Clever planning secures your future: Maximise retirement assets when withdrawing them
Article written on 28 September 2023
Retirement assets are saved up during employment, often for a pension or better retirement provision. Besides government levies, old-age and survivors’ insurance (OASI) contributions (pillar 1) and employers’ contributions to the pension fund (pillar 2), employed persons with an income subject to OASI contributions can also pay into pillar 3 – the tied pillar 3a retirement provision – and in turn deduct the contributions from taxable income.
Example
Taxable income: CHF 100,000
Tax rate: 25%
Tax due excluding pillar 3a retirement contribution: CHF 25,000
Pillar 3a contribution: CHF 5,000
Taxable income: CHF 95,000
Tax rate: 25%
Tax due including pillar 3a retirement contribution: CHF 23,750
Tax saving as a result of 3a contribution: CHF 1,250
This means that paying into pillar 3 is worthwhile from a tax perspective. However, this calculation has not been entirely thought through. The retirement account holder also has to pay tax when withdrawing retirement assets, although capital withdrawal tax at a reduced rate rather than the usual rate of income tax (25% in our example).
Capital withdrawal tax
Capital withdrawal tax is applied when a capital withdrawal is made. This is possible in pillar 3 in particular and also in pillar 2, depending on the pension fund. The level of the tax rate when withdrawing retirement assets depends on various factors.
On the one hand, the capital withdrawal tax is progressive, which means that it is based on how much is withdrawn per tax year. The higher the amount, the higher the tax rate. For this reason, it is advisable to spread pillar 3 retirement assets over several accounts in order to be able to withdraw them in stages on retirement and spread them over several tax years. This is because the assets in a 3a retirement account can only be withdrawn in full on retirement – not in part – as illustrated by the following example:
Example: Married couple (Hans and Elisabeth, reformed), living in Zurich, ZH
Pillar 3a retirement savings: CHF 250,000
Tax rate when withdrawing the entire retirement assets of CHF 250,000 in one tax year: 6.0%*
Total tax due: CHF 15,000
Tax rate when withdrawing in stages:
- Account CHF 50,000 in tax year 1, tax rate 4.5%*, tax due CHF 2,250
- Account CHF 100,000 in tax year 2, tax rate 4.9%*, tax due CHF 4,900
- Account CHF 100,000 in tax year 3, tax rate 4.9%*, tax due CHF 4,900
Total tax due: CHF 12,050
Tax saving as a result of withdrawing in stages: CHF 2,950
It is advisable to achieve an equal spread across all 3a retirement accounts in order to make the most of the different tax rates. As the first significant tax progression often begins at CHF 50,000, in general we recommend opening an additional 3a retirement account from this amount onwards. It is also important to know that withdrawals made from pillars 3a and 2 in the same year are added together for the tax progression. For the federal direct tax and for most cantons, this also applies to withdrawals made in the same year by spouses or persons living in a registered partnership.
Furthermore, the place of residence of the retirement account holder plays an important role, as tax rates can vary sharply when making a capital withdrawal depending on the canton and municipality. While our married couple in Zurich, ZH has a tax rate of 6.0%* if withdrawing CHF 250,000, a married couple in Herisau, AR pay 9.0%* (CHF 22,500) for the same amount and one in Liestal, BL just 4.9%* (CHF 12,250). Therefore the level of the effective tax burden when withdrawing retirement assets also depends heavily on the place of residence. It is advisable to look up the tax rates that apply to the retirement account holder, as well as the gradation of the progressive tax rates, on the internet (e.g. the federal government’s tax calculator ), or to ask the tax authority responsible.
The most important thing when optimising withdrawals of retirement assets is early planning. If measures are taken to optimise retirement assets, it often takes time for them to take effect. Five years or fewer are not usually enough. Our sample married couple who are ten years away from retirement should also discuss their pension situation with a pensions expert in good time to ensure the best possible outcome.
Do you have any questions about your retirement provision? Please do not hesitate to contact your relationship manager if you have any questions.
Please also note our six tips on pillar 3a.
*Source: Tax calculator of the federal government
Glossary
The job of the three pillars of the Swiss pension system is to ensure a person’s income after retiring. The idea was for OASI pension income (pillar 1) to cover basic expenses in old age, i.e. rent, insurance, health insurance, food and drink, etc. Income from pension funds (pillar 2) was intended to help maintain the same standard of living (to a certain extent). In most cases, income from pillars 1 and 2 is no longer sufficient owing to the increase in living costs (especially basic ones), which is why there is an additional form of tied pension provision – pillar 3a. In pillar 3a, further contributions to retirement provision can be made on a voluntary basis in order to be able to maintain the same standard of living after retirement.
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Hans and Elisabeth are a married couple in their late fifties and live in Zurich. They are teachers, so have always had a good pension fund. With retirement coming up, however, they are concerned about the rising cost of living and possible healthcare costs in future. They are keen to maintain their standard of living in the years ahead.
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