If you are here in Switzerland as an expat, it can be time-consuming and confusing researching your pension options. And while everyone’s situation differs, there are three key benefits of the 2nd and 3rd Pillar Pensions that you may not be aware of and more importantly, can actually save you money. Our head of Investment Management Alastair McCaig was interviewed last year on CNN Money Switzerland about the Swiss Pillar System.
1. The 3rd Pillar can reduce your tax burden each year
The private pension – 3rd pillar, is an ability for you to effectively top up your annual pension contribution. And whilst the main benefit is that it will help you to maintain your standard of living after retirement, there are additional benefits that you should know about.
The total amount that you can contribute into your 3rd Pillar is currently CHF 6,826 and there is a direct tax benefit for doing this as it will reduce your annual taxable income by the same amount. Depending on the income tax rate it creates savings for our clients between CHF 1,500 – 2,000 annually.
Someone who has a taxable income of Chf200,000 is married, has two children and lives in the canton of Zug would pay total taxes of Chf 30,845 each year.
If in that same year they were to make their allowable contribution of Chf 6,826 to their Pillar 3a their total taxes would drop to Chf 28,858.
Saving them Chf 1,987 each year.
It’s good to remember that any money you contribute will be locked into your Swiss pension scheme until your retirement age. However, an interesting aspect of Swiss pensions from an expat’s perspective is that you are able to access your pension if you should leave Switzerland before retirement age. More of this is covered in point 3 below.
There are a variety of Pillar 3 accounts offered with different options that may or may not be suitable for you. This is where we explain these in more detail and find the solution that is right for you.
2. The 2nd Pillar can also reduce your tax burden each year
Pillar 2 has two primary roles. The first purpose is for you and your employer to contribute to your pension for your retirement. Secondly, it includes an insurance element allowing payments to be made to your spouse and children should something happen to you such as loss of life or disability. It is worth checking these amounts with your HR department to see you have sufficient cover in place. This is an area we discuss with our clients.
Because your employer administers the pension payments on your behalf, few people realise that there is also an ability to top up your contributions into your pillar 2 scheme as well. The amount varies for each person (time spent living in Switzerland and the size of salary are the main factors), but it can be a significant amount. The benefits are that anything you contribute will reduce your taxable income further in much the same way as the Pillar 3 example above. For many of our clients the tax saving can be sizable when considering their tax rate can be as high as 25%.
Just like the Pillar 3, it is worth remembering that any additional contributions you invest into your Pillar 2 will be locked into your Swiss pension until your retirement age or when you leave the country. Also, one other point from an expat’s perspective is that your pension can typically grow to be your second biggest asset (main residence normally being the first) and as the pension is in CHF there could well be currency implications for you. Again this is an area we continually advise our clients on.
3. Reduce tax again, when you leave Switzerland
If you leave Switzerland before retirement age for a non-EU country, you will be able to redeem all of your Pillar 2 pension. If however, you leave and relocate to an EU country, you will have to leave the BVG part (minimum Government-Mandated Contribution) of your pension in the Swiss system which typically equates to 30% of your total pension pot. Once you hit the retirement age, you will then have the ability to withdraw this remaining portion.
Should you choose to cash in your pension when you leave there is a tax applied to the full amount which is called Withholding Tax. The calculation differs from Canton to Canton with the lowest rate between 4.8% and highest at 14.3%. When clients are in a position to transfer their pension we help to utilise the most tax-efficient canton ensuring you do not pay more tax than is actually required.
So, if you are an expat here in Switzerland and want to maximise the benefits available with the Pillar 2 and 3 Swiss Pensions, ensure you get the right advice from someone who understands your specific circumstances and has experience looking into the management of your wealth holistically rather than at pensions in isolation.
At Fern Wealth GmbH we provide sensible, strategic wealth management for expat investors who are moving up the corporate ladder and across borders. We will give you a guiding hand and a professional service based on decades of industry experience.
Click here (or call us on +41 (0) 41 720 2122) to book a call with one of our founders to explore your specific pension and wealth management options before the 2020 deadline for Pillar 3 in December.