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Everything You Need to Know about the Swiss Social Security and Pension System
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Everything You Need to Know about the Swiss Social Security and Pension System

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Switzerland has a very comprehensive social security and pension system, one of the kind. The Swiss system is based on three "pillars" and each pillar aims to help retired individuals and their immediate family to maintain the lifestyle they are accustomed to.

The following article explains how these three pillars of the Swiss social security and pension system work and offers insights into how you can leverage them to the fullest, depending on your personal situation and your personal goals.

Let's dive right in!

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All you need to know about first, second and third pillar

The first pillar contains the Old Age and Survivors/Disability Insurance (short OASDI) also known as the Swiss state pension.

The second pillar includes the occupational pension scheme (short BVG/LPP) and the third pillar contains private pension provisions.

Each pillar secures different entitlements and falls under different regulations. Sounds complicated? That's because it is. 

The Swiss social security system can be intimidating, especially if you are an expat trying to navigate it. But that's why we're here -- to make sure you are equipped with all the information you need to make the right choices.
 

Insurances taken by employers for employees 

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, we recommend you also take into account the mandatory Swiss health insurance, which is a significant cost for any household. The insurance premiums are considered a private cost, which is rarely covered by the employer.

The first pillar – OASDI and its characteristics

The first pillar social security or state pension is often referred to as AHV/ALV in German or AVS/AC in French and is meant to cover the basic needs of an individual and their immediate family. The state pension is set-up as a pay-as-you-go-system meaning that the contributions collected are spent immediately to the current beneficiaries.

What is OASDI and what does it include?

OASDI is the first pillar of the Swiss social security system for a reason: it covers the basic survival needs. It includes not only benefits in cases of retirement and disability, but also compensation for loss of income due to compulsory services (military, civil service etc.) or maternity leave.

Although it is covered by separate legislation, the first pillar system also includes the mandatory unemployment insurance, ALV/AC. In case someone involuntarily becomes unemployed, the insurance will pay 70% (80% if supported children live in the household) of the insured salary for up to 520 workdays depending on the individual's age and months of contribution made to the ALV/AC. Another 120 days may be added, if the individual is close to the ordinary retirement age (64 for women and 65 for men).

Every individual who resides in Switzerland is required to pay contributions to the OASDI regardless of the employment status. The obligation to contribute starts from the first day of January after the age of 17 is reached for employed individuals. For those who are not employed, the obligation to contribute starts from the first day of January after the age of 20 is reached.

Retirement age for women is 64 and for men is 65. You may begin withdrawing old-age pension benefits up to two years prior to official retirement age but you must accept a cut of benefits and you may defer state pension benefits up to five years with a benefit surcharge.

A special rule applies for married couples/individuals in a registered partnership: if only one individual is employed and contributes at least twice the minimum amount, the compulsory contributions for the individual who is not employed are considered included in contributions of the working spouse.

As an employed individual, your entire gross employment income (with a few exceptions) is subject to OASDI contributions. The total contributions are equally split between you and your employer. For 2021 the employee contributions are:

Old Age Pension (AHV/AVS)              4.35%

Disability Pension (IV/AI)                   0.70%

Loss of Income (EO/APG)                  0.25%

Total OASDI                                    5.3%


ALV/AC 1 (up to CHF 148,200)          1.10%

ALV/AC 2 (above CHF 148,200)        0.50%

Total contributions                        6.4% / 6.9%

 

Other mandatory insurances in the Swiss social security system


Accident insurance

Employed individuals are insured against accidents during and outside of their employment activity. Their employer is required to provide an occupational and non-occupational accident insurance, if the employee is employed for more than 8 hours a week.

Contributions for the occupational accident insurance premiums are fully funded by the employer, whereas the premiums for the non-occupational accident insurance may be fully funded by the employee. The contributions depend on the insurance policy and are capped at an insured salary of up to CHF 148'200 (for 2021).

The accident insurance usually covers medical expenses, loss of income, disability/survivor's pension and impairment compensation. A supplementary accident insurance can insure additional benefits or higher salaries.

Daily sickness benefits insurance

The employer is required to continue paying employees their salaries for a certain period during illness according to labor law. Many employers choose to take out a voluntary daily sickness benefits insurance instead that pays their employees 80% of their salaries during extended absences due to sickness for maximum 720 days within 900 consecutive days. The insurance premiums are usually split between employer and employee and depend on the insurance policy.

Mandatory health insurance

All residents in Switzerland must take out a health insurance with an approved Swiss health insurance provider no later than three months after their arrival in Switzerland. The only exception is when someone is covered in their home country based on a social security treaty.

