Many pension funds promote the benefits of voluntary purchases without transparently addressing potential downsides. In this article, we aim to do better. We also highlight the critical issues so that you can make a more informed decision about whether a pension fund purchase truly makes sense for you.
Table of content
| Buy into the pension fund: pros and cons at a glance |
| Buying into the pension fund: When does it make sense? |
| Important: Clarify death benefits |
| Alternatives to voluntary purchases |
Buy into the pension fund: pros and cons at a glance
Possible advantages of a pension fund purchase
- Enhanced retirement benefits: a voluntary pension fund buy-in can increase the pension benefits you receive after retirement.
- Income tax reduction: contributing to the pension fund can help you mitigate income peaks.
- Tax-free investment returns: earnings from retirement assets (dividends, interest) are not subject to income tax.
- No wealth tax: pension assets are exempt from wealth tax.
- Capital withdrawal tax: if you plan to withdraw the capital, it will be subject to capital withdrawal tax. However, the tax savings from contributions are typically greater than the capital withdrawal tax.
Disadvantages of a voluntary pension fund buy-in
- Restricted access: the assets are tied up and can only be accessed before retirement in specific cases (e.g., home ownership, self-employment, or emigration).
- Lower returns in the extra-mandatory segment: in the extra-mandatory segment, interest rates and the conversion rate are often lower than in the mandatory segment (keyword: redistribution*).
- Risk of underfunding: in the event of a funding shortfall, your pension fund assets could be affected by restructuring measures, such as reduced interest rates.
- Limited benefits for survivors: in the event of death, a voluntary pension fund purchase does not necessarily improve benefits for surviving dependents. In the worst case, dependents may not receive any portion of the voluntary buy-in amount.
*1e executive pension plans or pure capital plans (without an annuity option) are not affected by the redistribution issues described in this section. For 1e plans, each insured person has their own account, and for 1e and capital plans, there are no conversion losses since there is no annuity option.
Buying into the pension fund: When does it make sense?
For high incomes
Voluntary buy-ins are most tax-effective during years of peak earnings. In these years, not only do you pay the most taxes in absolute terms, but also the highest percentage of your income.
The goal should be to use voluntary buy-ins to smooth out income peaks, reducing your annual taxable income (see illustration). If your income falls within a lower tax bracket, a buy-in is less advantageous.
Mandatory portion before the extra-mandatory portion
Since the mandatory portion provides both a minimum interest rate* on retirement savings and a minimum pension conversion rate, it is advisable to first close gaps in the mandatory portion before contributing to the extra-mandatory portion. This is primarily possible if the mandatory and extra-mandatory portions are insured through two separate pension funds. Check with your pension fund to see if you can contribute exclusively to the mandatory portion.
If contributing to the mandatory portion isn’t possible or if you only have contribution potential in the extra-mandatory portion, consider the financial health of your pension fund. If the funding ratio is well above 100%, this is a positive sign. If it is close to or below 100%, contributions are less attractive. You should be prepared for the possibility that benefits in the extra-mandatory portion could be further reduced to offset conversion losses in the mandatory portion under the BVG.
Special caution is required with pension funds that use an enveloping model with a mixed conversion rate.
*In the event of restructuring, the minimum interest rate is not guaranteed. If usual restructuring measures are insufficient, the interest rate in the BVG mandatory portion can be reduced by up to 0.5 percentage points below the minimum rate for a maximum of five years.
Choosing the right timing
Whether contributing to your pension fund is worthwhile also depends on timing. We distinguish between two scenarios:
- The right time for pension funds with a low funding ratio
- The right time for pension funds with a high funding ratio
For pension funds with a low funding ratio, it’s better to contribute later rather than earlier. Over a shorter time horizon, you can better assess the risks of benefit reductions. You can make contributions up to three years before retirement if you plan a capital withdrawal. If no capital withdrawal is planned, you can contribute up to retirement.
For funds with a high funding ratio, contributing earlier can also be beneficial, especially if you anticipate staying with a pension fund with an exceptionally strong funding ratio until retirement or if the fund uses capital plans or 1e plans.
Why? Your retirement savings benefit from compound interest over time. While private investments also enjoy compound interest, the key difference is that you don’t pay income tax on interest and dividend earnings within the pension fund. Additionally, pension fund assets are not subject to wealth tax until withdrawal or prepayment.
Married couples should choose the better-performing pension fund
Married couples who are both employed have an additional opportunity to optimize pension fund contributions. Since their incomes are combined in the tax return, couples can compare their respective pension funds and prioritize the one that is financially stronger and offers better benefits.
In the event of a divorce, couples are protected. The retirement savings accumulated during the marriage are split equally, regardless of marital property regime. An exception applies if contributions were made using assets classified as separate property, provided such assets can be proven.
Important: Clarify death benefits
Before finalizing a contribution, check what happens to your pension fund savings in the event of your death. Does the pension fund offer a so-called refund guarantee? If not, be aware that voluntary contributions may be lost if you pass away before retirement.
The retirement savings, including voluntary contributions, are typically used to finance survivors’ pensions (widows and orphans). Voluntary contributions generally do not improve these pensions, as calculations are often based on the most recent insured salary rather than total retirement savings.
Good to know: finpension’s 1e collective foundation usually offers a full refund guarantee on accrued retirement savings, in addition to any survivor benefits.
Alternatives to voluntary purchases
Private pension: pillar 3a
The tax-advantaged pillar 3a is another alternative to pension fund contributions. If both spouses are employed and one is covered by a pension fund, both can contribute the annual maximum amount to pillar 3a and deduct it from their taxable income.
From 2025, you can also close contribution gaps retroactively for up to ten years. These contributions are fully tax-deductible. Learn more in our article on “pillar 3a top-up payments”.
Executive pension: 1e plans
1e plans are an attractive alternative for second-pillar savings. In 1e plans, each insured person has an individual account, avoiding redistribution from active to retired participants. Learn more about the benefits of 1e plans in our detailed article.
Free assets: invest money privately
The answer to the question of whether it makes sense to buy into the pension fund also depends on what else you do with the money. If you don’t invest it and even pay negative interest rates, contributing to a pension fund may be more worthwhile. If you can invest the money privately with good returns, the situation changes.
If you decide to invest the money yourself, choosing the right provider is crucial. Since May 2024, finpension has an investment solution for free assets. With us, you benefit from low fees and fee-free foreign currency exchanges. You can also choose between preconfigured or customizable investment strategies. To compare providers, see our comparison of digital asset managers.
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