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

Pillar 2

Second Pillar is work pension. Code name: BVG in German speaking Switzerland, LPP in French and Italian Kantons.

If you work in Switzerland and you earn at least a certain amount per year (in 2016 it’s CHF 21,150, i.e. 3/4 Pillar 1 MAX) and your age is at least 24, then you and your employer must contribute to a Pillar 2 pension fund according to a scheme your employer should provide with transparency and a little bit of control on your side.

Your mandatory yearly Pillar 2 insured salary is the difference between your current yearly salary and 7/8 of Pillar 1 MAX yearly salary (7/8 of 28,100 = 24,675), with some weird behavior if your salary is between 21,151 and 28,200. This difference is capped when your salary reaches 84,600 (three times Pillar 1 MAX), so the maximum mandatory yearly Pillar 2 insured salary is 59,925 (2 + 1/8 Pillar 1 MAX).

 

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pillar2contributionTo cover for your insured Pillar 2 salary, your mandatory contribution rate depends on your age and it’s regulated by law. The rates go from 7 to 18% of the insured salary (that maxes out at 59,925 CHF per year) and that’s your minimum contribution as employer. Your employer must at least match your contribution.

Example: Let’s assume your salary is 50K per year and you’re 30 years old. In that case your Pillar 2 insured salary is ~25K. Since you’re 30 y.o. your mandatory contribution is 7%, i.e 1750 per year (3.5% of your gross income).

Note: The fact that your insured Pillar 2 salary is X doesn’t mean that if you and your employer contribute your whole career to Pillar 2, from age 24 to age 65, you’ll get that salary. I did my math and discovered that at current contributions rates and conversion rate you get at most 65% of it.

I mentioned the word mandatory several times because Pillar 2 regulations specify the legal minimum given your salary, but if your salary is greater than 84,600 CHF per year, the remainder is insured as extra mandatory. Plus, your employer is free to offer you something better, something more. They can do better than just matching your contribution.

Any contribution above the one required by law falls into an extra mandatory portion of your Pillar 2. Extra mandatory Pillar 2 is less regulated (but contributions are still pre-tax) so the insurance company may offer you a different (usually better) interest on your capital and a different (usually worse) conversion rate.

Case of Study: In my case, age 39, my mandatory contribution is 10% of that ~60K (because I earn more than 84,600 CHF per year) which is ~6K per year or ~500 per month. My employer offered me a plan where it contributes 8.5% of my insured salary (which is Base Salary + expected bonus ~= 176K) and I can choose my contribution rate between 4.5% and 8.5%. I’ve chosen 8.5% that means 17% of my insured salary is going to my Pillar 2 fund, i.e. ~30,000 CHF each year. Out of this 30K, only 6K are mandatory. The remaining 24K are extra mandatory (rows 13 and 14 of my NW document).

Anyway, unlike Pillar 1, Pillar 2 consists in a physical account somewhere, with your name on it. You pay your (pre-tax) contributions, you can monitor it online, you receive a certificate at least once per year with your account balances (both mandatory and extra) and insurance benefits. Here‘s an example of a Pillar 2 pension fund certificate (pages 10-11).

You can’t do much more with it though: you can’t move money in or out freely, you can’t invest your money within your fund like a IRA or 401(k) – but pension funds are allowed to invest a little, sharing with you the eventual profits, which never happened to me so far.

The only way your money grows into the fund on their own is by earning little interests. There’s a minimum guaranteed by the law. Currently, 2016, the minimum guaranteed interest on the mandatory balance is 1.25% but going to change to 1% in 2017. For the extra mandatory the fund/insurance can offer you something better. In my case, my fund’s extra mandatory interest was greater than the mandatory one till last year. Now they’re both at 1.25%, with the extra mandatory probably following the mandatory down to 1%.
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Ok, what happens when you reach retirement age? Once you reach Pension age 64-65 you can finally access to your Pillar 2 pension fund. You can choose to get a lump sum, an annuity or a mix of both. Let’s assume your account at retirement time is 1 Million Francs, you can choose to get 200K cash (on top of which you’ll pay a lump sum tax) and the remainder 800K converted into annuity (on top of which you’ll pay income tax every year).

The conversion rate is the factor that determines how much per year you get from the fund’s amount you want to convert into an annuity. The mandatory portion of your Pillar 2 has a minimum conversion rate guaranteed by law of 6.8% (which is probably going to change to 6% soonish). It means that 100K of mandatory Pillar 2 capital converted into annuity becomes 6,800 CHF gross per year.

