Is it worth paying more into your pension fund?
If you make voluntary contributions into your pension fund, you can save a lot on tax and have more money to live off in your old age. This is what to watch out for if you want to do everything right.
In Switzerland, a certain amount is deducted from employees’ salaries each month and paid into a pension fund. If you can afford it, you are often able to pay in more. These voluntary contributions help build up your retirement assets and depending on the pension fund, improve the benefits paid out in the event of death or disability.
But above all, you save on taxes because these contributions are tax-deductible, meaning that less of your income is subject to tax. In addition, the money you pay in is exempt from wealth tax and the income generated is not taxed as income, although when you withdraw capital, this is subject to tax. However, this usually amounts to less than the tax that you have saved by making the voluntary contribution.
You should take note of the following when making contributions:
- Only start thinking about voluntary contributions once you have already paid in the maximum amount to your pillar 3a and would like to save even more on tax. Pillar 3a is more flexible, for example with regards to benefits paid in the event of death or how your money is invested. In addition, you cannot make catch-up payments into your pillar 3a if you have not paid in the full amount in previous years.
- The maximum amount you can pay in is usually listed on your personal pension statement, which you receive every year from your pension fund. If you have recently moved to Switzerland and were not previously a member of a Swiss pension fund, you can pay in up to 20 percent of your insured salary for the first five years.
- It may be worth spreading out larger payments over several years and making contributions primarily in years when your income is higher. This will usually result in greater tax savings.
- The returns are higher the quicker you withdraw the money again. You should be aware that if you want to withdraw any of your retirement assets to buy a home or upon retirement, for example, you should have paid in any such amounts at least three years previously. Otherwise you must repay the tax amounts that you saved when making the additional contribution. This does not apply if you are withdrawing the money only as a pension.
- Lump-sum withdrawals are taxed less than pension benefits. Your returns are therefore higher if you withdraw the money you have paid in as a lump sum.
- Before making a payment into your pension fund, you should clarify the impact it will have on your pension fund benefits and what will happen to the amount in the event of death. With many pension funds, your surviving spouse or life partner will not benefit from a higher pension, because the pension is paid as a fixed percentage of your insured salary.
- Additional contributions are usually only advisable if your pension fund’s coverage ratio exceeds 100 percent. If a pension fund has to take restructuring measures, these could negatively impact the future performance of your contributions.
- If you have already withdrawn some of your pension fund assets, for example to buy a home, your future contributions are then usually only tax-deductible once you have repaid the amount you previously withdrew.
Would you like to find out if it’s a good idea to make additional contributions into your pension fund? Then order the free-of-charge information sheet or arrange an appointment for a non-binding consultation at your local VZ branch.