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Understanding the Swiss Pension System

If you work in Switzerland, you have probably heard something about the three pillars. They refer to the three different types of coverage comprising the Swiss pension system.

The first pillar is the standard state pension plan that consists of various schemes such as the AHV pension (old-age and surviving dependants insurance), disability insurance (IV), compensation for loss of earned income during military service (EO) and unemployment insurance (ALV). The AHV/IV insurance is mandatory for all employees in Switzerland.

The second pillar is based on occupational pension plans and accident insurance. Employees with an annual income higher than CHF 20,520 are automatically insured by the second pillar pension fund, which is provided by the employer. The self-employed can join on a voluntary basis.

The 1st and 2nd pillar provision plans are designed to enable you to maintain your accustomed standard of living. But you might choose to supplement your pension coverage with the third pillar. It is a private, individual option that workers can use to help make up the remainder of their income not covered by the first two pillars. Such schemes are protected by law and often offer tax advantages.

The third pillar provision is divided into two categories: fixed retirement schemes (pillar 3a) and flexible retirement schemes (pillar 3b). The pillar 3a was introduced by the Swiss government to promote savings for retirement. It is a restricted pension fund, so you cannot take out your savings any time you like. In certain cases, however, it is possible to withdraw the savings early, for example: 1) to set up a self-employed business or 2) to finance home ownership and repay a home loan or 3) when leaving Switzerland for good. The pillar 3a can also be pledged for home ownership. No income tax, wealth tax or tax deducted at source is levied on these retirement savings. Entrepreneurs may contribute to the pillar 3a and profit from a substantial reduction in their income tax. A reduced tax rate is applied on withdrawal and depends upon the amount withdrawn and where you live at the time.

An example: In 2014 as an entrepreneur without a pension fund (pillar 2) you can contribute up to 20% of your AHV income up to a maximum of CHF 33,696.- (in 2015 – CHF 33,840). If you do not belong to a pension fund then you may pay a maximum of CHF 6,739.- (in 2015 – CHF6,768). In most cases a pillar 3a bank account is strongly recommended rather than a pillar 3a insurance policy. If insurance cover is required then take out a separate pillar 3b insurance policy. Saving schemes under the pillar 3b do not normally offer tax advantages and there are no special conditions.

This is an article from our winter magazine

1st Pillar 2nd Pillar 3rd Pillar
State pension plan Occupational pension plan Private, individual pension plan
Secures a minimum level of income Maintains current standard of living Voluntary additional provisions to supplement any gaps
AHV/IV, ALV, supplementary benefits BVG, UVG, extra-mandatory benefits Tied savings plan 3aFlexible savings plan 3b

charlie.hartmann@livinginluzern.swiss

Charlie Hartmann is the managing director of the Livingin organisation which focuses on helping international residents connect, grow and thrive in Switzerland.

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