If you pay money into your pension fund voluntarily, you can save taxes. You can deduct the amount paid in from your taxable income. Against this background, many pension funds advertise voluntary purchases without any restrictions and without providing transparent information about possible disadvantages.
In this article we would like to make it better. We also put our finger on the vulnerable points, so that you can better judge whether a voluntary purchase in the pension fund really makes sense for you.*
*1e management pension plans or pure capital plans (without pension option) are not affected by the redistribution problems described in the next section, as each insured person has his or her own account (1e plan) and no conversion losses are incurred due to the lack of pension option (1e and capital plans).
Second pillar is built on a sloping foundation
In order to be able to assess whether voluntary purchase is appropriate for you, you need to understand how the second pillar of the Swiss pension system is positioned. Let’s face it: not well. Lower yields on the one hand and higher life expectancy on the other have meant that the retirement assets saved up to retirement are no longer sufficient to finance pensions. There is a quiet redistribution from the active insured to pensioners, which is primarily expressed as follows: they no longer receive the full return as interest. A part of the returns earned by the pension fund on the capital markets is used to finance the conversion losses.
The current situation would basically not be all that bad if a reform was on the horizon that got to the root of the problems. But we are far from that. The last revision of the BVG dates back to 2004, and since then no bill has managed to attract a majority. The most recent one was the 2020 age reform, which was voted down by the people and the cantons (September 24, 2017).
All in all, this leads to considerable uncertainties. Without reform, pension funds will increasingly run into coverage shortfalls, especially if the stock markets do not perform well. If a pension fund finds itself in a deficit, it must take remedial action. In the event of a partial liquidation, voluntary contributions are also affected by the underfunding and are no longer repaid in full. Scenarios that you do not want to experience first hand*.
*1e-Kadervorsorgepläne oder reine Kapitalpläne (ohne Rentenbezugsmöglichkeit) sind nicht von den in diesem Kapitel beschriebenen Umverteilungsproblemen betroffen, da für jeden Versicherten ein eigenes Konto geführt (1e-Plan) wird und mangels Rentenoption keine Umwandlungsverluste erlitten werden (1e- und Kapitalpläne).
How can you still benefit from a pension fund purchase?
Obligation before supplementary obligation
Since we have both a minimum interest* on the retirement capital and the minimum pension conversion rate in the Obligation Pension Plan, it is advisable to first close any gaps in the Obligation Pension Plan before you pay into the Supplementary Obligation Pension Plan. This is primarily possible if you have insured the Obligation and supplementary Obligation insurance in two different funds. However, you should still ask your pension fund whether it is possible to buy into the Obligation insurance.
If it is not possible to pay into the obligation or if you only have purchasing potential in the supplementary obligation, the question arises as to how solid your pension fund is. If the coverage ratio is well over 100 percent, this is a good sign. If it is close to or even below 100 percent, purchases are not very attractive. You have to expect that the benefits in the supplementary obligation will be further reduced in the future to finance the conversion losses in the BVG Obligation.
* In the event of restructuring, the minimum interest rate is no longer guaranteed. If the usual measures to restructure a pension fund do not suffice, the interest rate can also be reduced in the BVG Obligation for a maximum of 5 years by a maximum of 0.5 percentage points below the threshold of the BVG minimum interest rate.
Choosing the right time
For pension funds with a low coverage ratio: better late than early
If you want to take advantage of the existing purchasing potential despite a low level of coverage in the supplementary obligation, it is advisable to do this as late as possible. Conversion rates cannot be significantly reduced overnight. In other words, over a short period of time you can assess the risks of benefit reductions better than in the long term. You can make purchases up to three years before retirement if a capital withdrawal is planned. If you are not planning a lump-sum withdrawal, you can buy in until retirement.
For pension funds with a high coverage ratio: also interesting at an early stage
If you are likely to have the same pension fund with an exceptionally good coverage ratio until retirement, or if it is a lump-sum plan or 1e plan, it may be worth buying in earlier. Why? Firstly, your retirement assets benefit from the compound interest effect. Of course, your private assets also benefit from this. The main difference, however, is that you do not pay income tax on the interest and dividend income in the pension plan. In addition, the retirement assets are not subject to wealth tax until retirement or an early withdrawal (does not have to be declared in your tax return).
Objective: Breaking income peaks
From a tax point of view, voluntary purchases are most interesting in the years in which you earn the most. This is when you have to pay the most taxes, not only in francs and centimes but also in percentage terms. If your income is at a low level of progression, the voluntary purchase will be less worthwhile.
Your goal should be to break income peaks with voluntary purchases and thus smooth annual taxable income (see diagram).
Spouses should choose the better pension fund for purchases
Spouses who are both working have an additional opportunity to optimize pension fund purchases: Since your incomes are added up in your tax return, you can compare your pension funds and prefer the pension fund that is financially better off and offers better benefits. You are also protected in the event of a divorce. The retirement assets accumulated during the marriage are divided in half, regardless of your matrimonial property regime.*
*Exception: Purchases by means of funds that belonged to the “Errungenschaftsbeteiligung”, provided that the “Eigengut” can be proven.
Restitution of retirement assets in case of death?
Before you definitely make the purchase, one final note: check whether your pension fund offers a restitution of the retirement assets and voluntary purchases. If it does not offer a restitution, you must be aware that voluntary purchases are lost if you die before retirement. This is because the retirement capital (including voluntary purchases) is then used to finance the widow’s and orphan’s pension. As a rule, these pensions are not improved by voluntary purchases (often a fixed percentage of the last insured salary and not in relation to the retirement capital).
*The 1e collective foundation established by finpension usually offers a full restitution on the saved retirement assets (in addition to any pensions).
Alternatives to voluntary purchase
Free assets: pillar 3b
Finally, the answer to the question of whether it makes sense to buy into the pension fund depends on your alternatives. What else do you do with the money? If you don’t invest it and possibly even pay negative interest, it is more worthwhile buying into the pension fund than if you know how to invest the money privately for high returns. In the Pension Fund Obligation, you have a certain amount of capital protection, since the minimum interest rate may not normally be undercut and a minimum withdrawal benefit is guaranteed. In addition, pension assets and their income are exempt from both income and wealth tax.
Private provision: pillar 3a
As an alternative to buying into a pension fund, the 3rd pillar is a good choice. If both spouses are gainfully employed and are members of a pension fund, both can pay in the annual maximum amount of the pillar 3a and deduct it from their joint taxable income.
Management pension plans: 1e plans
1e plans are an attractive alternative for a second pillar pension solution without redistribution. In 1e plans with an income of CHF 127’980 or more, a separate account is managed for each insured person. Redistribution can be avoided.
Advantages and disadvantages summarized
Advantages:
- Reduction of the top tax burden on high incomes.
- Tax deduction at the time of deposit is usually higher than the capital withdrawal tax. Capital withdrawal tax is a reduced tax.
- You pay no wealth tax on pension assets
- Income from pension assets is not taxable as income.
- A certain amount of capital protection and a minimum interest rate in the BVG obligation.
Disadvantages:
- Assets are tied up and can only be withdrawn before retirement in a few exceptions (home ownership, self-employment, emigration).
- Lower interest rate and lower conversion rate in the supplementary obligation (keyword: redistribution).
- Possibly no restitution of the retirement assets (including voluntary purchases) in the event of death.
- You pay a reduced tax when you withdraw your pension assets.