Switzerland has a very comprehensive social security system that is unique in its kind. The system is based on three “pillars” and each pillar aims to help retired individuals and their immediate family to maintain their accustomed lifestyle. The first pillar, which this article focuses on, contains the Old Age and Survivors/Disability Insurance (OASDI) also known as the Swiss state pension. The second pillar covers the occupational pension scheme (BVG/LPP), and the third pillar covers private pension provisions. Each pillar secures different entitlements and is subject to different regulations.
In addition, employers are obliged to take out a range of insurances for their employees. Some insurance premiums are fully covered by the employer, whereas the employer may ask the employee to contribute to other insurance premiums. Finally, the mandatory Swiss health insurance is a significant cost to a household. The insurance premiums are considered a private cost, rarely covered by the employer.
Second pillar – occupational pension BVG/LPP and its characteristics
In addition to the mandatory OASDI and ALV/AC insurance you are also obligated to contribute to the second pillar pension scheme, which is an occupational pension scheme. This scheme is referred to as BVG in German or LPP in French. In the following, we are covering the legal minimum requirements only. Please bear in mind that your employer might have a different pension fund regulation. However, if so, it will always be a more beneficial pension plan for you.
Who is covered under the occupational pension scheme?
Basically, every employee who is subject to OASDI contributions and has an annual income of at least CHF 21’330 (for 2020) is compulsorily secured under the BVG/LPP.
Qualified individuals are exempt from compulsory coverage such as self-employed individuals, employees who reached statutory retirement age, employees who are already secured under the BVG/LPP with another employer and individuals who have an annual income of less than CHF 21’330. All these individuals can be secured under the BVG/LPP on a voluntary basis. This may often be of interest for trailing spouses, who e.g. manage to find a part-time job.
The compulsory coverage for employees starts as of the first day of January after the age of 17 is reached. Until the age of 25 the coverage only includes the risk of death and disability but not building up an old-age pension. As of the first day of January after the age of 24 is reached the coverage is enlarged and includes the old-age pension as well.
The salary that is covered under the mandatory BVG/LPP ranges between CHF 24’885 to CHF 85’320 (for 2020), where the CHF 24’885 reflects the so-called coordination deduction. Consequently, if your annual salary is above CHF 85’320 your mandatory coordinated salary according to the BVG/LPP legislation is CHF 60’435 (maximum coordinated salary). However, Swiss employers often choose to insure their employees above these legal minimum requirements by abolishing the coordination deduction or insuring salaries above CHF 85’320 with a legal cap at CHF 853’200 at a maximum that is insurable.
Contributions to the occupational pension scheme
Unlike the state pension scheme, the occupational pension scheme is a fully funded pension system, which means that your contributions are credited to your individual savings account and will be used to pay your future benefits. Therefore, you are not financing benefits to current beneficiaries. Your employer’s pension fund puts your savings in low risk investments to achieve an annual interest yield of at least 1% (for 2020). Even if the return of investment in your savings is below this interest yield, your employer’s pension fund needs to yield this interest in your savings account.
The BVG/LPP is based on the principle of collective financing, meaning the employer contributions must match at least the employee contributions. The contributions are calculated based on your coordinated salary:
*The employer may choose to contribute to the BVG/LLP second pillar pension plan at a higher rate than the employees.
Voluntary pension contributions (buy-ins)
Foreigners arriving in Switzerland and who are above the age of 25, inevitably will have a gap in their second pillar pension fund due to the missing years of contributions. Your employer’s pension fund provider typically calculates how much pension savings you would have had if you earned today’s salary since the age of 25. This creates a gap in your pension fund, and you may close this gap with so-called voluntary pension buy-back contributions. These contributions are tax deductible! So next to improving your Swiss retirement benefits, such buybacks will also help optimizing your income taxes. The annual voluntary contributions are limited to 20% of your insured salary during the first five years after you have arrived in Switzerland. US citizens/green card holder and other nationals who remain taxable in their home country should seek professional advice before making any voluntary pension contributions as the tax benefit might be very limited.
A tax is triggered in Switzerland when withdrawing your pension savings. The tax rate depends on whether you choose an annuity or a lump-sum withdrawal of your pension savings whereas in the latter you benefit from preferential tax rates.
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