly, in the event of divorce, a particular point concerns cross-border workers. They should take into consideration that Swiss courts are exclusively competent for settling the division of occupational pension claims on a Swiss 2nd pillar pension fund. Consequently, if cross-border workers divorce in their country of residence (France, Germany, etc.), they must also take action before a Swiss court – in this case the competent civil court for divorce – to obtain a court ruling on the division of the 2nd pillar (complementary court action). A divorce judgement pronounced abroad relating to retirement savings capital constituted in Switzerland is not recognised by the pension fund.
1 Cases where a person performs several gainful activities in several countries require more detailed explanations.
When a person insured in the 2nd pillar leaves his pension fund prior to the occurrence of an insured event – for example he changes employer or loses his job – his pension fund draws up the statement of the amount due in the framework of the 2nd pillar. This amount is called a vested benefit or exit benefit.
This money must serve for the pension plan. The insured person may not dispose of it freely to spend it or transfer it onto a savings account. That is why it has to be transferred to the pension fund of the new employer or, if this is not possible, to a vested benefit account with a bank, for example.
If you do not make sure to have your vested benefit transferred, for example if you fail to communicate to your former pension fund the information for the transfer, the amount will be remitted to the LPP Substitute Pension Plan which will play the role of replacement fund. This occurs frequently when workers of foreign origin leave Switzerland definitively or at the end of a short-term activity.
If several years later you are considering the possibility of disposing of your vested benefits credit but you do not know where it is, you can contact the 2nd pillar Centre which will make a search for you.
The Federal Social Security Office published a brochure entitled ‘Vested Benefits: don’t forget your pension assets!‘ which clearly explains to insured persons what a vested benefit is and the situations in which they need to take care of this, or whom to contact to obtain help if they think they have lost track of a vested benefit credit.
Live another life elsewhere, build a professional project, move closer to one’s family… there are several reasons for leaving Switzerland. Can one take along one’s occupational pension capital?
Simply put, there are two cases: EU and EFTA countries, and the others. With the Agreement on Freedom of Movement of Persons concluded with the EU and EFTA countries - thus including Iceland and Norway - it is no longer possible for insured persons from one of these states who leave Switzerland definitively to benefit from payment in capital of the whole of their vested benefit
Only the extra-mandatory part of the retirement capital may be paid. The LPP minimum part must be transferred to a vested benefit account or policy in Switzerland. At retirement age, or at the earliest five years before retirement age as per the AVS, this part of the capital may be paid out in cash as old age benefits.
In his new country of residence, it is compulsory for the person to have social insurance to cover against the risks of old age, disability and survivors. In addition to the above, it is indeed the country of destination that prevails and not the nationality of the insured person. Example: a Canadian who leaves Switzerland definitively to settle in Rome is subject in Italy to compulsory social insurance to cover old age, disability and survivors.
Only the extra-mandatory part of his vested benefit acquired in Switzerland can be paid out to him in cash. If the person is not subject on a compulsory basis to the local social security system, he may also withdraw the mandatory part. This absence of liability to the local system must be verified and attested by the liaison body established with the bilateral agreements. For Switzerland, this is the Guarantee Fund.
Special case in Europe: Liechtenstein. Moving to Vaduz and its surroundings is equivalent to changing one’s employer in Switzerland. Payment in cash of the vested benefit (mandatory and extra-mandatory part) in the event of a definitive departure for Liechtenstein is excluded. Persons who embark on a new gainful activity subject to the social security system of Liechtenstein must transfer the exit benefit of their LPP assets to the pension fund of their new employer in Liechtenstein.
Second case: when an insured person leaves Switzerland definitively for a country outside the European Union or EFTA, he can ask to benefit from payment in cash of the whole of his retirement pension capital. In this case, he waives any future payment (pension) on the part of the occupational benefits plan.
