Understanding the Three Pillars System

Upon retirement, you will receive a pension calculated based on the contributions made to your pension accounts during your working life. If you decide to retire earlier or later, the amount of your pension will be adjusted accordingly. In Switzerland, old-age pension provision relies on three pillars: the state pension (AVS), occupational pension (LPP), and the third pillar.

AVS: First Pillar

In accordance with the Swiss Constitution, AHV pensions must adequately cover your basic needs when you reach retirement age. However, if you wish to maintain your standard of living, this pension may not be enough.

Pension amounts

• Minimum pension for a single person: CHF 1,225 per month.
• Maximum pension for a single person: CHF 2,450 per month.

Factors affacting the pension amount

• If you have paid AVS contributions every year, you are entitled to a full pension.
• If there are gaps in your contributions, you are entitled to only a partial pension. For example, a year without contributions reduces your pension by around 2.3%.

• The higher your salary, the higher your AVS contributions, which increase your pension.
• To obtain the maximum pension, your average annual income must be at least 88,200 Swiss francs.

Married couples or registered partnerships

The pension for a married couple or registered partnership is limited to 150% of the maximum individual pension. Currently, this limit is 3,675 Swiss francs per month. If the sum of your two pensions exceeds this limit, your couple's pension will be adjusted accordingly.

Splitting AVS in case of a divorce

A divorce has consequences on your AVS (Old Age and Survivors Insurance) assets. The distribution of the provident assets from the three pillars after a separation is governed by law. The entire old-age provision of both spouses is divided equally between them. The income distribution takes into account all the calendar years corresponding to the duration of the marriage.

AVS pension for early or deferred retirement

In Switzerland, the retirement age is 65. However, you can retire one or two years earlier, which will reduce your pension.

• Early retirement of one year: 6.8% reduction in pension for the entire period of retirement.
• Two years' early retirement: 13.6% reduction in pension.

Anticipating your retirement can have impacts on your income and taxes. If one of the spouses continues to work, it is crucial to calculate carefully, as a combined income with an early pension could lead to tax progression that might minimize the benefits of this pension.

If you take early retirement, you must register as a person without gainful activity, because if you do not, you risk having a gap in contributions that could reduce your pension.

If you decide to postpone your retirement by one year, or even up to five years, your monthly pensions will be increased by a supplement proportional to the length of the postponement.

AVS pension estimate

At any time, you can request an estimate of the pension you will receive at retirement. Please note, this estimate is indicative, as it is based on current legal provisions and your current professional status.

To obtain an online estimate of your future pension, you can consult social insurance services.

LPP: 2^nd Pillar

The pension from the second pillar is calculated based on the contributions made during your professional life and the regulations of your pension fund. At retirement age, you will generally receive the accumulated amount as a monthly old-age pension.

However, you can receive up to a quarter of your second pillar in the form of a lump sum (single payment), with the remainder being paid as a monthly pension. Some pension funds may allow for a higher lump sum payout or even the entire amount in capital instead of a pension.

The old-age pension is calculated based on the 'conversion rate,' which is the rate used to convert the accumulated capital in your second pillar into an annual old-age pension. The minimum conversion rate for the mandatory part is set by law and is currently 6.8%.

For example, if you have accumulated a retirement capital of 600,000 francs and the LPP conversion rate is 6.8%, your annual pension will be 40,800 francs, or 3,400 francs per month.

3^rd Pillar: Your savings

The third pillar is not mandatory, but strongly recommended. If you have made contributions to the third pillar, your total retirement capital will be higher. On average, the amounts from the first and second pillars that you will receive at retirement will represent about 60% of your last earned salary. The third pillar is a voluntary and individual savings plan to ensure additional income at the end of your working life.

Third Pillar A

The Third Pillar A is an individual savings plan for retirement.

• Tax benefits: Amounts paid into Pillar 3a are tax-deductible, subject to certain statutory limits.
• Withdrawals: Withdrawals from Pillar 3a are subject to capital gains tax.
• Payment limits: Working people with a pension fund can contribute up to CHF 7,056 per year, while those without a pension fund can contribute up to 20% of their net income, with a maximum of CHF 35,280 per year.
• Subscriber: Only working people can make Pillar 3a contributions, as they must be affiliated to the AVS scheme. Assets invested in this vehicle are not taxed for the duration of the product.
  
  

Third Pillar B

The third pillar B corresponds to individual savings not linked to retirement.

• Tax advantages: Unlike Pillar A, amounts paid in are not tax-deductible (with certain cantonal exceptions, such as Geneva).
• Withdrawals: Withdrawals from Pillar 3b are tax-free under certain conditions, such as the age of withdrawal or the term of the contract.
• Payment limits: Pillar 3b has no annual contribution limit.
• Subscriber: Subscribing to a Pillar 3b is free.

Piguet Galland helps its customers to organise their savings so that they can maintain their initial strategy, regardless of life's ups and downs, and take advantage of the fresh start that is retirement. Our experts are available to advise you. We look forward to hearing from you.

In the next episode, we'll explore the differences between pension and lump-sum withdrawals.