Last update: 17.09.2024 08:32
You can deposit your termination benefit from the pension fund in a vested benefits policy. But what exactly is it and does it make sense for you? Read the article to find out what a vested benefits policy is, the differences to a vested benefits account and the 20 most frequently asked questions about vested benefits policies.
What is a vested benefits policy?
A vested benefits policy is a premium-free life insurance policy where you transfer your termination benefit from your occupational benefits insurance to an insurance company as a one-off investment. The vested benefits policy serves to secure your pension assets and provide you with additional insurance benefits for death and disability. The policy is managed by an insurance company. Please note: you can only terminate a vested benefits policy prematurely at a loss. It is therefore not suitable for the short-term investment of your termination benefit.
When can I open a vested benefits policy?
You can only open a vested benefits policy if you do NOT join a new pension fund immediately after leaving the old pension fund. This applies, for example, if you are unemployed or planning a job break.
You can also open a vested benefits policy if you have bought into the regulatory benefits of a new pension fund and have residual assets from the transferring pension fund.
When do I need a vested benefits policy?
A vested benefits policy can be useful if you want to insure against the risks of disability and death in addition to retirement provision. It offers you insurance cover if you become disabled or die before the normal retirement age. The policy allows you to withdraw the pension capital you have saved in the form of a lifelong pension or a one-off lump-sum payment. The vested benefits policy is less suitable if you want to transfer your pension fund assets back to a pension fund in the near future. This is because a vested benefits policy cannot be terminated prematurely without incurring a loss.
Our tip: Separate saving and insuring
If you want insurance cover for disability or death, we believe that the alternatives to a vested benefits policy are more attractive. And these consist of buying risk insurance in pillar 3b and investing your pension fund assets in more lucrative investments, for example in a vested benefits account with a pension fund.
How can I open a vested benefits policy?
To open a vested benefits policy, you must contact an insurance company that offers this insurance solution. Opening a vested benefits policy requires you to fill out an application form and provide the necessary documents (e.g. valid ID, instruction to the previous pension fund to transfer the retirement assets). Once the insurance company has processed your application, you will receive the policy and the relevant documents. The vested benefits policy is then financed by a single contribution – this is the termination benefit from your pension fund.
Please note that termination benefits are always transferred directly from the transferring pension fund to your new vested benefits policy – your pension assets always remain in the pension cycle.
What are the advantages of a vested benefits policy?
The advantages of a vested benefits policy lie in the protection of your pension assets, on which you do not want to accept any fluctuations in value. It allows you to withdraw your pension capital as a one-off lump sum payment or as a lifelong pension when the contract expires. Typically, you receive the interest-bearing lump sum in the event of survival (i.e. when the contract expires).
Depending on the structure, it also offers insurance cover if you become disabled or die before the normal retirement age. In the event of death before the end of the term, it pays out the agreed lump-sum death benefit.
What are the disadvantages of a vested benefits policy?
The vested benefits policy has a number of disadvantages. One of the main disadvantages is that the policy cannot be terminated prematurely without loss. The expiration date is agreed when the policy is taken out and is specified in the policy. The pension capital saved is not flexibly available when you start a new job and have to transfer your termination benefit to the new pension fund. Payment is only possible in special cases provided for by law or at the earliest 5 years before reaching the (ordinary) BVG retirement age. Technically, this early termination before the contract expires constitutes a repurchase; a repurchase before the end of the contract is usually associated with a partial loss of your transferred termination benefit.
In addition, vested benefits policies are affected by low interest rates, which significantly reduces returns.
Another disadvantage is that the policy includes insurance benefits, which affects the return. The return is therefore even lower than with a vested benefits account.
We are convinced that you should separate savings and insurance. That’s why we believe that a vested benefits account is the better solution for most people.
How long does an FC policy run for?
The contract term of your vested benefits policy is determined when you take out the policy. It ends either on your death or on the “survival date”, i.e. the date of your normal retirement in accordance with the BVG that applied when you took out the policy. From 2028, the reference age will be 65 for both men and women.
Some insurance companies offer the option of deferring the policy for up to five years. This can be very attractive from a tax perspective. By then at the latest, the amount will be paid out as a lump sum.
Can I terminate my vested benefits policy early?
You can only terminate a vested benefits policy prematurely if there are legally defined reasons for doing so. Otherwise, the pension capital saved is not flexibly available. In the event of early termination, you will receive the surrender value, which is less than the amount paid in during the first few years.
