Retirement is a challenge. After years of work, one leaves working life balance in a single swoop. Fixed daily structure disappear and have to be redefined. Against this background, it seems obvious that a gradual retirement can ease the transition from working life to retirement. If you also take into account the tax advantages of partial retirement, it becomes a real alternative*.

*It is crucial whether your employer goes along. Because partial retirement is not possible without the employer’s consent. The gradual reduction of the workload can only take place by mutual agreement (keyword: employment contract / employment relationship).

When does partial retirement bring tax advantages?

Partial retirement has tax advantages if you wish to withdraw your retirement assets as a lump sum. With a partial retirement you can divide the withdrawal of the retirement benefit over several years and thus reduce the tax burden.

Are you wondering why the tax burden is reduced if you divide the lump-sum withdrawal over several years? This is relatively simple. The tax rate on lump-sum withdrawals is higher, the higher the lump-sum withdrawal. Example: Canton of Zurich:

  • Capital withdrawal 500,000 -> Tax rate: 7.4 %.
  • Capital withdrawal 1,000,000 -> Tax rate: 11.4 %.

You can see from this example that partial retirement can be very interesting when it comes to lump-sum withdrawals.

If, on the other hand, you wish to draw your pension fund in the form of a pension, then partial retirement does not have the same tax effect as a lump-sum withdrawal. Pensions are not taxed separately like lump-sum withdrawals, but are added to other income. Pensions increase taxable income.

In comparing the taxation of pensions or lump-sum withdrawals, we have come to the conclusion that a lump-sum withdrawal is often interesting from a tax point of view. Even more so if the capital is withdrawn in stages.

What can partial retirement look like?

With the “AHV 21” reform, which was approved at the ballot box in autumn 2022, the framework for partial retirement was set out concretely in the pension law for the first time.

Previously, there was no explicit provision for partial retirement in the law. Pension funds were not obliged to offer partial retirement. Now they do. Pension funds now have to allow pension withdrawals in at least three steps.

In the case of lump-sum withdrawals, three steps are also provided for, but in contrast to pensions, not a minimum of three steps but a maximum. Three steps mean that after these three steps either the entire retirement assets are paid out or the rest can only be drawn as a pension. If no pension can be drawn, the third step must include the payment of the entire remaining credit.

The legislator leaves it up to the pension funds to define the minimum amount of a partial withdrawal step. However, if your pension fund does not have a regulation, the first partial withdrawal must be at least 20%.

The “AHV 21” reform will come into force on 1 January 2024.

Where are the boundaries?

As we have already mentioned, a staggered withdrawal of pension assets has tax advantages. For this reason, the legislator provides for a division of the PF capital withdrawal into a maximum of three tranches (more on this in the previous chapter).

Unification of tax practice to be expected

It can be assumed that in future all tax authorities will accept three steps for the withdrawal of capital. Until now, this was not a matter of course. Since there was previously no legal regulation on the possibilities of partial retirement in the Occupational Pensions Act (BVG), there were different interpretations from tax authority to tax authority as to what was allowed and what was not. Thanks to the AHV 21 reform, a standardisation of tax practice is to be expected. Nevertheless, it is advisable to obtain confirmation from the tax authorities in advance that the planned procedure is permitted under tax law.

Capital withdrawals in the same year are considered a step

If you are affiliated to several pension funds, the following regulation applies:

  • Each year in which at least one lump-sum withdrawal is made is regarded as one step. If you make several lump-sum withdrawals in one year, these are counted together for tax purposes anyway, which is why they are not regarded as individual steps under pension law. Thus, you have the possibility to withdraw both the basic fund and the supplementary fund (if the latter is insured in another institution and the withdrawals are made in the same year), each with up to three steps.

Other important provisions

Other provisions that must be observed:

  • The salary reduction must be at least as high as the share of the retirement benefit drawn before the statutory reference age. Reason: Especially in owner-managed companies, it would otherwise be possible to reduce the workload to 50 % but simply pay oneself double the salary. This regulation prevents such “games”.
  • Partial retirement requires that you continue to be gainfully employed for the remaining portion and that you are also insured under the PF. If you fall below the entry threshold of the pension fund, you may have to leave the pension fund and withdraw the entire (remaining) capital in one go.

From 58 and up to 70: Depending on your pension scheme

The pension funds were already able to provide for retirement from 58 under the previous law. The law now states that the pension fund must allow early retirement from 63. However, the previous regulation that the fund can provide for retirement from 58 does not change. If you would like to know when you can take partial retirement, please consult your pension fund.

According to the law, the drawing of retirement benefits can be postponed until the 70th birthday. The maximum range of different partial retirement steps, thus extends from 58 to 70 and is somewhat shorter at the front end, depending on how the regulations are structured. 

Partial retirement now also in the 1st pillar (AHV)

The aforementioned “AHV 21” reform has been in force since January 1, 2024. The AHV pension can now also be drawn in advance or deferred in stages, regardless of what happens to the pension fund. The AHV pension can be drawn at any time (monthly) between the ages of 63 and 70 (for women of the 1961 – 1969 transition generation from the age of 62). It is now also possible to draw only part of the AHV pension, whereby the early withdrawal may be between a minimum of 20% and a maximum of 80% of the ordinary pension. A corresponding monthly reduction is made for each month of early withdrawal. Withdrawal of the AHV pension must be registered separately. This change to the AHV makes the gradual transition to retirement even easier.

Alternative: Reduction in workload with continuation of full pension provision

An alternative to partial retirement is a one-time or gradual reduction of the workload. The salary is adjusted to the new workload, but the insurance remains at the previous insured salary. In this way, the pension plan can be continued at the previous level. If you are interested, clarify directly with your employer or their pension fund whether such a solution would be possible.

Tip: Pay into pillar 3a for as long as possible

Because you still have income from gainful employment subject to AHV contributions in the context of partial retirement steps, you can continue to make payments into the 3rd pillar. This is even the case if you completely withdraw from the pension fund due to insufficient residual income and are no longer insured in the 2nd pillar. In this case, you can pay up to 20% of your earned income into pillar 3a instead of the maximum contribution for the small pillar 3a. You can do this for as long as you earn income from gainful employment, but up to a maximum of 70.