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.

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

Pillar 1

First Pillar is state pension. It’s a PAYGO system. You live in Switzerland, you contribute to a global pension system by paying a percent of your salary. It’s actually more than just a global state pension system, it’s more like a social insurance package.

There are tons of names and acronyms you may need to learn, since everything in Switzerland has to be named in at least 3 languages. The first name we meet is AHV/IV which are the Pillar 1 main social insurances. You pay these premiums for old age pension (AHV) and disability (IV). In Italian/French the two names become AVS/AI.

There are other benefits you get from Pillar 1, like unemployment insurance (ALV & ALV2) loss of income due to compulsory services (EO) and maternity pay (MSE). Full list on the AHV/AI website (available in English too).

How much do you contribute on Pillar 1?

It’s 6.225% of your monthly income charged on you and the same amount on your employer.

Unemployment insurance is split in two parts. There’s a concept of “maximum insured salary“, which is driven by law and it’s 148,200 CHF today, in 2016. You and your employer pay collectively 2.20% of your salary up to the maximum, then 1% on the remainder. In case you lose your job, you get 70% (or 80% if you have children) of your salary, capped to the maximum.

Here‘s a ridiculously detailed doc with all the official information about social insurances.

When and how much will I get back from pillar 1?

Well, let’s set aside unemployment, maternity and disability. Let’s look at the old age pension, i.e. the benefit you have when you reach pension age 65 (the AHV has an english name too and it’s the coolest name for a state thing I’ve seen so far. In English it’s named OASI. How cool is that? Wait… is it named OASI because it’s a mirage??).

The yearly pension you’ll get will be between MIN and MAX set by law. MAX is by definition twice the MIN. Today MIN is 14,100 (1,175 CHF per month), assuming your yearly salary is less than 14,100 CHF. Then there’s a linear zone till a salary of 84,600 CHF per year, when the MAX kicks in and your pension is capped at 28,200 (2,350 CHF per month, or twice the MIN).

This is how it works for a person who contributed into Pillar 1 for 44-45 years, from age 20 to age 64-65. In case you didn’t (you immigrated in Switzerland after age 20 or you leave the country before age 64-65), you will receive a pension (annuity) anyway when you reach age 64-65, but the amount is prorated based on the years you’ve worked.

Let’s say you’re single and your yearly salary is above 84,600 CHF, then you may assume you’ll receive a monthly pension of roughly 54 CHF per year of contribution starting at retirement age.

Example: you come to Switzerland to work 5 years and then you leave. One day in the future you’ll receive a letter saying “congratulation! This is your pension from now on: ~270 CHF per month!“.

This is based on the assumption that you can’t withdraw Pillar 1 benefits upon leaving Switzerland. I’ve spent some time to answer the question “can you withdraw Pillar 1 contributions when permanently leaving Switzerland?”. There are tons of misleading pieces of information on the net. While our pension consultant at Hooli keeps telling us every year “forget about that, Pillar 1 is forever” and while the internet seems to agree on this, I’ve found something interesting in official documents. This is the official guide from the immigration office that explains what happens when you leave Switzerland. Pages 12-15 are about Pillar 1 and leaving Switzerland. Apparently it depends on whether the destination country has stipulated a social security agreement with Switzerland or not. The countries listed in the section are non-EU countries (like USA, Australia, Canada…). In case your destination country has not an agreement with Switzerland, you may actually apply for a withdraw of your contributions plus your swiss employers’ ones, up to 8.4% of yearly gross salary (while you and your employer paid 12.5%). Digging deeper I’ve found that all EU-EFTA countries have an agreement which is part of the agreement on the free movement of persons. So essentially it’s true, Pillar 1 is forever!

… Unless you move into a country which is not in any agreement for 6 months, a country that doesn’t apply income tax on this money. Food for thought.

2018 UPDATE: here‘s a link on englishforum.ch with a 2017 Pillar 1 cashout success story.

Plus, no way to transfer, withdraw or perform any reconciliation with other pension accounts everywhere else in the world. Swiss pension will be waiting for you in Switzerland and, in case laws won’t change, your pension day is already known. Mine is in 2042.

Things get complicated if your salary crossed MIN-MAX lines during working years, if you’re married, if you’re divorced, if you’re widow, if you’re unemployed, if you’re self employed, if you had to care for kids or elderlies or other relatives (you get contribution credits for bringing up children or caring for someone). Just to mention an example, married couples have a different MIN/MAX, which are 28,200 and 42,300, i.e. 2x and 3x the original MIN for singles. It means that the couple earns a pension which is capped at 150% the pension of a single individual instead of 200%. Unfair to the couple.

Pillar 1 is mandatory if you live in Switzerland, even if you don’t work, unless your partner works and already pays Pillar 1 contributions on a salary which is at least twice the MIN (~28K per year). Else you have to pay a minimum contribution regulated by law which today, year 2016, is 478 CHF per year.