What is the difference between a vested benefits policy and a vested benefits account? Which is better?
Vested benefits accounts and vested benefits policies are identical in terms of tax treatment, restrictions on the maximum possible duration and restrictions on cash payouts and beneficiaries. But there are also important differences.
Firstly, pension protection differs between a vested benefits policy and a vested benefits account. A vested benefits policy is an insurance solution that protects your capital and also insures you against risks. It covers risks such as disability or death during the term of the policy. Financing the insurance benefits reduces your return. The vested benefits account is about temporarily depositing your vested benefits. The FC policy is also about insuring pension benefits.
Secondly, there is a difference in flexibility. A vested benefits account is a special account into which you pay your termination benefit from the occupational benefit scheme. The account is managed by a vested benefits foundation, which “parks” the money for you and pays interest on an ongoing basis. The vested benefits foundation sets the interest rate independently and can change it at any time. As long as you do not invest the money in securities, you can transfer the account to a new pension fund at any time without incurring any losses. The termination of a vested benefits policy, on the other hand, is associated with losses.
Our tip: Insure risks in pillar 3b
It is better to insure yourself against death and disability by taking out pure risk insurance with an insurance company. You can then invest your vested benefits more advantageously.
What are the costs of a vested benefits policy?
The costs of a vested benefits policy vary depending on the provider and are not always transparent. As a rule, there are no visible costs for taking out or maintaining a vested benefits policy. If the policy is terminated, held for less than a year, funds are withdrawn in advance for home ownership or the policy is suspended, fees of several hundred francs are common.
Please note that the insurance benefits and management of your assets are associated with administrative costs and premiums for the insured benefits. Your policy provider recoups these in other ways: either with a lower interest credit than on a vested benefits account. Or, if the vested benefits assets are invested in investment funds, with slightly higher fees that are charged directly to the investment funds. You won’t see any of these costs at first, you will only notice them in the return on your assets.
Technically, termination before the contract expires is a surrender, which is associated with a partial loss of capital for you. This results, for example, from the fact that the insurance company invests your credit balance on the capital market until the end of the contract and the early termination of this interest differential transaction incurs costs. Any acquisition commissions paid by the insurance company to third parties are also charged to your capital and are lost to you.
How does the capital in an FC policy earn interest?
You receive interest on the capital in your vested benefits policy from the insurance company managing the contract. The insurance company usually sets the interest rate each year. It is completely free to set the interest rate – there is no minimum interest rate as there is in occupational benefits insurance. Some providers allow the capital to be invested in funds, which can enable a higher return.
How is an FC policy taxed?
As with other occupational pension assets or pillar 3a assets, you do not pay any wealth, income or withholding tax during the term of the contract.
The lump-sum benefit is payable at the retirement age stipulated in the policy. It is taxed separately from other income at a reduced rate: capital tax. The exact amount depends on various factors, such as your canton of residence and your marital or civil status.
Our tip: divide your assets between two foundations when you leave
When you leave your pension fund, you can divide your termination benefit between a maximum of two vested benefits institutions. This division of the pension assets is only provided for in the case of a direct transfer from the previous pension fund. It is no longer possible to split a vested benefits account or FC policy once it has been set up. With this division, you can stagger the later withdrawal and thus save taxes.
What happens to my vested benefits policy if I move abroad?
Switzerland has concluded agreements on the free movement of persons with the EU and EFTA. This means that if you leave Switzerland permanently, you can withdraw your policy assets as follows: if you move to the EU and EFTA countries (with the exception of Liechtenstein), you can withdraw the extra-mandatory portion; if you move to other countries, you can withdraw the entire capital. Check which tax regulations apply to these lump-sum benefits in your new home country, for example in this article for Germany.
Can I use my vested benefits policy to buy a home?
Yes, you can withdraw your vested benefits early to finance owner-occupied residential property within the framework of the statutory provisions on home ownership promotion. The exact modalities and conditions for the early withdrawal of home ownership are determined by the respective insurance company.
What happens to my vested benefits policy after a divorce?
A divorce results in a pension equalization. The pension capital saved during the marriage is divided equally between the spouses and the former spouse receives a share of the assets. Vested benefits assets and therefore also the FC policy are subject to pension equalization. If things go wrong, you will have to liquidate your policy at a loss in order to pay your former spouse his or her share.
