Swiss retirement provisions are based on three pillars. These pillars – AHV/AVS, disability insurance and supplementary benefits, pension funds and private provisions – are intended to ensure financial self-determination and security in old age. But how exactly do retirement provisions work? And what is behind the individual pillars? Here is an overview and some valuable tips.
What is Switzerland’s three-pillar system?
Switzerland’s three-pillar system comprises Swiss retirement, survivors’ and disability provisions. The system is designed to cater to the needs of different population groups and to optimally cover risks such as old age, death and disability.
The three pillars each play different roles and are organised differently.
First pillar: state benefits (AHV/AVS, disability insurance, supplementary benefits)
The first pillar contains state benefits. This includes Swiss old-age, survivors’ and disability insurance (AHV/AVS, disability insurance) as well as supplementary benefits (EL). Old-age, survivors’ and disability insurance serves to ensure a basic standard of living in old age and in the event of disability and to support surviving dependants (widows, widowers and orphans) through survivors’ pensions. Supplementary benefits apply if the pensions, together with any income, are not enough to cover the costs of living.
Duty to pay contributions and retirement age
Everyone living or working in Switzerland is subject to mandatory AHV/AVS insurance. The duty to pay contributions generally commences on 1 January following a person’s 20th birthday and lasts until retirement age. If a person is already in employment before their 20th birthday, the duty to pay contributions commences on 1 January following their 17th birthday. This obligation generally ends when the AHV/AVS reference age is reached, but remains in place if someone continues working beyond the reference age. For pensioners who are in work, the allowance of CHF 1400 per month or CHF 16 800 per year can be waived in order to increase their AHV/AVS pension.
The AHV/AVS age is currently 64 for women and 65 for men. Following the adoption of the AHV/AVS 21 reform, a uniform reference age of 65 will apply to both men and women from 2028 onwards. However, AHV/AVS pensions are not paid out automatically; this must be requested. An anticipated pension calculation can be requested from the cantonal social security administration office in order to estimate the level of the pension to be expected.
AHV/AVS contribution gaps
If you have not paid your AHV/AVS contributions every year, you will receive a lower pension. Pensions are reduced by 1/44 for every year in which no AHV/AVS contributions were made. Order an account statement from your social security administration office to check whether there are any contribution gaps in your individual account (IA).
Financing the first pillar
The various first pillar benefits are financed in different ways as follows:
- AHV/AVS and disability insurance: These benefits are financed on a pay-as-you-go basis. This means that the salary contributions from employees and their employers go directly to cover current pensions.
- Supplementary benefits (EL): Supplementary benefits are financed directly from federal and cantonal taxpayers’ money.
Please note: the amount of the AHV/AVS pension can vary depending on the contribution period and income. In case of doubt, an anticipated pension calculation from your cantonal social security administration office will clarify the situation.
The second pillar: occupational provisions (pension fund)
The second pillar contains occupational provisions and provides protection in old age and in the event of disability or death for insured people and their relatives. Specifically, occupational provisions are pension funds. Together with the first pillar benefits, the second pillar is intended to enable people to adequately maintain their standard of living.
Duty to pay contributions
The duty to pay contributions to occupational provisions is mandatory for most people in employment. This obligation applies if the following conditions are met:
- You are subject to AHV/AVS contributions, i.e. you are already insured under the first pillar.
- You are at least 17 years old and have not yet reached statutory retirement age. You are insured against disability and death from 1 January following your 17th birthday. From 1 January following your 24th birthday, you are also insured for retirement benefits.
- Your annual salary is more than zweite-saeule-minimum-jahreslohn.
You and your employer each have to pay half the contributions to the second pillar. The amount you pay in depends on your salary, age and your employer’s pension plan.
If you are self-employed and decide to pay BVG/LPP contributions voluntarily, you can obtain information on the process from an employee benefits institution of your choice.