Don’t forget: when vested benefits are paid in cash due to definitive departure abroad, the assets are subject to withholding tax and the consent of the spouse is necessary for insured persons who are married. Last but not least, to benefit from payment in cash it is necessary to be already established in the country of destination in order to receive the payment. No payment can be made in anticipation of being established abroad, even if the insured person has left his employer or company.
There are five sets of circumstances in which an insured person can withdraw part of his occupational pension capital. Let us examine the case of advance payment for the purchase or maintenance of a home.
Since the coming into force on 1 January 1995 of the Ordinance on the Encouragement of the Use of Vested Pension Accruals for Home Ownership, insured persons may use their 2nd pillar to become owners of an apartment or house (individual ownership, co-ownership, joint ownership with one’s spouse).
In reflecting on the reform of additional benefits, the Federal Council envisaged the possibility of prohibiting the financing the purchase of a home thanks to retirement capital. It abandoned this in November 2015. The argument retained was that a house or apartment represents a capital that contributes to retirement planning. Thus, status quo.
Apart from purchasing a home, insured persons may also use their 2nd pillar to reimburse a mortgage loan, acquire co-ownership in a residential property or, on strict financial conditions, finance certain works intended to maintain the value of the home. There is no question of using the 2nd pillar to install a spa, build a swimming pool or put marble or gold taps in the bathroom! However it is possible to have recourse to encouragement to home ownership (EPL) to replace windows by double glazing, install solar panels or a heat pump – albeit with certain conditions to be respected!
The funds must also be used for the primary residence. This must be the domicile or regular place of residence of the insured person and his family, and not a secondary residence in the Valais or on the Mediterranean coast, nor a property intended for rental. Financing is only authorised for one property at a time. The minimum amount of advance payment is set at CHF 20,000, except for the acquisition of shares in building and housing cooperatives. A request for withdrawal of funds can be repeated every five years up to three years before entitlement to retirement benefits. Up to the age of 50 the whole of the vested benefit can be withdrawn. After 50 and up to three years before retirement, it is the higher amount between the pension assets acquired at age 50 and half of the assets available at the time of the request for advance payment that may be withdrawn. For insured persons who are married or bound by a registered partnership, the written consent of the spouse/partner is necessary. Advance payment is taxed as a benefit in capital.
A withdrawal is not without consequences. In a primacy of contributions pension plan what is withdrawn from the 2nd pillar cannot be received at retirement. Future pensions are reduced by the fact that the insured person has already gone into his retirement piggy bank. This is a major element to be considered in view of the interest in reducing the amount to be borrowed for home ownership. Finally, and more disadvantageous, according to the pension plan the insurance benefits (disability, surviving spouse and orphan pension) can also be reduced. Hence, insured persons are invited to fill this gap in coverage by taking out private risk insurance. Another important point: a withdrawal for home ownership (EPL) cancels the possibility of buy-in of contributions within the pension fund, until full reimbursement of the amount withdrawn. These disadvantages can be limited by progressive or full reimbursement of the withdrawal. In fact until retirement age if no insured event has occurred before, the insured person has the possibility of reimbursing the amounts withdrawn, in instalments of minimum CHF 10,000, and of receiving reimbursement of the taxes paid in consequence.
It should be noted that encouragement to home ownership through occupational pension plans can also take place by the pledging either of the right to the benefits insured (retirement, disability, death), or of the vested benefits. It is only in the event that the pledge is realised that the benefits will be reduced.
There is a lot of confusion today on the use that can be made of the 2nd pillar. The trouble stems from a recent consultation on a revision of the Federal Law on Supplementary Benefits, involving a question of limiting access to the capital of the 2nd pillar. So let’s try to make it a bit clearer!
To cool down the overheating of the property market, the banking authorities chose to limit recourse to funds from the 2nd pillar for buying a primary residence. Since 1 July 2012, the Swiss Bankers Association has established its own regulations concerning the minimum requirements on mortgage financing. These new directives are recognised by the Swiss Financial Market Supervisory Authority (Finma) and constitute a minimum standard of prudence. Consequently, before delving into their 2nd pillar piggy bank, borrowers must produce at least 10% in own funds not originating from their retirement savings. This 10% equity can be taken from a savings account, 3rd pillar account or, for example, from a family interest-free loan. That’s the rule: ‘’no cash, no home!’’
