Lump Sum Tax on Pillar 2 & 3 – Kapitalauszahlungssteuer

Gruezi RIP Freunde,

Welcome back to the Switzerland series!

Today questions are: when and how will my Pillar 2 & 3 be taxed?

We’ve took a look at the Swiss Pension System in a previous post. We’ve seen how Pillar 1, 2 and 3(a) work. We’ve seen that Pillar 2 & 3a are pre-tax investments thus when you withdraw them as lump sum you have to pay a tax named Kapitalauszahlungssteuer.

In this post we’re going to take a deeper look at this tax and how to optimize your withdrawing to pay as less a possible of it.

Let’s split the initial question in two. First: when will my Pillar 2 and 3a be taxed? When am I going to pay the Kapitalauszahlungssteuer, i.e. the lump sum tax?

You’re going to pay taxes based on the withdrawal actions from your Pillar 2 & 3a on each year. You can’t withdraw whenever you want from your tax advantage accounts though. Withdrawal actions from your Pillars happen when:

  • You reach retirement age and choose to get a portion (or the whole) capital as lump sum.
  • You buy a house of primary residence.
  • You start a company.
  • You permanently leave Switzerland.
  • (some other minor circumstances).

I said “on each year” because lump sum tax is based on the amount you withdraw during a tax year.

It means that if you withdraw X this year, you pay – this year – the tax due on the full withdraw of amount X. If, instead, you withdraw half of X this year and the other half next year, you pay the lump sum tax due on a withdraw of half of X both this year and next year, which is usually less than the tax due on a single withdraw of X thanks to the progressivity of the tax.

So, first rule of thumb: if possible, split the withdraws over more than one year.

Before moving to the second question, I need to admit that I don’t know the actual details of Kapitalauszahlungssteuer payments. I mean, if you withdraw from N different Pillar 3a accounts you owe the tax due on the whole withdrawn amount. I’m not sure you get to access the gross amount from your accounts and then pay your tax at tax declaration time the year after. You may have left the country and be unreachable (and not accountable any more). I guess your funds/vested benefits accounts are going to withhold the expected tax on each lump sum and then you have to pay the difference at tax time, which is still risky for the government but at least you’ve already paid a good portion of your due tax. A safer option for the government would be to force you to communicate all other withdraws and withholds you had during the year so that on each withdraw you’ll pay the right tax due. I’d love if someone could bring their experience and clarify this point. Anyway, that’s just a technical issue and if you (like me) don’t plan to game the system in illegal ways (don’t, just don’t!) you shouldn’t care.

There are legal ways to minimize tax due though. For example we’ve already seen that splitting the withdraw over multiple years helps.

Next trick is: the lump sum tax is due in the Canton where your fund/vested benefits account is domiciled. It doesn’t depend on your domicile, even though your employer’s Pillar 2 and your Pillar 3a bank accounts are probably in your Canton of residence.

RIP, does that make some difference? Do I have control over it?

Sure my friend, let’s take a look at the tax rates on some popular Cantons. I’ve manually pulled data from the PostFinance tool for lump sum payments and I’ve created this spreadsheet. Here’s a screenshot

lumpsumrates

Data have been extracted beginning of November 2016. They’re probably going to change every year since federal government and individual Cantons can change their tax brackets. Having a way to extract numbers automatically would be great (I tried to inspect the HTML to find some API I could call but I failed). I won’t keep the spreadsheet in sync with the official data in future.

The Cantons considered for the analysis are:

  • Zurich, Zug, Schwyz and Bern (German speaking)
  • Geneve and Vaud (French speaking)
  • Ticino (Italian speaking)

The selected Cantons represents all the (main) language areas of Switzerland, they are roughly the most populated ones (sorry Aargau). Some of them are there just show off their tax skills (welcome Zug and Schwyz).

On the left column of each region you’ve the amount to withdraw. I’ve analysed the range 0-2M CHF with 50K increases till 300K, then 100K increases till 1M, then 200K increases till 2M.

The upper blocks are absolute tax you’d pay to withdraw that amount in that Canton. Lower blocks are percentages.

There are 3 different scenarios analysed:

  • Single person with no kids.
  • Single person with with kids, apparently it doesn’t matter how many.
  • Married couple, same applies for registered partnerships / civil unions. Apparently it doesn’t matter if you have kids. Most of the time tax brackets for a married couple are identical to those for a single with kids.

I completely removed church tax from the equation. All scenarios are without religious affiliation. Yes, in Switzerland there’s a tax on your religious affiliation.

Hi highlighted the top 3 (three shades of green) and the worst (orange) Cantons from a tax perspective on each scenario.

