Financial lexicon

Financial lexicon

AHV

AHV stands for old-age and survivors’ insurance.

The AHV is the cornerstone of old-age and survivors’ provision in Switzerland. It is therefore also known as the 1st pillar. The AHV is intended to cover your basic needs in old age or in the event of your death. As a national insurance scheme, AHV is compulsory for all residents, regardless of whether you are employed or not. You pay contributions until normal retirement age, from your 18th birthday (if you are working) or from your 20th birthday (if you are not working).

The Federal Social Insurance Office answers many questions here.

Coverage ratio

A pension fund must be able to cover its obligations at all times. Whether it succeeds in doing so is determined by a simple key figure: the coverage ratio. It shows the ratio between the value of the assets and the obligations of a pension fund.

The ratio is formed between

• the value of the pension assets of all insured persons (i.e. how many invested assets does the fund have?) and
• and the amount required by the fund for its future payments to actively insured persons and pensioners.

For example, a coverage ratio of 105% has a value fluctuation reserve of 5%. If it is below 100%, there is a so-called shortfall. In this case, the pension fund does not have enough money to cover all current and future obligations with assets.

The level of the coverage ratio depends on the so-called technical interest rate applied by the pension fund. The technical interest rate is purely a calculation factor. This means that the payments due in the future are discounted to the present date. A reduction in the technical interest rate therefore leads to a lower coverage ratio.

When comparing two pension funds with comparable coverage ratios, the one that applies the lower technical interest rate is therefore better. As a rule of thumb, a 0.5% difference in the technical interest rate equates to a 5% difference in the coverage ratio. The best pension funds have a coverage ratio of 115 to 120% with a 2% technical interest rate.

If you would like to know more, you can read more about the different types oflanguageor read the article on the “pension language“.

Years of absence / youth

What are missing years?

Missing years are years in the AHV contribution period in which your account has gaps in contributions. This is because how much pension you will receive from the AHV in the future depends on how many contributions you have paid and for how long. Gap years are years in which no contributions were paid into your individual AHV account. Your employer pays the contributions if you are employed or you pay them yourself if you are self-employed. There are therefore gaps in your contribution account in the years without contributions – years are missing.

What are teenage years?

In principle, everyone in Switzerland must pay AHV contributions: As an employee, OASI contributions from January 1 after you turn 17, and as a non-employed person from January 1 after you turn 20. These 3 years are called youth years.

A full pension requires, among other things, that you have paid contributions every year from then until normal retirement age. Or you have accrued childcare credits for individual years. Or your (spouse) partner has paid in at least twice the minimum AHV amount if you have not paid in yourself. As a man, you must therefore currently have at least 44 years of contributions: Retirement age 65-21 = 44. If you lack contribution years from the age of 21, you can compensate for missing years with up to 3 years of youth.

How can years of absence arise?

For example, if you only start working at the age of 21, study at university for longer or work part-time, you will have years of absence. Or if you take a sabbatical/time off abroad or are a single parent and not working, raising children while your boyfriend provides the household income, you will also incur years of absence. There may also be irregularities on the part of your employer, who may have deducted the contributions from your salary but not paid them to the AHV. Or you may have immigrated to Switzerland from another country and therefore not paid into the AHV for years. As the old-age pension is reduced by around 2.3 percent for life for each missing year of contributions, you should avoid missing years if possible. As a rule of thumb, you will receive around CHF 55 less pension each month for each year of absence (based on the individual maximum AHV pension in 2019).

If you would like to know more, you can find out more about years of absence and contribution gaps at AHV or read the article on the “Pension discussion“.

Our tip: Check how high your pension will be for free with our pension calculator and use the tips there to do something about missing years.

Vested benefits / vested benefits account

Money you are entitled to if you leave a pension fund before a benefit event occurs

The vested benefits are also known as termination benefits or vested benefits money. It is defined in the Vested Benefits Act (“Federal Act on Vesting in Occupational Old Age, Survivors’ and Disability Benefit Plans”). All pension funds must comply with this law. The vested benefits are the capital that you receive when you leave your pension fund before a benefit event occurs (retirement, death, disability).

How high are the vested benefits?

The amount of the vested benefits depends on a comparative calculation. Your pension fund calculates this automatically. You receive the largest of three contributions:

• the statutory minimum amount,
• the BVG retirement assets or
• the vested benefits specified in the pension fund regulations of your pension fund.

The aim of the Vested Benefits Act is to ensure that your pension benefits are maintained even if you change employer or retire before retirement age. Therefore, if you change jobs, your employer must transfer the entire vested benefits (mandatory and non-mandatory portion) to the new employer’s pension fund. You must therefore tell your previous pension fund where to transfer the termination benefit. If you do not do this or forget to do so, it will transfer your termination benefit to the BVG Substitute Occupational Benefit Institution after 2 years at the latest.

What is a vested benefits account?

If you do not (yet) have a new pension fund, your termination benefit will go into a special account that you designate: the vested benefits account. This is in your name and is managed by a vested benefits foundation, which “parks” the money for you until you have a new employer or reach retirement age and can then withdraw your vested benefits. It is a “blocked pension fund balance”, so to speak.

Our tip: Divide your vested benefits into 2 equal accounts to save tax if you withdraw them in stages in old age.

