Last update: 04.10.2024 09:20
As we have already written, “the more you pay into the pension fund, the more you get out”. Although your employer chooses your pension fund, you have a choice with many pension funds. You can voluntarily choose a higher savings option, make a pension fund purchase or make an early withdrawal. Find out which considerations are worthwhile.
In the 2nd pillar, the occupational pension scheme (BVG), the contributions paid in by you and your employer are invested by a pension fund and earn interest. This increases your retirement assets, which you can ultimately withdraw as a lump sum or convert into a lifelong pension. If you make a pension fund purchase, your retirement assets will grow by this amount.
What actually happens to my money in the pension fund?
A pension fund must ensure that it can meet these benefit obligations at all times. This is why pension funds continue to invest their assets mainly in bonds and real estate, the value of which fluctuates less than the value of shares.
Because interest rates have been falling for many years, pension funds are increasingly shifting into investments that generate a higher expected return and therefore have a correspondingly greater fluctuation range. They are investing more in equities. Equities are now the largest asset class. In 2020, around 31 % of pension fund assets were invested in equities (Switzerland, abroad). Bonds (Switzerland, abroad) are in second place with around 29 %, real estate is in third place with around 20 %. As a safe investment, it is becoming increasingly attractive in the low interest rate environment. It is also noticeable that pension funds are investing more in alternative investments (around 8 % of investments) and holding less liquid assets (cash, liquidity) and short-term investments.
In principle, pension funds are still doing relatively well, but they are coming under pressure due to rising life expectancy and low interest rates and therefore need to act. You can assume that the BVG conversion rate of 6.8 % for pensions will be lowered in the coming years.
Is a higher savings option for the pension fund worthwhile?
With many pension funds, employers grant their employees benefits that go beyond the prescribed minimum (known as mandatory benefits). For example, they do not make a coordination deduction from the insured salary. This means that they – and you – pay savings contributions to the pension fund on your income from the very first franc. Another non-compulsory benefit is to insure income in excess of the upper BVG limit. Both lead to higher savings contributions in total, therefore to higher retirement assets and thus to a higher pension.
Many employers also offer their insured members the option of voluntarily making higher savings contributions than the statutory minimum. This is called a “higher savings option” or “optional plan”. You can think of it as a regular pension fund purchase “in installments”. If you choose a higher savings option, you voluntarily pay slightly more savings contributions each month than prescribed. These savings contributions are credited to your retirement assets and reduce your taxable income. They earn interest with the rest of your retirement assets.
You therefore need to consider whether you can invest your money more profitably elsewhere or whether you would “only” be saving it in your private account or savings account anyway. Are you saving for a property, for example? Then you can voluntarily use a higher savings option for a few years on a tax-privileged basis and later make an early withdrawal to buy a property. Unlike a pension fund purchase, savings contributions from a higher savings variant are not subject to the 3-year blocking period for a lump-sum withdrawal.
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What is a pension fund purchase?
Similar to regular, voluntary higher savings contributions, you can consider a one-off pension fund purchase. You can compare such a purchase into the pension fund with a payment into pillar 3a, except that you do not transfer the money to a pension foundation for pillar 3a, but to your pension fund.
Do you have purchasing potential? Your pension certificate will tell you. It contains a line “Purchase potential”. Otherwise your pension fund can tell you whether and how high your purchase potential is. The purchase potential corresponds to your contribution gap in the occupational benefit scheme. This involves checking “how high would your retirement assets currently have to be if you had always earned as much as you do now?” The purchase potential can therefore change over time, for example if you increase your level of employment, choose a higher savings option or switch to an employer with a pension fund that also insures extra-mandatory benefits on your salary.
Is a pension fund purchase worthwhile?
You can pursue various goals with a purchase into the pension fund, such as
No matter what your main goal is, you can always deduct 100% of a purchase amount from your income tax. This makes particular sense in years with a higher income, e.g. if a bonus would put you in a higher tax bracket.
Similar to choosing a higher savings option, you need to check whether the interest on the capital in the pension fund is worthwhile or whether it would be better to invest your bonus elsewhere and thus offset the tax advantage with a higher alternative return. You should also get an overview of the financial situation of your pension fund; is it underfunded, does it achieve low investment returns or does it have an unfavorable ratio of pensioners to active members? These are signs that speak against a purchase.
The shorter the time before retirement, the higher the return on a purchase tends to be. That’s why the rule of thumb is: you should consider buying into your pension fund for the first time around 10 years before you retire. Your income will then generally be higher than when you are younger and the time horizon until retirement will be shorter: the tax savings will ensure a high return in the remaining investment period until retirement. However, make sure that the purchase is made at least 3 years before you retire. Otherwise the tax authorities will no longer recognize the deduction and will reclaim the taxes saved when you buy into the pension fund if you withdraw the retirement assets or parts of them as a lump sum.
How big is the tax advantage of a pension fund purchase?
Let’s take a look at the example of Kurt (59) from Bern. Kurt is single, reformed and has no children. He has to pay tax on CHF 90,000 and has saved up assets of CHF 300,000. He is considering buying into his pension fund with an amount of CHF 25,000. What tax advantage does this give him?
Well, first of all, Kurt’s taxable income falls from CHF 90,000 to CHF 65,000 in the year of the deposit. His tax burden falls by CHF 5,400 (CHF 9,600 instead of CHF 15,000). However, if he then retires at 65 and withdraws his capital as planned, the capital tax will increase by CHF 2,600. In the end, this leaves him with a taxable profit of CHF 2,800. A worthwhile business.
You can find out what the situation is in your case with just a few clicks. Simply use the tax calculator from the Federal Finance Administration.
What does the three-year vesting period mean for pension fund purchases?
After your purchase, you may not withdraw any retirement assets as a lump sum for three years. Otherwise the purchase will not be recognized as a tax deduction and will be taxed retrospectively.
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Is an early withdrawal from a pension fund worthwhile?
In defined cases, you can also have your pension fund assets paid out for a specific purpose. These cases are described in the Occupational Pension Act. In short: you are financing a property you use yourself, renovating it, starting a business or moving abroad permanently. Depending on the coverage ratio, interest on capital and conversion rate, an early withdrawal can be attractive. In the event of a payout, different cantonal capital taxes are due, which generally amount to 5 % – 10 % – a good deal compared to the “saved” income tax. You can also use the tax calculator of the Federal Finance Administration.
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Capital payment tax
When you withdraw money you have saved from your pension, a tax is payable: the capital payment tax (also known as capital tax or capital withdrawal tax).
Find out in the article how you can cleverly optimize this tax.
Summary of pension fund purchase and savings option
The question remains whether you have the opportunity to invest your money more profitably outside the pension fund? You have to take into account the tax advantages that higher contributions or a pension fund purchase entail. In the Smolio Cockpit, you can adjust the parameters in the 2nd pillar and see the effects on your assets and your pension.
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