Few considerations:

  • Zurich sucks.
  • Vaud sucks.
  • Zug is the asymptotic best Canton on every scenario.
  • Schwyz is awesome for married couple up to 300K.
  • Ticino Canton is amazing from 200K to 1M.

Some graphs (click on the images to enlarge them):

Ok RIP, great, now I know I live in a sheetty Canton and when I’ll get my Pillar 2 I pay a lot of taxes. Is there something I can do about it?

Yeah, you have control over it. You can open a vested benefit account in a Canton you like and transfer your funds there. There are even institutions who can do that for you (with reasonable fees).

So don’t worry, keep accumulating wealth into your Pillar 2 & 3a and at the time of withdrawal just evaluate if it makes sense to open a vested benefit account in a tax favorable Canton.

Mind that in 2020 there will be a major Pillar 1 & 2 reform and that they may make harder to pull money from Pillars (and Cantons can always play with the lump sum tax rates). There’s no guarantee that your today’s strategy will work tomorrow.

But… what happens if I have a Pillar 2 in Canton X and a Pillar 3a in Canton Y?

Well, I don’t know. I don’t think you’re going to pay taxes on each Canton based on the split funds volumes, that alone would be another nice tactic. I guess you pay the marginal tax on the amount you withdraw on each Canton based on previous withdraws as if they were all in the Canton where you’re performing the withdraw. But these are just speculations, if anyone has more information please let me know.

That’s all folks!

Before letting you go, let’s analyze a case study:

RIP Family

  • According to rows 13 to 15 of my NW documentmy current Pillar 2 & 3a capital is 126K CHF (end of October 2016).
  • I do plan to invest 20K in a Pillar 2 buy in this year (2016).
  • I won’t do any other buy in on the following years: buy ins are locked for 3 years and I do want to be free to withdraw by January 2020 (which corresponds to my current optimistic FI date).
  • I do plan to keep investing 6.7K per year on Pillar 3a.
  • I plan to keep my Pillar 2 monthly contribution at 8.5% (100% matched) of my gross salary, which means ~2450 CHF per month. Probably going down since I’ll start working 80%, but I plan to get a promotion within 12-18 months so I can assume the average will stay the same.
  • I do plan to be in the Married/Partnership or at least have a kid.
  • I assume Pillar 2 interests of 1% and Pillar 3a interests of 0.2%.
  • I may work a little bit to find a better Pillar 3a options but it’s not my first priority. I may leave Switzerland in 3-5 years and I may be ok with investing in a saving account. We’re talking of 4-6 Pillar 3a contributions, i.e. 27-40K CHF.

This leads to a Pillar 2 & 3a projection of ~275K by January 2020 and 355K by January 2022 (forecast spreadsheet here).

Zooming in below 500K - Schwyz is your answer till 350K. Why does Vaud suck so much?
Zooming in below 500K – Schwyz is your answer till 350K. Why does Vaud suck so much?

Assuming, from a tax perspective, the worst case scenario where I won’t be able to split the withdraw between 2 tax years and that I will be able to withdraw the whole Pillar 2 (even the mandatory portion), it means I should expect a tax rate of 4.5 – 6.5%. Best Canton for my situation is Schwyz, with a tax rate of 4.5 – 5.5%. In my NW document I’m already taking this into account and expecting a tax rate of 5.3% (row 62).

Will it be worth to move my funds in Canton Schwyz? Well, we’re talking about 1 – 1.5% tax difference with respect current situation, i.e. a 3-4K CHF difference – hint: I don’t live in Canton Vaud 😀

I don’t know if it will be worth, I’ll think about it at withdrawing time.

That’s finally all 🙂

Enjoy!

Unemployment in Switzerland

Hi RIP friends,

Today we have the first guest post on this blog! I asked a close friend of RIP family to write something about being unemployed in Switzerland. This post fits in the Switzerland series, where we discuss how’s life and work (and the lack of it) in Switzerland.

So… welcome Mr. DIP!

No, guys, Mr DIP is not an “imaginary friend of mine”.

But RIP, you used to talk with your imaginary friend on this blog!!

Yes, I know I sometimes like to draw a post as an imaginary talk with an imaginary friend of mine, but it’s not the case for Mr DIP! Trust me, my… my imaginary… friend.

Anyway, welcome Mr DIP, it seems we’re going to see you again on this blog 🙂


I don’t know why all those places look exactly the same. They’re all like… like you see them in the movies. Trust me, I am an expert. It all started when I was a teenager. In and out of them. Sometimes I succeed for a while, but then I fell down again and again.

