Swiss
3 Pillar System

Old Age and Survivor’s Insurance – OASI

The Pillar 1 pension scheme, also referred to as the OASI, is the Swiss state pension scheme. It is the government’s equivalent part of the 3 Pillar system – with the occupational 2nd Pillar and private 3rd Pillar making up the three Pillars.

The 1st Pillar is mandatory in Switzerland for all workers, although contributions can also be made by unemployed persons. In addition to pension benefits, the 1st Pillar also includes;

  • Invalidity insurance
  • Compensation for loss of earnings
  • Unemployment insurance
  • Supplementary insurance

Contributions are made throughout a person’s working life. These contributions are made by both the employee and the employer. In the case of a person being self-employed, he or she must make up both parts, although the total contribution should be slightly lower than that of an employed person.

Retirement Benefits

The amount of income paid in retirement is dependant upon four things;

  • How many years you have contributed into the 1st Pillar
  • The level of contributions you have made
  • Any equivalent credits you may have received for bringing up children or caring for others
  • Whether or not you are married

In order to receive a full pension in retirement you must have made contributions in full from the age of 20 until the retirement age – currently 64 for women and 65 for men. You may also draw an income early (up to two years before retirement age) or choose to defer receiving an income (up to five years after normal retirement age). Drawing early will result in a smaller income and drawing later will result in a higher income than would normally be expected.

It is also possible to close gaps by paying in missing contributions. However, this can only be done for missing contributions dating back five years and only if you were insured in Switzerland during this period.

For married couples, the sum of their two combined individual pensions may not exceed 150% of the maximum single person’s pension.

The Pillar II is the mandatory occupational pension scheme in Switzerland. It is normally provided by an insurance company, although in some cases a business may manage its own pension scheme and simply outsource the administration. There is no possibility to opt out of a Pillar II as in other countries, however, it does not apply for those earning less than CHF 21,330 per annum.

Contributions are made by both the employee and the employer. Unlike the Pillar I it is very possible that contributions made by each party will be unequal. This is normally due to an employer contributing a larger percentage than the employee, which may be seen as an added incentive when choosing an employer to work for.

Self-employed persons have the right, but not the obligation, to open and make contributions into a Pillar II scheme of their choice.

All contributions into a Pillar II occupational pension scheme are tax deductible. Tax is then charged once you begin to draw benefit in retirement. If you reside in Switzerland this tax rate will be based upon the canton that you live in. If you leave Switzerland the withholding tax rate will be based upon the tax rate of the canton in which the scheme itself is based.

Occupational pension schemes in Switzerland will include added insurances to cover illness, disability and death. These coverages, much like contribution levels, can vary widely between employers and pensions schemes and the details of this coverage can always be found in the scheme particulars. They are also normally shown on any Pillar II valuations.

Retirement Benefits

Unlike the Pillar I, benefits from a Pillar II are not promissory i.e a promise to pay a future pension based on years made contributing into the system, with no guarantee of what that pension amount will be – or even necessarily when it will be paid. Rather, a Pillar II pension is always held in the members name and is made up simply of the joint contributions made (by employee and employer) plus any growth accrued. Thus, it is always possible to see what is in one’s Pillar II account. Benefits may be taken up to five years before retirement age, although this will have a negative impact on the pensionable amount. It is also possible to withdraw Pillar II benefits early if a member leaves Switzerland permanently. However, depending on the country that the member moves to, there could be restrictions on how much of their Pillar II account they are able to take with them. It is also possible to ‘buy ‘back’ missing years from your Pillar II pension. Therefore, as in the Pillar I, you have the ability to close any gaps in your pension. Again, all contributions are tax deductible up to certain limits. It is always suggested to seek advice when buying back years to ensure you make an informed decision before doing so, as conditions may apply.

The Swiss International Private Pension Plan

The 3rd pillar pension plan is a private pension scheme available to people living and/ or working in Switzerland. Originally introduced as it was believed the combined Pillar 1 and Pillar II pensions would not be sufficient to provide a comfortable level of income in retirement for most.

In order to calculate exactly how much wealth you will need to build over the years to provide a comfortable life in retirement please try our Retirement Calculator.

The Pillar 3A is a restricted pension plan where the member may contribute a maximum amount of Swiss francs in any given year. It is available to anyone earning an income in Switzerland. All contributions are tax deductible up to a certain amount. However, on withdrawal, a small withholding tax may be charged. This pension scheme runs to retirement – 64 for women and 65 for men, with the ability to withdraw funds up to 5 years beforehand. Exceptions to this could be in the case of a property build or purchase, starting a business or for someone permanently leaving the country.