Want to know more about Pillar 1?

• Here‘s a nice detailed doc on Pillar 1 by AXA.
• Here‘s a nice page on www.ch.ch website, with a calculator.

Let’s move to Pillar 2 🙂

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).

To 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%.

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.

Let’s move to Pillar 3 🙂

Pillar 3

Third Pillar is private pension. It’s been introduced not very long ago.

Relax a little bit, we’re getting close to the end 🙂 Pillar 3 is much more simple than the others.

First of all, it’s all voluntary. Yeah, finally a pension plan which is not compulsory!

There are two families of Pillar 3, named 3a and 3b.

Pillar 3a is the simplest of the two and it works this way: you put your money on your Pillar 3a account whenever you want during the year (you don’t have to do it monthly, you could just do it all at once in December) and you can deduct the amount from the taxable salary up to a certain yearly cap regulated by law. This year (2016) the limit is 6,768 CHF. There’s no way to fill gaps, if you don’t contribute this year or contribute less than the cap there’s no way for you to contribute more next year. You can’t either fill gaps due to moving to Switzerland after a certain age.

You can fund how many Pillar 3a accounts you want, like 10 for example (not very smart though). The important thing is that if your total contribution is more than the yearly cap you can only deduct such cap at tax time. So, it doesn’t make sense to contribute more. Without tax benefits, a not locked CHF is always better than a locked one.

Plus, I just discovered (page 5 of the AXA Pillar 3 doc, tax advantage) that the tax deduction can’t be greater than a fixed amount regulated – again – by law. You can get no more than 2000 CHF tax reduction. Extra Pillar 3a contributions after the 2000 CHF equivalent deduction are taxed at an unspecified-but-lower tax rate.

Example: contributing 7000 CHF into Pillar 3a. Top tax bracket 33.33%. Out of the 7,000 CHF, 232 (7,000 – 6,768) can’t be deducted from taxable income (bad decision to go above the cap). 6,000 CHF out of the other 6,768can be fully deducted from taxable income, since 33.33% of 6K is 2K. The remaining 768 CHF are taxed at the reduced rate.

Depending on the reduced tax rate above the 2,000 it may be worth or not to go beyond a certain Pillar 3a contribution. Anyway, due to other deductions it’s very complex to anticipate what’s the tax bracket where this money would fall. And the break-even tax bracket to make the whole 6,768 CHF fully deducted is 29.55% (29.55% of 6,768 is 2000), a relatively high one in Switzerland.

When can I withdraw from my Pillar 3a accounts? Pillar 3a withdrawing conditions are essentially identical to Pillar 2 ones. Reaching retirement age, leaving Switzerland, buying a house, starting a company.

You can’t get annuities from a Pillar 3a account though. Plus, when withdrawing from an account, you have to withdraw it all. A suggested approach is to open a new Pillar 3a account once you reach a certain amount. Say 20K CHF. It means open a new one every 3 years of full contribution.

Another important difference is that, unlike Pilar 2, there’s no 3 years lock on your Pillar 3a contributions. If you’re leaving the country tomorrow and you do a Pillar 3a contribution today that’s great. You save taxes and get your money back soon.

What can I do with Pillar 3a money? Good news here: you can invest your Pillar 3a, but with several limitations (it’s not like having a brokerage account). First, you need to stick with investment options offered by the bank/insurance/institution where you’re opening your Pillar 3a account. They may propose a simple saving account (with interest rates of 0.0000…) or they may offer you some funds.

Pillar 3a funds are usually very bad compared against funds you invest with your after tax money.

• They tend to have high fees, especially when it comes to the total expense ratio (TER).
• They’re usually actively managed funds, no index funds.
• They invest into Swiss stocks, so not much diversification in terms of both companies and currencies.
• They are limited by law in term of risk, so they can’t contain more than X% of stocks or other non currencies assets. Which sounds ridiculous: You’re (normally) getting this money back in 30 years, you want to be more aggressive and invest in stocks!

Anyway, if you want to invest in Pillar 3a for the long term, you’d better do it with funds instead of saving accounts or life insurances.

How to open a Pillar 3a account?

Here the big mess begins. You’ll find everywhere offers for Pillar 3a. Each bank has something to tell you. Each insurance company has something to offer to you. Be extremely careful, there’s a lot of scam.

Rule of thumb: avoid insurances. They offer life insurances as “Pillar 3a investments”. I was offered one where if I survived I wouldn’t have back the whole amount I contributed! Stick with a bank. Pick either a saving account or a low fees investment solution. If you don’t know what to do, stick with the good guys, i.e. Postfinance.

What about Pillar 3b?

This is called “Flexible pension” plan. I know very little and have zero personal experience with 3b. I could go hunting for information but I can’t add more than what you can find in the internet.

Want to know more about Pillar 3?