This rule does not block recourse to the 2nd pillar, because once this condition is met the borrower can then put on the table part of his retirement savings capital to acquire the home of his dreams, amortise a mortgage debt, or pledge.
Up to the age of 50, it is possible to withdraw an amount equal at most to the vested benefit available at the time of the request, namely the amount mentioned on the insurance certificate. After the age of 50 the maximum amount that the insured person may withdraw to buy his primary residence corresponds to half the vested benefit available at the time of the request or to that of the vested benefit acquired at the age of 50. It is the higher amount that is paid out.
In both cases, if there have been buy-ins during the three years prior to the request, there will be limits and tax implications.
Moreover, there are other limits to withdrawals. Which are the most important to know? First, a withdrawal must be minimum CHF 20,000, and a maximum of one withdrawal may be made every five years. Secondly, the advance payment must be requested at the latest 3 years before entitlement to retirement benefits. Lastly, advance payment can no longer be requested if an insured event, retirement, death or disability, has occurred.
In all cases the advance payment is taxable in line with the taxation level applicable to the tax domicile of the insured person, (or registered office of the pension fund if domiciled abroad).
Key reminders: when advance payments are made to finance a home, voluntary buy-ins in the pension fund can only take place after reimbursement of the whole of the advance payments. Thus, no tax savings can be made thanks to voluntary buy-ins before having reimbursed the whole of the amount received. Finally, as at each time there is a withdrawal of capital, the consent of the spouse is indispensable, and the withdrawal is only possible for the acquisition of a primary residence!
You have used part of your retirement savings capital to acquire the home of your dreams for you and your family. Today, in a more comfortable financial position, you wish to reimburse this amount. It will be credited to your individual retirement savings capital and your future benefits will be increased in consequence. Furthermore, once the whole of the amount is reimbursed, this operation reopens your entitlement to make buy-ins of contributions, a measure that has a double positive impact: building up the retirement savings capital and benefiting from tax advantages.
Voluntary reimbursement is possible up to the age of 65 for men and 64 for women, or up to the occurrence of an insured event. The reimbursement can be made in full or in stages. In the latter case, the minimum amount is set at CHF 10,000. If the amount still due is less than CHF 10,000, the reimbursement must be completed in one go.
With the slate clean, your pension fund notifies the Federal Tax Administration of the reimbursement of the advance payment within thirty days, and confirms to you in writing that the advance payment has been reimbursed. The attestation provided enables you to claim from the competent tax authorities the reimbursement of the tax paid when the advance payment was made. The right to tax reimbursement expires three years after reimbursement of the advance payment.
As a reminder, reimbursement of the advance payment is mandatory in the event that the home is sold. As stated in the text of the law (art. 30d), the obligation to reimburse is limited to the proceeds realised: ‘’Proceeds are understood to mean the sale price less mortgage debts and legal charges borne by the seller’’.
‘’Does your pension fund apply defined contributions defined benefits?’ When discussing the 2nd pillar, this is the question that distinguishes those familiar with occupational pension plans from those who are really struck by doubt. Let’s attempt an explanation that is as simple as possible. The pension plan of a fund applying defined contributions offers benefits that are directly linked to the amount of contributions. The more one contributes, the higher the benefits. Thus in concrete terms, the retirement pension will be derived from the capital accumulated, interest that will have been credited on the savings account, any personal buy-ins, and the conversion rate at the time of retirement that enables the capital to be converted into a pension.