This may be the case when someone is assigned to Switzerland and such exception typically also covers the spouse/registered partner and any children. Many employers have made agreements with a preferential insurance provider, which may lead to a lower insurance premium.

But as the health insurance is a strictly private matter, the individual may opt for any of the approved Swiss insurance providers. There is a range of international health insurance providers offering qualitatively good health insurances at attractive prices. However, they are mostly not approved for Swiss health insurance purposes.

In addition to the insurance premiums, there is a deductible to make toward the health bill, which is referred to as the annual "franchise". The minimum annual deductible is CHF 300 and the maximum deductible is CHF 2'500. The higher the deductible, the lower is the insurance premium. If you are in good health, You may want to consider a higher deductible to save insurance premium costs.

The 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.

What is BVG/LPP?

In the Swiss social security system, BVG/LPP 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 21'510 (for 2021) is compulsorily secured under the BVG/LPP.

Qualified individuals are exempt from compulsory coverage such as self-employed individuals, employees who have 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 21'510. All these individuals can be secured under the BVG/LPP on a voluntary basis.

Who can benefit from this? A good example here are trailing spouses, who, for instance, 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 and excludes 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 25'095 to CHF 86'040 (for 2021), where the CHF 25'095 reflects the so-called coordination deduction. Consequently, if your annual salary is above CHF 86'040 your mandatory coordinated salary according to the BVG/LPP legislation is CHF 60'945 (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 86'040 with a legal cap at CHF 860'400 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, but directly to yourself.

How exactly does the occupational pension system work? 

Your employer's pension fund puts your savings in low risk investments to achieve an annual interest yield of at least 0.75% (for 2021). 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:

Age                              Employee Portion        Employer Portion*

25-34                            3.5%                                 3.5%

35-44                            5.0%                                 5.0%

45-54                            7.5%                                 7.5%

55-64 (65 for men)       9.0%                                 9.0%

*The employer may choose to contribute to the BVG/LLP second pillar pension plan at a higher rate than the employees.

Voluntary pension contributions

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. Not interesting in spending even more? What if we told you that 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 holders 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.

The third pillar: private pensions and their characteristics

The voluntary third pillar pension schemes are flexible pension plans in addition to the plans of the mandatory first and second pillar schemes. Their purpose is to close financial gaps if your benefits from the first and second pillars are insufficient. 

Neither the state nor your employer is involved with funding your private pension provisions. The decision as to whether you want a private pension provision is completely up to you.

The third pillar is divided into restricted and unrestricted pension provisions. The restricted pension provisions (pillar 3a) are long-term plans which are tax deductible upon contributions, but the capital is locked into the retirement plan.

The unrestricted pension plan provisions (pillar 3b) are flexible plans without mandatory terms and usually not tax deductible upon contribution. The capital can be withdrawn at any time. As pillar 3b provisions vary depending on the insurance provider, this article focuses on the pillar 3a plans provisions/insurances only.

Pillar 3a pension/insurance plans and its solutions

Pillar 3a provisions are very popular among Swiss taxpayers mainly because whenever a contribution is made, the taxpayer can claim a tax deduction in the tax year when the contribution was made. However, the maximum amount which may be contributed within a tax year is CHF 6'883 (2021) for employed individuals.

The easiest way to get a pillar 3a pension is to open a restricted pillar 3a bank account with a financial institute in Switzerland. Every transfer to this bank account is counted as a qualified contribution. Once transferred, the money is blocked, and you are not allowed to withdraw it unless there is a qualified distribution reason. Usually, pillar 3a bank accounts are interest-bearing. However, the interest rate depends on the financial institution.

Alternatively, you have the possibility of going for a life insurance that meets the requirements to qualify as a restricted pension provision. Many Swiss insurance providers offer a variety of life insurance solutions.

The benefits of a life insurance are that not only can you accumulate savings for your retirement, but you can also insure financial risks in the event of disability or death. The premiums you pay towards your life insurance policy qualify as pillar 3a contributions and are tax-deductible, just as if you had transferred money to a pillar 3a bank account.

However, the major difference with most life insurance solutions is that you are contractually bound to pay the annual premiums, while with a bank account solution, you have no obligation to contribute.

US citizens/green card holder and other nationals who remain taxable in their home country should seek professional advice before arranging for any pillar 3a pension or insurance provisions. Like for the second pillar pension plans, a tax is triggered when withdrawing your pillar 3a pension savings. With a bank account solution, there is no other option than a lump-sum withdrawal. Only with certain life insurance solutions can you opt for an annuity rather than a lump-sum withdrawal.

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