• Here‘s a nice detailed doc on Pillar 3 by AXA. Be careful, they’re an insurance company and in the doc they try to sell you their products on top of an otherwise good explanation of Pillar 3.
• Here‘s the UBS Pillar 3 page, with offers for both 3a and 3b. Again, that’s not a recommendation, just resources good for comparison since UBS is usually too expensive.
• Here‘s the ch.ch page on Pillar 3.
• Here‘s a list of Pillar 3a funds, with stocks percentage and current year performance.
• Here‘s the Pillar 3a tutorial by nugget on MP forum.
• Here‘s a MP post about “Swisscanto LLP 3 Index 45 R”, claiming it’s the best Pillar 3a fund around.

Let’s draw some conclusions 🙂

Putting all together

The three pillars system looks like a very complicated one, and in fact it is. But you can’t achieve great results without complexity. I generally like the Swiss system.

Well, I come from Italy. In Italy – the only other pension system I’ve been exposed – you essentially have no choices. You’re forced to follow the inefficient system and can’t do much else. The world of private pensions are as dangerous as you could possibly imagine, with likelihood of an insurance company not going broke before you reach retirement age close to zero.

The US system seems more interesting since it lacks compulsory contributions – as far as I understood – and let you invest as you wish. No protection, no guarantees, a lot of freedom. Well, it may lead to under-contribution and lack of a pension at all (and that’s apparently a common issue in US), but that’s another problem.

Anyway, the factors I consider when evaluating a pension system are the following:

• freedom and flexibility in your contributions.
• transparency and control on your accounts.
• the amount the government is contributing.
• the amount your employer is contributing.
• the amount the system is eating.
• the social fairness.
• the overall complexity of the system.

Let’s evaluate them one by one.

Freedom and flexibility in your contributions
Pillar 1 has no flexibility. Pillar 2 may have some kind of flexibility. Pillar 3 is totally flexible. We score better than Italy here, but I’d like to be really free to do whatever I want, like in the US.

Transparency and control on your accounts
Amazing transparency over Pillar 2 and 3. Very little over Pillar 1.
Zero control over Pillar 1, little control over Pillar 2, something more on Pillar 3 but not enough.

The amount the government is contributing
The government is contributing in several ways: via letting you save taxes on your contributions and via giving you a pension till you die, starting at age 65. Apparently the Swiss pension system is not in good shape thanks to a very high life expectancy, which means the government is contributing too much.

The amount your employer is contributing
Pillar 1&2 eats in my case 29.45% of my insured salary (which is lower than my gross salary, roughly 70% of it). Half of this 29.45% (~15%) is on my employer. It hasn’t to be, since my employer could offer me an inferior Pillar 2 plan, but I’m evaluating my case. 15% of employer contribution is very good for me. Compared to US that’s way above the average. Compared to Italy it’s not. In Italy I remember something like 33%, split 7% on you and 26% on your employer. Crazy.

The amount the system is eating
Pillar 1 is handled by the state. The amount eaten is analized in the social fairness section. Pillar 2&3 are handled by private institutions and they’re not there for charity. Anyway, I don’t experience hi fees or maintenance costs. Main Pillar 2 cost is opportunity cost. Lending my money to the fund at 1% interest when they can invest this money for greater returns is not the best option. Pillar 3 costs are both opportunity (for savings account) and fees (for funds). These costs are not optimal and I’m not super satisfied.

The social fairness
Pillar 1 implements redistribution of wealth where “the riches” pay more than due and get less while “the poor” pay less and get more. Things may get political here. I’m obviously a “rich” person, so I may be tempted to say “who cares about that”, but I do think that’s fair to make the richer pay slightly more to sustain pensions for the poorer. Pillar 2 is apparently a cost for the government (that bailout in case Pillar 2 funds go broke) due to the 6.8% conversion rate and the very high expectancy of life here in Switzerland. This cost is actually higher for higher pensions (the riches). A re-redistribution of wealth, in the opposite direction.

The overall complexity of the system
The system is complex, yes. That’s not good. But I see it as the minimum complexity to achieve social fairness, flexibility, transparency and control.

Overall score

I generally like the system. Being “kindly forced” to set aside close to 30% of your salary – with a gentle ~15% contribution by your employer and a nice ~5% contribution by the government in the form of reduced taxes – to get back ~25% of it (instead of 30% due to social fairness) is something good and you should take advantage of it.

Again, I’d prefer a more freedom oriented solution, like US 401k and roth IRA, but with some regulation over minimum contribution by you and your employer. Something like “you can contribute as much as you want to your pension plan, tax free. Your employer must match up to X%. You can invest your money however you want, capital gain and interests/dividends are tax free”

But that’s a dream situation!

That’s all!

Other nice resources on the whole Swiss pension system:

• Here‘s a helloswitzerland.ch summary of the Swiss Pension System (they have a nice final recap).
• Here‘s a nice Swiss Pension System thread on englishforum.ch.

I hope you enjoyed this guide. I want to keep it “Work in Progress”, so feel free to suggest me corrections and things I may have missed.