The pension plan of a fund applying defined benefits, on the other hand, offers benefits as a percentage of the salary insured. In such a plan, the retirement pension is set as a percentage of the last insured salary or of an average of the last insured salaries (over five years for example). This percentage depends on the pension rate to which one year of insurance gives entitlement, and sometimes also on the age of the insured person when he joins the fund. In this system, one can say that the insured person knows in advance, by estimating the number of years of contributions, the amount of benefits that will be paid to him, because these are calculated in percentage of the person’s (final or average) income.
A concrete example: take the case of a system that provides for the retirement pension to be equivalent to 60% of the last insured salary after forty years of contributions, i.e. 1.5% per year of insurance. If a person has worked for thirty-five years and his last salary is CHF 80,000, he will receive an annual pension of CHF 42,000 francs (80,000 x 1.5% x 35). As the world of the 2nd pillar knows how to be creative, there are also mixed plans or plans with a combination of defined contributions and benefits. In this case, retirement savings are in defined contributions (pension calculated in function of the retirement savings capital constituted), whereas benefits in the event of disability and death are defined as a percentage of the salary insured. The benefits in case of disability are not dependent on the level of retirement savings capital accumulated.
Today, a very large majority of pension funds are in defined contributions. However the system of defined benefits remains common in public law institutions, especially but not exclusively in French-speaking Switzerland. So to the question ‘’ does your pension fund apply defined contributions or defined benefits?’’ you can probably reply ‘’defined contributions’’.
At the end of 2018, only 7% of all the four million active insured persons in occupational pension schemes were affiliated to a fund applying defined benefits.
There are different ways of calculating the benefits to which an insured person is entitled.
The pension regulations proper to each pension fund make it possible to determine precisely the method of calculating benefits.
The new divorce law relating to the division of occupational pension benefits came into force on 1 January 2017. The law made management more complex for pension funds. What needs to be noted in the new legal provisions?
The basic principle remains: in the absence of any insured event, exit benefits acquired during marriage will always be shared equally (50/50) between two spouses. In other words, each cedes to the other half of the capital he/she has constituted with his/her pension fund during the marriage or registered partnership.
The first change concerns timing: the decisive moment for the calculation. Henceforth the division is calculated at the date the divorce proceedings were initiated, and no longer on the date the divorce judgement takes effect.
What is most specific in the new provisions is that a division of the pension capital may take place even after the occurrence of a case of benefits. In other words, in the event of disability pension, the capital to be transferred is calculated in function of a hypothetical exit benefit – with as a consequence a possible reduction of the disability pension of the liable ex-spouse.
For retired and disabled insured persons over 64/65 who are retired or disabled, the pension of the liable ex-spouse is divided and converted into a lifelong annuity. According to the experts, this concerns a limited number of cases. In Switzerland there are about two thousand divorces per year (out of some seventeen thousand divorces pronounced) in which one of the two ex-spouses is the beneficiary of a disability pension or retirement pension. It should be noted that the spouses may waive the above principles through an agreement between them ratified by the court, provided an adequate retirement or disability pension remains ensured.
It is also worth noting that Swiss courts alone are competent to rule on the division of occupational pension claims on a Swiss 2nd pillar institution. Consequently, if cross-border workers divorce in their country of residence (France, Germany, etc.), they must also take action before a Swiss court – namely the civil court that has jurisdiction for divorce – to obtain a Swiss judicial decision for the division of the 2nd pillar (complementary court action). A divorce judgement pronounced abroad covering a pension plan constituted in Switzerland is not recognised by the pension fund.
If you read the text above, you will be aware of the most important and intelligible points. In fact, the principles and calculations arising out of the new provisions can create complex legal and technical analyses which we will refrain from describing here. Specialists in each pension institution will be able to respond competently to the insured persons concerned.
To make a determination, pension funds, like the divorce judge, must be able to dispose of complete information on the pension assets to be considered for division. Hence the notification, at the end of January each year, to the 2nd pillar Central Office by the some one thousand five hundred Swiss pension funds, of all persons for whom they manage pension assets. The courts can thus verify that no asset is deducted from the division.