Payout of BVG/LPP pension
Pension fund assets can be withdrawn in a number of ways: as a lifelong annuity, as a one-off lump-sum payment or as a combination of the two. A payout is possible as soon as you reach the statutory reference age of 65*. In any case, the current regulations of your pension fund apply.
* This excludes the transitional cohorts from 1961 to 1963 for women whose reference age is gradually increased to 65 due to the AHV/AVS reform.
Lump-sum payment or lifelong pension?
We explain the advantages and disadvantages:
Financing the second pillar
In contrast to the first pillar, occupational provisions are paid for via a fully funded system. This means that everyone will save for their own pension. The contributions paid in are invested on the capital market for each person and paid out with interest at the end of the insurance period. Your pension certificate provides you with information on the amount of your retirement pension. The pension funds send out a new pension certificate at the beginning of each year. However, the amounts shown there are to be regarded as “projected”; factors such as salary changes, level of employment, conversion rate and interest influence the amount of the contribution.
The third pillar: private provisions
The third pillar contains private provisions and allows people to close any pension gaps and save for their old age. As a rule, AHV/AVS pensions (first pillar) and your pension fund (second pillar) amount to around 60% of your last salary. The resulting shortfall can be reduced by contributing to a private pension plan. In practice, 80–90% of your last income is used as the benchmark for what you will need in retirement.
The third pillar is divided into tax-qualified provisions (pillar 3a) and non-tax-qualified provisions (pillar 3b):
• Pillar 3a: tax-qualified provisions with annual contribution ceilings and tax advantages during the term
• Pillar 3b: non tax-qualified provisions with no restrictions and tax advantages on payout
Banks, insurance companies and employee benefits institutions offer tax-qualified 3a products. Banks and employee benefits institutions offer these products in the form of 3a account solutions or 3a securities solutions. Insurance companies offer so-called mixed 3a policies. These policies typically combine retirement provisions with a risk component, where part of the annual premium is invested in a retirement account while the other part is used to cover the waiver of premium, death or disability.
Duty to pay contributions
Payments into the third pillar are not mandatory. These are individual and private, voluntary provisions. You can pay into one of these solutions as long as you are subject to AHV/AVS contributions.
There is a maximum amount that can be paid into pillar 3a every year. For employees, this amounts to a maximum of abzug-3a. People with a very low income (below the entry threshold) or self-employed people without a second pillar can pay in up to 20% of their income and up to a maximum of abzug-3a-selbststaendige. The third pillar is a good way to save money for old age, particularly for the self-employed.
Financing
The third pillar is financed via individual payments made by the insured person.
Tax advantages and payout
Pillar 3a offers tax advantages: the annual amounts paid in can be deducted from taxable income up to a legally stipulated limit. This reduces taxes and at the same time creates an incentive to provide for old age.
Pillar 3a is paid out at the earliest five years before statutory retirement age. In special cases, payment may also be made earlier, i.e. when financing residential property, emigrating or becoming self-employed. The money paid out is treated separately from your other income and taxed at a reduced rate.
There are fewer restrictions for pillar 3b. Premiums for 3b life insurance cannot be deducted from taxable income in most cases, but payment of 3b life insurance is tax-free.
Why is the three-pillar system so important?
The three-pillar system ensures financial stability in Switzerland and guarantees people the opportunity to lead a financially self-determined life in old age. The combination of state, occupational and private provisions offers comprehensive protection and enables everyone to provide for the future early and in a targeted manner.
Tips for your individual pension planning
- Analyse your current financial situation: the first step is to have a clear overview of your AHV/AVS and pension fund entitlements.
- Close pension gaps early: consider how you can close any gap in coverage by using a pillar 3a.
- Tax advantages: contributions to pillar 3a pensions reduce your tax burden and at the same time help accumulate capital for the future.
- Regular review: it is advisable to regularly adjust your pension plans, especially in the event of changes in income or following a change of profession.
Questions about future provisions?
Our experts will be happy to advise you.
