The pillars the Swiss pension system
The first pillar is the state pension. Known as "OASDI" (old age, survivor and disability insurance), it aims to cover the basic cost of living after reaching retirement age or in the event of death or disability. This pillar is compulsory for everyone living and/or working in Switzerland.
The second pillar is an occupational benefit plan. In combination with the first pillar it ensures that the insured person can maintain their pre-retirement standard of living. This pillar is compulsory for anyone who is employed in Switzerland and who earns more than a specified minimum wage.
The third pillar is a voluntary pension, allowing individuals to set money aside for their retirement.
The second and third pillar offer tax optimisation possibilities: in principle, contributions are tax deductible and capital payments are taxed at a privileged tax rate.
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Above an annual salary of currently CHF 21,150, employees are insured in the second pillar. Depending on the age, salary and the applicable pension fund, ordinary contributions are directly deducted as a percentage from the salary. However, the employer finances at least half of the ordinary contributions into the second pillar.
Additional voluntary contributions (so-called purchases) into the second pillar allow individuals to fill any gaps in the retirement savings and to improve their financial situation after retirement. These purchases are fully tax deductible (i.e. deductible from the taxable income). For individuals moving to Switzerland who have never participated in the Swiss pension scheme, the annual purchases into the second pillar are limited to 20% of their insured salary during the first five years.
If all or part of the savings in the second pillar are paid out as capital, this capital is taxed at a privileged tax rate and generally without consideration of any other income (meaning no progression effect). However, most cantons take any capital payments within a certain period from both the second and third pillar (type 3a, explained below) into consideration when determining the tax rate (resulting in a progression effect here).
In the third pillar, a distinction is made between restricted pension plans (pillar 3a) and unrestricted pension plans (pillar 3b):
Pillar 3a - restricted pension plan
Anyone working in Switzerland, including foreign workers, can sign up for a third pillar insurance or open a third pillar bank account. These savings are tied to the retirement age - currently 64 for women and 65 for men. However, it is possible to withdraw the funds from the pillar 3a if you meet one of the following conditions:
- You leave Switzerland permanently
- You become self-employed
- You buy your principal residence
- You withdraw the funds 5 years before retirement
Contributions made to pillar 3a are tax deductible up to a maximum allowance. The pay-in threshold for employed individuals with occupational retirement provision is an annual amount of CHF 6,768 (at January 1, 2017) that is fully deductible from taxable income.
Self-employed individuals without occupational retirement provision but with income from the state pension (first pillar) can pay in a maximum of CHF 33,840 (up to a maximum of 20% of their earnings from gainful employment) and deduct this sum from their taxable income.
There are two types of pillar 3a savings accounts to choose from: through a bank with a bank account or securities solution, or through an insurance company by taking out a life insurance policy. Both institutions are obliged to adhere to the same legislation.
However, in the case of a bank account, the entire capital is invested in the pension scheme, which results in a higher pension saving than an insurance solution. With a securities solution a higher return on investment can be reached than with a "normal" bank account pension type.
The advantage of an insurance solution is that insurance coverage is provided, which is not the case with a bank account solution. However this insurance coverage is not free of charge, and the premium payments reduce the pension savings accordingly.
The savings from pillar 3a are taxed at a privileged tax rate and generally without consideration of the other income (no progression effect). However, most cantons take any withdrawals within a certain period from both pillar 3a and from the second pillar into consideration when determining the tax rate (resulting in a progression effect).
Pillar 3b - unrestricted pension plan
Pillar 3b is available to everyone, whether you are an employee, self-employed or a cross-border commuter. Pillar 3b has no statutory restriction, meaning you can choose how you want to save and invest your money, when you want to save and invest, how much you want to save, and when you would like to withdraw your funds.
There are generally no tax benefits in connection with contributions to pillar 3b.
How expats apply for tax benefits within Swiss pension scheme
As explained above, foreign individuals working in Switzerland can buy into the second pillar. The amount is limited within the first five years. They can also contribute to pillar 3a and benefit from the respective tax deductions.
If the foreign individual is subject to withholding tax but is not required to file a tax return, the tax benefits need to be applied for by filing a tariff correction request to the appropriate tax authority. Based on this tariff correction request, the withholding tax burden should be reduced accordingly.
Please note that the deadline for filing the tariff correction form in most of the cantons is at the end of March of the following calendar year. This deadline cannot be extended.
If a foreign individual is required to file a tax return, the respective tax benefits can be applied for in the tax return.