There’s no guaranteed conversion rate on the extra mandatory portion. My Pillar 2 fund offers a 5% conversion rate for it – for now. They may change this at anytime. Anyway, if they reduced it too much, more people would just get lump sums instead.

A Pillar 2 pension fund is tiered to your current employer. What happens if you lose your job, quit or change employer? If you change job, your new employer’s pension fund may allow you to transfer your old Pillar 2 balance over with them. If you simply quit or lose your job, you need to open a vested benefits account with some bank, which essentially locks your money till some event happens. Like getting a new job (and a new Pillar 2 plan), reaching retirement age, becoming invalid, dying or other reasons for which you (or your survivor/heirs) are entitled to withdraw some or all your Pillar 2 money.

As for Pillar 1, Pillar 2 contribution may have holes in case you moved to Switzerland after age 24 (or in case you have employment gaps). These are called contribution gaps. You’re allowed by the law to cover these gaps via voluntary (pre-tax but not matched) contributions, named buy ins. You ask your fund/insurance and they send you the contribution gap you can cover during current year. For an immigrant, during the first 5 years you’re in Switzerland you have a buy in limit of 20% your annual insured salary. After 5 years, your limit is: current yearly contribution projected backward to age 24 minus current total contribution. It means you can fill the gap until your balance is the same you would have had if you contributed since age 24 at today’s rate.

As I explained in my October Financial Update, Pillar 2 can be withdrawn (as a lump sum) earlier than regular retirement age in case of buying a house (here‘s a link with amazingly detailed instruction on MP blog), starting an activity and leaving Switzerland. If you ask a lump sum for buying a house or starting a company, then all subsequent Pillar 2 contributions won’t be tax free until you restored the amount withdrawn.

The case of leaving Switzerland is somehow special, since you may not be entitled to withdraw the whole Pillar 2, but only the extra mandatory portion. It’s not clear though. It seems it depends on the target country requiring a compulsory insurance. It seems Italy is ok and you can withdraw the whole thing if you move there. Somewhere else I heard that moving to Italy, like the rest of EU countries, means you can’t withdraw the mandatory portion of your Pillar 2. Couldn’t find the truth during this superficial research of mine.

Anyway, all these things are going to be revisited in the 2020 planned maxi reform of Pillar 1&2. There’s not been yet a full agreement among political parties but rumors say they’re going to make it harder to withdraw money from Pillars before conventional retirement age.

In withdrawing your Pillar 2 fund as lump sum, you pay a tax named Kapitalauszahlungssteuer. You saved the tax when contributing to your fund, you pay taxes when withdrawing from it. The tax rate is progressive but sensibly lower than the income tax you usually pay. And there’s a trick: the tax is due on the Kanton where your Pillar 2 fund is domiciled at the time of the withdraw action. You can pay lower taxes if you can move your fund into a lower tax Kanton before withdrawing the lump sum. Be careful when doing this trick on leaving Switzerland: this procedure may take time and your destination country may tax it as income. Study your case carefully.

Buy ins are locked for 3 years even if you meet the conditions to early withdraw (leaving Switzerland, buying a house, starting a company). In case you leave the country before 3 years have been passed, you can withdraw the rest but the buy in amount must be transferred to a vested benefit account till the end of the 3 years. Buy ins are always extra mandatory Pillar 2 contributions.

Now the obvious question is: is it better to take lump sum or annuity? Remember this is money you’re going to get starting at age 65. Given that average returns on stocks are way better than the best conversion rate it seems silly to a financial savvy person to take the annuity, especially at a shitty rate of 5%, trending down. That’s not a serious advice though. Take your time, do your math, evaluate your risks and take an informed decision.

That’s all for Pillar 2.

What didn’t we cover here about Pillar 2?

  • Contribution for self employed persons.
  • What happens in case of your death.
  • What happens in case of invalidity.
  • What happens if you’re married.
  • What happens if you’re divorced.
  • How to retire “early” (age 59-64) on your Pillar 2.

Want to know more about Pillar 2?

  • Here‘s a nice detailed doc on Pillar 2 by AXA.
  • Here‘s a nice Pillar 2 thread on englishforum.ch.

Click on next page, let’s move to Pillar 3 🙂

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