The Pillar 3B is an unrestricted private pension available to everyone in Switzerland. There is no cap on how much money may be paid into the plan per annum. Annual payments must come from post-taxed income i.e. contributions are not tax deductible. However, all withdrawals may be paid out free of any Swiss withholding tax. Unlike the Pillar 3A, the Pillar 3B does not necessarily mature at retirement age. Rather, the plan holder may choose the duration of the account. He or she may also withdraw funds during the plan, subject to set conditions.

Anyone working in Switzerland and receiving a salary can pay into the Pillar 3A. All contributions are tax deductible. If the plan holder self declares tax then this amount is directly off-set against their taxable income for the year. If the member has tax withdrawn by their employer (a permit B holder for example) then they may apply for a tax rebate in the following year – a very easy process, which MWC Group can help with. The maximum contributions allowed are as follows;

Employed:
With very few exceptions, persons employed in Switzerland will already be making contributions into their company’s Pillar II pension scheme. In this instance, the maximum amount that can be contributed into their Pillar
3A is CHF 6,826 per annum.

Self-employed:
With very few exceptions, persons working in Switzerland on a self-employed basis will not be paying into any occupational pension scheme. In this instance, self-employed people may pay up to 20% of their annual income
into the Pillar 3A, but with a maximum cap of CHF 34,128.
There are various features and benefits available via 3rd Pillar pension schemes. Pillar 3A’s are available from banks and insurance companies. Pillar 3B’s are only available from insurance companies. As banks do not provide a capital guarantee (unless providing a nearly nil rate cash return), any beneficial critical illness, disability and life insurance or the ability to continue paying in once a plan holder leaves Switzerland, we will focus instead on the features and benefits of insurance 3rd Pillars.

Illustration of a 3A account with a 25% income tax rebate and 4.5% pa in growth

Tax Efficient

Whether structured as a Pillar 3A or a Pillar 3B, the Swiss 3rd Pillar pension scheme provides a highly tax-efficient means of saving for retirement.

The difference between the two is that the Pillar 3A allows you to receive tax back on contributions going into the plan. Then at the end, when you withdraw funds, you may have a small withholding tax applied. For the Pillar 3B, however, there is no tax relief on contributions, but then all of the proceeds are eventually paid tax free in Switzerland i.e. no withholding tax is applied.

Both 3rd Pillars also provides tax free growth. At no point is income tax levied on interest payments nor withholding tax on capital gains.

Finally, the Pillar 3A does not form part of your wealth in Switzerland. Therefore, no wealth tax is applicable on this account.

An International Plan

Unlike the Pillar 1 and Pillar 2 pension plans, a large added benefit of the 3rd Pillar pension is that it can continue when you leave Switzerland.

Once you leave Switzerland you would, of course, no longer be paying Swiss income tax. Therefore, it is not possible to deduct Pillar 3A contributions from your taxable income.

However, to compensate for this, upon leaving Switzerland all future contributions would be treated as per the Pillar 3B tax rules. Thus, these future contributions would be paid in from post-taxed income in your new country of residence. The benefit is that for all of these contributions made there would be no withholding tax applied at the end when you finally withdraw this pension capital.

Additionally, any life insurance that is included in your Pillar 3A or Pillar 3B would normally remain in force upon leaving the country and up until retirement.

Strong Growth and Capital Protection

One of the main benefits of insurance 3rd Pillars is that they are, generally, able to offer capital protection. This means that your pension is safeguarded at all times and the worst performance you will receive – no matter what is happening in the financial world – is the technical interest rate. This is a rate that is set annually and generally sits a little higher than the interest rate you would normally receive in your bank account.

On top of this, the historical performance of most insurance 3rd pillars has been incredibly strong. Over the past 15 and 25 year period, for example, one stand out account that we recommend has returned, on average, around 4.5% per annum.

Protection for Your Family

The final added benefit of insurance 3rd Pillars is that they can provide significant protection for you and your loved ones. At the outset, you are able to choose the level of protection that suits your needs. This can include illness and disability cover, where the insurance company will pay your annual contributions when you are unable to. It would also normally include life insurance. The life insurance can also be tailored to your specific requirements, but normally the default amount will be similar to the equivalent of all of the contributions that you would have made up until retirement.