Making a voluntary payment into your pension fund can be beneficial, but it requires careful planning. In this article, you’ll discover when such a purchase is truly advantageous, the conditions you need to meet, and key considerations to keep in mind.
Table of contents
What is a pension fund purchase?
In Switzerland, employees save for their retirement through the pension fund. They and their employer make pension fund contributions each month, which are mandated by law. Many people have gaps in their contributions due to factors such as salary increases, delayed job starts, part-time work, or breaks for travel or childcare. As a result, their retirement savings end up being lower than they could be. Making voluntary contributions to the pension fund can help fill these gaps and boost the retirement pension.
Many people have gaps in their contributions. Reasons for this include salary increases, starting work later, part-time work or breaks for travelling or children. The retirement assets are then lower than they could be.
Why can it be worth buying into the pension fund?
Buying into the pension fund is worthwhile not only because of the usually higher retirement pension:
- You save taxes.
- Disability and death benefits may increase.
- In the event of early retirement, you can use it to cushion the impact of reduced benefits.
You can deduct the purchase from your taxable income. The pension fund assets are taxed only upon withdrawal. It is necessary to report your pension as taxable income each year. When a lump sum is withdrawn, the assets are taxed once at a reduced rate. Tax rates vary by canton. You can find a table with the tax rates in our article on capital withdrawal tax.
A purchase does not always improve the retirement pension
A purchase into the pension fund does not automatically increase your retirement pension. This is due to two factors:
- In the 2nd pillar, there are two schemes: a mandatory and a non-mandatory one.
- Pension funds use different models to calculate the pension.
Many pension funds utilize an enveloping model. This means that a standardized conversion rate is applied to the entire retirement assets, regardless of whether they come from the mandatory or non-mandatory portion.
If the mandatory portion has been fully utilized, any voluntary contributions are then allocated to the non-mandatory portion. In some cases, this could result in a pension that is lower than it would have been without the voluntary contribution.
What requirements do I need to meet?
For a purchase to be made into the pension fund, two essential conditions must be fulfilled:
- You must have a contribution gap, which is also referred to as your purchasing potential.
- You must have repaid any advance withdrawals related to the home ownership promotion.
Anyone who does not meet these conditions will not be able to make a purchase.
When is it beneficial to conduct a pension fund buy-in?
A purchase is especially beneficial in the final years of your career. Salaries tend to be at their highest during this time, along with the associated tax burden. You can alleviate income peaks by making staggered purchases.
You can find more background information in our article on the topic “Pension fund buy-in: When does it make sense?“.
Until when is it possible to make a purchase into the pension fund?
If you do not plan to withdraw your capital, you can make additional purchases into your pension fund until retirement, usually up to age 65. Some regulations allow purchases up to one month before retirement. If your retirement plan allows it, you can make buy-ins into the pension fund until the age of 70. Please check with your pension fund for the specific deadline.
Observe blocking periods for capital withdrawals
Following a purchase into the pension fund, capital withdrawals are subject to a three-year blocking period. Non-compliance may result in tax return adjustments or additional tax proceedings. Pensions remain unaffected.
Please use our lump-sum withdrawal calculator to determine whether a lump-sum withdrawal or a pension best meets your needs.
What should I consider when paying into my pension fund?
Check liquidity
The amount you invest is typically locked until retirement. Can you manage without that money until you retire? If your answer is no, you should refrain from making the purchase.
Maximum purchase amount
The maximum purchase amount differs for each individual and is generally specified on your pension certificate.
The pension fund calculates your benefits based on your insured salary, assuming it remains constant from age 25. This approach determines the maximum possible retirement assets. The difference between this amount and your actual savings is your maximum purchase amount.
Review disability and death benefits
The treatment of voluntary purchases upon death depends on the specific pension fund.
In technical terms, this is referred to as “full reimbursement “. This means that the voluntary buy-ins are paid out to the beneficiaries in addition to the survivors’ pension. If the pension fund does not grant a refund, the money paid in voluntarily is used to finance the survivors’ pensions.
Please clarify the following points:
- Does the voluntary purchase enhance pension benefits for surviving dependants?
- Is a lump-sum death benefit provided in addition to regular pension benefits?
You can find out more about this topic in our article “Survivors’ pension“.
Repurchasing after a divorce
If you transferred part of your pension fund assets due to a divorce, you may repay this amount without restriction.
Repayment of advance withdrawals for residential property is not required. The three-year blocking period for capital withdrawals also does not apply in this case.
Check regulations
Pension funds may set their own rules in addition to legal requirements. Please review your pension fund’s regulations and contact your fund directly for details.
3 examples from practice:
- Swiss Life: Purchase is possible up to 1 month before retirement or early retirement. The repayment depends on the pension plan. You must obtain a non-binding offer before making a purchase.
- Axa Professional Invest: Purchases are possible from CHF 1,000 and until retirement.
- ASGA Pension Fund: Purchases are permitted until retirement. A maximum of 3 payments is possible per year. You must submit a questionnaire to calculate the maximum purchase amount. The refund differs depending on the pension plan.
Financing the purchase with pillar 3a
You may use pillar 3a assets to buy into the pension fund. However, this is rarely beneficial for tax purposes, as such transfers are not deductible from your income.
If you lack liquidity in your free assets, this approach may still be appropriate. It enables you to enhance your pension provision, even with a limited budget.
Moving to Switzerland
If you immigrated after 2005 and have never been affiliated with a pension fund, you may contribute up to 20% of your insured salary per year for the first five years.
Return to employment
If you are returning to employment from self-employment, your maximum purchase may be reduced if you have made significant contributions to pillar 3a.
Making a voluntary purchase in the 1e plan from finpension
In the 1e plan from finpension, purchases are possible up to 3 years before retirement. Generally, full reimbursement is included. However, different rules may apply depending on the pension plan.
How purchasing works
- Log in to your 1e plan.
- Select “Voluntary Purchase” and then choose “Calculate Purchase.”
- After entering your details, we will calculate your maximum purchase amount and display the payment details.