How secure is a vested benefits policy?
Assets from the vested benefits policies are fully guaranteed by the insurance company at all times. This is because it must set up tied and specially segregated special assets for this purpose. FINMA monitors that the insurance companies comply with the relevant regulations. The security of a vested benefits policy therefore depends on the creditworthiness of the insurance company.
What happens to my vested benefits policy in the event of my death?
Vested benefits assets are not part of your estate. This is because pension assets should primarily benefit those who are financially affected by your departure. Depending on the contract or regulations of your vested benefits institution, it pays out a lump sum or a pension.
Therefore, in the event of death, the benefit goes to the beneficiaries in accordance with the order of beneficiaries. If you do nothing, the statutory order according to Art. 20a BVG applies – see table.
| Sequence | Beneficiaries of the level |
|---|---|
| Legal level | Surviving spouse Dependent children Registered partner |
| 1st level (or rank) | Significantly supported natural persons Cohabiting partners from 5 years of age |
| 2nd stage | Children who no longer require support Parents Siblings |
| 3rd stage | Other legal heirs |
The law stipulates the first level – they always benefit, so you can’t exclude them completely. If there are several people in this group, they will receive the money in equal shares – unless you have specified who should receive which share.
You can partially change this order or specify the percentage shares that beneficiaries in the same tier should receive. However, you cannot kick people out of the first tier. If you wish, you can directly benefit people from group 2 (and only those) by adding them to group 1.
And if there is at least one person in a level, this level cannot be skipped. In concrete terms, this means that someone in level 3 only gets a turn if there is no one in the previous levels.
How can I transfer my vested benefits policy to the pension fund of a new employer?
As part of the statutory provisions on occupational benefits, you must transfer your vested benefits to the pension fund of a new employer. This transfer process usually takes place on the basis of a transfer application, which you must submit to your new pension fund.
What happens to my vested benefits policy in the event of unemployment?
In the event of unemployment, the vested benefits policy remains in place and is not terminated. The accumulated pension capital will continue to be managed by the insurance company.
If you are unemployed and receive daily allowances from unemployment insurance, you are compulsorily insured with the BVG Substitute Occupational Benefit Institution against the risks of disability and death, but no longer save for your retirement. To prevent pension gaps, you can take out voluntary insurance with the Substitute Occupational Benefit Institution. However, you will then have to pay both employee and employer contributions, as your employer will no longer pay for you.
Our tip: close the gap with a later purchase
If you cannot afford the contributions for financial reasons, you can close your pension gap later by purchasing into the pension fund.
How is a vested benefits policy treated in the case of self-employment?
In the event of self-employment, the vested benefits policy generally remains in place. Self-employment is a permissible reason for drawing benefits from the pension plan. Self-employment must be your main occupation and the withdrawal must be made when the company is founded, but at the latest within one year of becoming self-employed as a sole proprietorship or general partnership. A withdrawal for self-employment with your own corporation is not possible.
If you would like to use your credit balance from the policy to take up permanent self-employment, you will receive the surrender value of the policy.
How is a vested benefits policy treated in the event of disability?
In the event of disability, the vested benefits policy remains in place. If you are undisputedly disabled and receive a full disability pension, but no pension fund is required to pay a disability pension, you can have the entire vested benefits balance paid out. You will then receive the surrender value of the policy.
If you were insured with a pension fund when the reason for your disability arose, you should wait to withdraw your vested benefits. This is because you may also receive a disability pension from your former pension fund in addition to your IV pension. To do this, you would have to return your vested benefits to the pension fund.
You can find out more about occupational benefits and disability in this article.
Which providers of vested benefits policies are there?
The demand for vested benefits policies has declined with the low interest rates. This is why many large insurance companies (such as Zurich, Mobiliar and Axa) have withdrawn from the vested benefits policy business in recent years. Others (such as Baloise or Allianz) now only offer vested benefits policies to existing customers. Generali Versicherung, for example, is accepting new customers.
Summary of vested benefits policy
With a vested benefits policy, you can deposit your termination benefit from the pension fund with an insurance company for a fixed contract term until you reach normal retirement age. In addition to capital protection, you also acquire insurance cover against death and disability, depending on the structure. We are of the opinion that it is better to insure these risks in the unrestricted pension plan (pillar 3b) and either park your retirement assets in a vested benefits account or invest them in a vested benefits custody account.
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