Author: Lucas Widmer
As the year draws to a close, many people contemplate making contributions to their pension fund. To qualify these voluntary payments as tax deductions for 2023, it’s advisable to complete the transactions by the end of November. This timing allows for pre-Christmas planning and adherence to the pension funds’ deadlines.
But when is it beneficial to buy into your occupational pension plan, and what should you consider? What extra benefits does a 1e pension plan offer?
Good Planning Pays Off
Buying into a pension fund, primarily for tax reasons, is often recommended alongside closing pension gaps.
You can deduct these voluntary contributions from your taxable income, thereby substantially reducing your tax liability. This reduction effectively provides a guaranteed tax benefit return, especially valuable in a low-interest-rate environment. Maximizing tax optimization involves spreading your contributions over several years rather than a lump-sum payment in a single year. The following example illustrates this effect.
It is based on two spouses living in the city of Basel who would like to buy a total of 300,000 francs into the pension fund. A one-off payment would reduce the taxable income of 180,000 francs to zero and completely eliminate the original income tax burden of 50,012 francs. However, if you spread the amount over several years, you will achieve a much higher cumulative tax saving. If the CHF 300,000 to be bought in is staggered over six payments of CHF 50,000 each, a total tax saving of CHF 102,852 is achieved – more than twice as much as with the one-off payment.
Purchases Offer Attractive Returns
When evaluating voluntary contributions, consider how long the funds will remain in the pension fund. Generally, the sooner the amount is withdrawn, the higher the return.
Therefore, it's advantageous to formulate a purchase plan from age 50, making targeted payments until retirement. Remember the three-year lock-in period following the last payment. Withdrawing retirement assets during this period could lead to tax recapture.
The net return from a CHF 300,000 purchase staggered over six years, considering the three-year vesting period, demonstrates the attractiveness of well-planned pension fund contributions. Compared to investing in free assets, which requires a higher risk for a similar return, this approach is more favorable. Additionally, a 1e plan offers protection from redistribution, unlike conventional savings plans.
1e Pension Plans Offer More Security Than Traditional Pension Funds
The current landscape for the 2nd pillar in the Swiss pension system is challenging, with low interest rates and an aging population impacting the sustainability of pensions. Swiss pension funds often redistribute funds from younger to older members. For instance, in the exceptional market year of 2019, employees received an average return of 2%, while a significant portion of the 10% return generated was used for retirees´ high pension payouts.
If considering a traditional pension plan, it's crucial to assess the pension fund's health using indicators like coverage ratio, technical interest rate, and insured person structure. Choosing a stable solution helps avoid bearing the cost of any potential restructuring.
In a 1e plan, these risks are mitigated. Each insured person has a separate account, and the absence of a pension option means no conversion losses favoring retirees. Thus, you can expect to withdraw the entire purchased amount plus the full return on your chosen investment strategy at retirement (minus administration/product expenses).
Determining Purchase Potential
Pension fund contributions are capped at your "pension gap." You can continue making payments until this gap is filled. Your pension certificate typically shows your purchase potential, calculated by estimating the amount you would have saved in the 2nd pillar with your current insured salary over your career, then subtracting existing 2nd pillar assets. The difference is your purchase potential. Other reasons for pension gaps are
- Change of employer, where the new pension fund offers higher benefits or you earn more.
- Divorce, where you have paid out part of your pension fund assets to your former partner.
- Interruption of employment, e.g. if you previously studied, traveled around the world or did not work for a longer period of time for another reason.
Note that any withdrawals for home ownership promotion (WEF) must be repaid before making voluntary contributions. Also, remember to reclaim any taxes paid on the WEF withdrawal within three years of repaying the advance withdrawal.
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