I remember the very first time. I was 17 or 18 I guess. I’m sure that I hadn’t a driving license yet, so it must have been before age 18. I remember I was going around by bike, after school, looking for itA friend of mine that started some months before gave me few contacts, phone numbers, even physical addresses. He said: “trust me, there you could find what you need”. He also told me that as soon as I’d begin with it I would have suddenly felt more adult, more independent… a free man! Of course he omitted to say that once you start it’s almost impossible to stop. It’s addictive. I don’t blame him though. He’s not guilty, of course. He was probably not fully aware of what we were just doing.

Anyway, fast forward more than 20 years and I’m sitting here, in this bare room lighted with a cold, partially blinking neon lamp. There is a ring of cheap chairs in the middle of the room. On the otherwise empty walls just a couple of posters from the nineties. One of them picturing a happy smiling family that appears to come from another world. The other one is announcing the national 1997 meeting of the association.

Well, it’s my turn. Let’s go!

I stand up. I know, it’s visible and I don’t care… I am nervous. Every week it’s the same torture. Even though I know that I am clean, I can’t help myself. It always feels like the very first day of school.

I breathe…

Again…

And finally: “HELLO, MY NAME IS MR. DIP….. AND I AM A WORKAHOLIC! TODAY ARE 314 DAYS THAT I AM TOTALLY CLEAN

I did it!!

First one to stand up is John, the homeless. He is the older member of the crew and the most devoted too. Legends say that he never worked! He comes and hugs me strong. Then, one by one, all the others stood up clapping sincerely. A standing ovation! I can read happiness on their faces. Happiness for my impressive score and a spark of hope for themselves. There is the ex banker, FI since 6 months. Two actually retired guys, but we all have to check on them periodically since it’s so difficult for them to accept that they don’t have to go to work every day. Then there’s Thomas, an ex CEO from a multinational company fired with an embarrassing fat severance package, but I’m sure he’ll stay briefly with us. He’s so dangerously addicted. I bet on just a couple of weeks.

There is also an observer. A real worker. A man from the dark side. I’m watching you, Mr. RIP!!! I know that you think you can stop whenever you want. You’re so naive… I have to admit that you are diligently doing your homework… Unfortunately, coming out from the shifting sand of a guaranteed work is not so easy as it seems. Luckily I, John, the banker and the others will always be here to help!

So, now you know me. I am Mr. DIP and I am F.I. since the beginning of the year… well… it should be better to say that I am temporary F.I. or that I am testing the life of a retired, just to be sure I don’t discover that I don’t like it when the actual retirement comes at age ~70.

In other words, I AM UNEMPLOYED, which here in Switzerland it exactly means to be FI for a certain period, and I am here to tell you about this amazing experience.

First of all, why MR. DIP? Well, it is the acronyms of Depression In Progress. That’s because no matter which one of the possible paths this story would evolve, I will certainly be depressed, sooner or later.

As a matter of fact, best case scenario I will find a Job in the next 14 months and then I will be depressed: I’d miss this amazing time of my life of waking up with no stress and no alarm clock, taking care of my little daughter, making something for myself like learning a new language. Everything will be over. On the other side if I will not find a job I will become soon extremely poor… and of course I will be depressed by that.

Below you can find the status of my unemployment insurance period.

dip

But the real reason why I am here is because my friend and source of great inspiration Mr. RIP invited me to explain how the unemployment system works in Switzerland. So, take pencil and paper and be ready to note it down.

RECIPE FOR A SWISS SUCCESSFUL UNEMPLOYED:

Ingredients:

  • A worker, registered within the confederation.
  • A valid residence permit.
  • Having lost (or quit) partially or totally your job.
  • At least one year of work (and the relative payment of the unemployment insurance).
  • Having completed the compulsory education and not being yet retired.
  • Being willing to start immediately in case you receive an offer.

With these 6 simple elements you can happily register yourself to the RAV (Regionale Arbeitsvermittlungszentren), ORP (Offices régionaux de placement) or URC (Uffici regionali di collocamento) depending on the main language of your Kanton.

Note: you actually only need the first 3 ingredients to be register as unemployed at RAV (ORP or URC) but of course you will just receive a general consultancy, access to the RAV job databank and no unemployment compensation. In some cases RAV can decide to offer a basic language course or other elementary services to this subclass of unemployed citizens, like a CV clinic or similar.

If you are lucky enough to have collected all the above requirements then you can access to the golden paradise of the Full Swiss Unemployment System Package that includes:

  • A RAV consultant that you can must meet once a month.
  • The unemployment compensation ($$$).
  • Accident insurance.
  • Sickness insurance.
  • Paid holidays, i.e. a week every 60 days of unemployment.
  • 14 weeks of maternity, in case you are a woman… and only if you are pregnant!

