Retirement means different things to different people but one thing all have in common is that a secure retirement requires careful planning. Experience has shown that most of us are not ready to consider retirement planning until we reach forty-something.
The main sources of income for retirement in Switzerland are:
Pillar 1 (State pension): Your AHV/AVS pension is determined by the eligible contribution years, your earned income and any credits for time spent raising children or caring for relatives. Anyone who has paid AHV/AVS contributions between the age of 21 and the normal retirement age with no interruptions will receive a full pension. The maximum annual AHV/AVS pension is CHF 26,520. In the case of married couples, each couple receives two AHV/AVS single pensions, which together amount to a maximum of CHF 39,780 each year. These are current figures and will be amended in the future. Forecasts confirm that due to low birth rates and longer life expectancy the ratio of people paying into the system will be insufficient to cover the number drawing a pension. Unless the government drastically changes the way the 1st pillar is financed the state pension is unlikely to keep up with inflation.
Pillar 2 (Company pension): Your Pillar 2 pension depends on your retirement assets at the time of retirement as well as the conversion rate. This can vary depending on the pension fund. In addition to the annuity option, you also have the chance of receiving a single lump-sum payment of at least one-quarter of your accrued retirement assets. (The current conversion rate is at least 6.8%) A pension fund can however choose to pay out more.
Pillar 3 (Annuity insurance): The life annuity of an annuity insurance policy under Pillar 3 is calculated either on the basis of the retirement assets accrued through regular or irregular premiums, or the retirement assets financed by a single premium. The conversion rate tends to be lower compared with the company pension rate however the flexibility and rate of tax must also be considered.
The company pension fund options and taxes in brief
Taxes
The lump-sum withdrawals of pension fund assets and Pillar 3 assets are taxed separately from other sources of income at a reduced rate. Retirement assets can be withdrawn as a lump-sum payment five years before the normal retirement age. Careful tax planning can significantly reduce the amount of taxes.
Pension fund - Annuity or cash withdrawal option
If you decide to opt for a cash withdrawal instead of a company pension fund annuity you will have to make sure that the pension fund are notified in writing in accordance with their regulations. It is important to know that the notice period can be a number of years before retirement age. We recommend you request a written confirmation from the pension fund company. Factors such as family circumstances, health and your financial situation must be considered when deciding between an annuity or a lump-sum payment. The decision usually requires a specialist therefore the layman often takes no action and the company pension annuity is paid automatically. As a rule of thumb if your accumulated capital at retirement age is at least CHF500’000 then it is worthwhile considering the cash withdrawal option.
