In Switzerland, a three-pillar concept of provision for personal and occupational retirement, disability and death benefits is embodied in the Swiss constitution.
The concept is based on the following three pillars:
Foundations: AHV (Age and Survivor’s Insurance), IV (disability insurance) and EL (supplementary benefits), EO (income compensation regulations, maternity insurance).
Objective: Guarantees a minimum standard of living.
Financing: The first pillar is financed on a pay-as-you-go basis. Employees and employers pay monthly contributions that are used to finance the pensions paid to current pensioners. The AHV, IV and EL are also funded to a significant extent by the Confederation and the cantons, value added tax (VAT), and tax on tobacco and alcohol. Employees and employers each contribute 5.125% of the total income from employment (8.4 % for the AHV, 1.4 % for the IV and 0.45% for the EO total 10.25%). Self-employed individuals contribute 0.6% less to the AHV. Non-employed persons pay contributions on the basis of their pension income and assets.
Insured persons and contributors: Everybody who lives or works in Switzerland is insured under the first pillar from the day of their birth. Swiss citizens living abroad can join the state pension scheme voluntarily. Everybody who lives or works in Switzerland must pay AHV contributions from January 1st of the year following their 17th birthday. Those who do not or do not yet work, must pay contributions from their 20th birthday. Pensioners who continue to work only pay contributions if they earn more than CHF 16,800 per year.
Benefits: The regular retirement age is 65 for men and 64 for women. On retirement, the average annual income for the entire contribution period is calculated. This average income is revalued using a specific inflation factor. Credits for time spent raising children or caring for relatives can increase the income. A full state pension for men who contributed to the AHV for 44 years and women who contributed for 43 years is calculated using the following formula:
Revalued average income < CHF 42,300: 0.37 * 28,200 + 0.26 * salary
Revalued average income > CHF 42,300: 0.52 * 28,200 + 0.16 * MIN(salary;84,600)
The disability insurance (IV) calculates pensions on the same basis. Benefits are paid to partially or totally disabled persons.
The loss of earnings suffered by persons who serve in the military or civil defence service and mothers (maternity insurance for a period of 14 weeks) is covered under the income compensation regulations (EO).
Foundations: BVG (Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans), UVG (Swiss Federal Law on Accident Insurance).
Objective: Enables employees, together with the benefits under the first pillar, to maintain their accustomed standard of living after retirement or in the event of disability or death.
Financing: Contrary to the first pillar, second pillar pension funds are financed according to a level premium system, which means that every insured persons directly finances his/her own benefits and saves up for his/her retirement. The insured and the employer usually pay equal contributions to the pension fund. The employer must contribute an amount that equals at least the contributions of all employees together.
Insured persons: The insurance covers all employees subject to the AHV who
Pensionable Salary: An effective annual salary of between CHF 21,150 and CHF 84,600 is insured. The pensionable salary equals the annual salary minus a coordination deduction of CHF 24,675. If the annual salary exceeds CHF 21,150, the pensionable salary amounts to at least CHF 3,510 and not more than CHF 59,925.
Benefits: The occupational benefits insurance covers the risks of old age, disability and death. The minimum benefits equal:
Organisation: The occupational benefits insurance in Switzerland is provided by a legal entity that is independent of the employer, usually a foundation or a cooperative association. These pension carriers are exempt from tax, provided that they comply with the statutory provisions. The insured benefits can far exceed the minimum benefits prescribed by the BVG. The pension fund must use a BVG calculation of conformity to prove that it insures at least the benefits prescribed by the BVG. It is managed by a joint governing body (equal number of employer and employee representatives). As far as the financing and benefits are concerned, employee pension funds are structured as defined contribution plans, mixed plans (e.g. risk benefits as a defined benefits plan and the savings process as a defined contribution plan), or defined benefits plans. However, the current trend is towards defined contribution and mixed plans.
Further topics related: Insured people who are missing contribution years can purchase additional service years and benefits until the gap in occupational benefits cover is stopped. The amounts used for such purchases can be deducted from the insured’s taxable income. Since 1 January 1995, insurants quitting their job are entitled to their full vested benefits. All accrued savings assets of the insured persons are transferred to the pension fund of their new employer. In the event of a divorce, the spouses are entitled to equal shares of each other’s vested benefits. Early retirement is possible at the earliest from the age of 58 (or 55 as a transitional solution). Under certain circumstances, vested benefits or part thereof can be withdrawn in advance in order to finance the purchase of owner-occupied residential property.
Basics: Swiss Federal Constitution
Objective: Fulfilment of personal wishes, Elimination of gaps not covered by the first and second pillars, Tax optimisation.
Financing: Level premium system (savings). The personal pension provision system is divided into two categories: pillars 3a (tied or restricted-access pension provision) and 3b (flexible pension provision). A maximum annual amount of CHF 6,768 can be paid into a tied pension scheme and this amount can be deducted from the taxable income. These assets can be paid into insurance policies (retirement, disability, death) or a bank account. The funds paid into the scheme can only be withdrawn from the age of 60 (men) or 59 (women), unless the assets are withdrawn in advance to finance residential property. Flexible pension schemes are not subject to any restrictions, but contributions to these schemes do not enjoy any tax privileges.
The employer’s and employee’s contributions to the first pillar (AHV/IV) and the second pillar (BVG and extra-mandatory pension funds) can be deducted from the taxable income. As far as tied third-pillar pension schemes are concerned, employees can deduct an amount of CHF 6,768 per year from their taxable income, and self-employed persons who do not belong to a pension fund can deduct CHF 33,840 or a maximum of 20% of their income.
Pension benefits paid under the first and second pillars must be taxed in full as income. Any lump-sum benefit payments are taxed at a reduced rate.
Contributions Income on capital Benefits:
(October 2, 2016)