Essentially you’re now a RAV employee, with rights and duties. Of course, nothing of the above comes for free:

  • You have to stay in Switzerland. You are not authorized to leave the country during the workdays – Monday to Friday – unless you have requested holidays (and had them approved), at least 14 days in advance. You must also be reachable per ordinary mail or telephone within 24 hours if needed, even while enjoying your holidays.
  • You have to demonstrate that you are actively looking for a Job on a monthly basis. You have to prove (with emails, phone calls, letters from companies you have contacted) that you have applied for at least 10/12 different positions each month, no matter how narrow your field is. Ten to twelve is your magic number.
  • You have notify your RAV consultant about any event that you’d normally be required to tell to your employer, as for example sickness.
  • It’s mandatory to “do your homework” that the consultant decides with for you. Like attending a German course.

If you miss one of the above your consultant can suspend the compensation for a while, and if you are recidivist he can suspend it permanently.

So, as you can easily see it all strongly depends on the RAV and your consultant. Which, believe it or not, is not the same entity that pays the unemployment compensation. For that there is a separate private insurance. There are many of them and at the beginning of your unemployment period you can choose among a selected and authorized numbers of them. Once picked one at the beginning, you only have to fill a form each month and bring it to your lovely insurance. Within 2 days you have your money in your bank account.

[RIP note: we’ve recently seen that unemployment insurance is part of the large Social Insurance System named Pillar 1]

And last but not least… the actual money! I know you’re all interested in this, so I kept it for the sweet ending: how is your unemployment compensation calculated?

Easy. It will be 70% (or 80% in case you have children below 25 years) of your insured salary. The “insured salary” is usually considered your last salary before unemployment or, in case of big swings during last months, the highest average salary between the last 6 and 12 months. Salaries lower than 500 and higher than 148,200 chf/year are not insured. It means that the best case scenario is a gross yearly unemployment compensation of 80% of 148,200 chf/year, i.e. 118,560 chf/year.

For how long can you receive unemployment compensation?

It’s complicated… To make it simple let’s say that if you worked at least 2 years as a full time employee then it’s 400 working days plus vacations (a week every 60 days). Yes, you’re paid day by day (but on a monthly basis). 400 daily allowances that have to be received in a two-year period. It’s more or less 22 actual months.

More info here.

That’s more or less all folks! I could add here details about my personal experience and opinion, but maybe we can leave it for another post.


Hamster Getting a Workout on Spinning Wheel --- Image by © Royalty-Free/Corbis
Hamster Getting a Workout on Spinning Wheel — Image by © Royalty-Free/Corbis

… sure there will be another post, DIP, I actually hope more than one.

Mr. DIP, thank you for your time!

I really wish you to get back boon on your hamster wheel, if that’s what makes you depressed the less.

Holy sheet guys, how can we help Mr. DIP? Well, keeping him busy with writing for this blog is a good start!

Next DIP’s episode would be about his personal experience and opinion, but I’m also planing to ask him to answer few more technical questions, like:

  • What happens if you receive a job offer? Are you really forced to accept an offer no matter what the compensation and/or job location is? Are you supposed to accept an offer from everywhere in the word? Everywhere in Switzerland?
  • What actions does the RAV take in order to help you getting back on the hamster wheel? Just a language course? Other professional courses?
  • What happens if there are less than 10-12 available open positions for your job title in your area? Should you send random CVs around to hit 12?
  • What about sickness? Are you receiving your daily allowance during a prolonged sick leave? Does it block the 400 days term?
  • Are vacation (a week every 60 days) paid? If they do extend the 400 days term, why isn’t it just a 446 days term instead (you roughly have 46 days of vacation on 400 days)?
  • What if I’m a self employed / freelance?

Any other specific question, readers?

I’d love to enjoy my hamster wheel too, but I’ve a different idea on how I’d like to play with it 🙂

hamsterrelaxed

Swiss Pension System a.k.a. Pillars for dummies and immigrants

Gruezi RIP Freunde,

This very long post is about the Swiss Pension System, with special attention to information for immigrants.

Let’s ask the main question: when and how are you suppose to retire in Switzerland?

In Switzerland you usually start working very early. Legal minimum depends on the kind of job and accordingly to wikipedia you may be allowed to work at age 13 (upon parental permission).

During your active years you accumulate retirement assets and then, at retirement age, you can finally use these assets by getting annuities and/or withdrawing lump sums.

Traditional Swiss retirement age is 65 for men and 64 for women. I heard they’re going to unify this soon to 65 for both genders. As everywhere else there’s public regulation over pension system (like Italy), things change over time, usually for the worse, due to increased life expectancy and high national public debt.

Ok, how does the Swiss pension system work?

Let’s introduce the 3 Pillars System: state pension, work pension, private pension.

overview

Let’s take a closer look at each pillar, one by one.

This article is structured in pages. Click on next page to start with Pillar 1 🙂