Since the purpose of the Vested Benefits Act is to maintain your pension protection, the vested benefits can only be paid out in cash in 3 cases:

• you are leaving Switzerland permanently and are not subject to compulsory pension provision in the EU/EFTA
• you become self-employed and are not subject to compulsory occupational benefits insurance.
• the amount of your vested benefits is very small – it is less than one annual contribution.

You can also use vested benefits – like money from your pension fund or pillar 3a – to promote home ownership.

If you would like to find out more, you can find out more from the Federal Social Insurance Office or read the article on “Vorsorgesprache“.

Compulsory

The mandatory minimum benefits that you receive from the 2nd pillar are

The Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG) has been in force since 1985. The BVG is intended to supplement AHV benefits so that you can continue your accustomed standard of living in an appropriate manner. The BVG distinguishes between compulsory and voluntary insured persons on the one hand, and employees and self-employed persons on the other. The BVG is primarily aimed at employees, but since 1997 it has also included the unemployed. It describes the cases in which they must take out compulsory insurance, i.e. pay compulsory contributions. And what they receive in return – the compulsory scheme.

When do I have to pay BVG contributions?

This is the case if the following three conditions are met. Firstly, you have an employment contract and are insured with the AHV/IV. Secondly, you are between the ages of 18 and have not yet reached the normal retirement age (64 / 65 for women / men, as of 2020). Thirdly, your annual salary is above the so-called entry threshold. In this case, your employer must pay contributions from your salary to the pension fund. The amount of the entry threshold and BVG insurance limit depend on the AHV maximum pension. The AHV maximum pension and the limits derived from it are reviewed every two years. For your BVG contributions, you receive the so-called mandatory amount.

Obligation in return for BVG contributions

The compulsory scheme provides minimum benefits for retirement pensions, death and disability. Self-employed persons can take out voluntary occupational pension insurance. To do so, they join a corresponding pension fund or the Substitute Occupational Benefit Institution and pay contributions to it. If you would like to know more, you can find out more from the Federal Social Insurance Office or read the article on “Pension planning“.

Tax progression

Tax progression means that a higher tax rate applies to higher incomes and assets than to lower incomes.

Switzerland and most other countries use progressive tax rates. In Switzerland, only the cantons of Obwalden and Uri have a flat-rate tax. In this case, the tax rate is the same regardless of income.

Tax progression means that an additional CHF 1,000 of income incurs more tax than the previous CHF 1,000. Or: the more you earn, the higher your tax rate (also known as the “tax base”). Therefore, the proportion of tax on your income also increases. The rate applicable to the last 100 francs is called the marginal tax rate. This is much higher than the average tax rate.

The tax progression is based on the affordability principle. In everyday life, this is more simply called “redistribution”: those who already have less should also pay less tax. And if you earn more, a little more won’t hurt you much. You should therefore look for ways to reduce your taxable income and break the tax progression.

Shortfall

Underfunding is a precarious situation in which the pension fund assets are not sufficient to cover all current and future obligations

A pension fund must always be in a position to meet its obligations. A simple key figure expresses this: the coverage ratio. It shows the ratio between the assets and the liabilities of a pension fund.

A shortfall exists if the available pension assets are less than the actuarially required pension capital on the reporting date. Or to put it more simply: the coverage ratio is less than 100%. Or even simpler: the fund does not currently have enough assets to pay all future insurance commitments in addition to the current ones. In this case, it must initiate restructuring measures in accordance with the BVG. These are temporary measures to remedy the shortfall within a period of five to seven years. For example, it is possible to adjust the investment strategy, adjust the financing, reduce future benefits, lower the conversion rate, reduce the interest rate on retirement assets or encourage the employer to make special contributions. Finally, restructuring contributions may also be levied from insured persons if other measures do not achieve the desired result.

You can find out more at the Federal Social Insurance Office.

Advance withdrawal for home ownership (WEF) / home ownership promotion

An advance withdrawal for home ownership (WEF) is a “cash withdrawal” from the pension fund before retirement age in defined cases.

Advance withdrawal for home ownership (WEF) means that you use your pension assets before retirement to finance owner-occupied residential property. To do this, you can have funds paid out in full or in part or pledge them. “Anything goes”: you can use funds from any source. Regardless of whether they come from mandatory or non-mandatory occupational benefits insurance, from vested benefits policies or vested benefits accounts or from pillar 3a.

The purpose of the advance withdrawal for home ownership (WEF) is also defined quite broadly by law: you can use your pension assets to buy or build residential property, extend or convert it and repay existing mortgages. Or you can buy shares in housing cooperatives or similar investments. The residential property must only be owner-occupied at your place of residence, not a fancy vacation home in the mountains.

How much you can withdraw in advance depends on your age (younger / older than 50). And the advance withdrawal you make will of course reduce the amount of your future pension benefits.

Our tip: This is why it is often advisable not to make an advance withdrawal for home ownership (WEF), but to pledge your assets instead. Because then the pension protection is not reduced. Only if you are unable to service your mortgage and the bank wants to realize its pledge will your pension protection be lost in the amount of the pledged capital. But it shouldn’t come to that.

If you would like to know more, you can find out more about implementation at one of the largest pension funds or read the article on the “Pension discussion“.