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Understanding the Second Pillar: Occupational Pensions

The 2nd pillar is intended as a supplement to the 1st pillar so that you can be sure of receiving an adequate pension in retirement. If you leave Switzerland, become self-employed or buy your own home, you can also withdraw the capital you have saved up to that point ahead of time

The second pillar of the Swiss social security system is the occupational pension plan. This pillar includes the mandatory pension funds (BVG or PK) and the occupational pension insurance (BAV). This pillar is mandatory for all employees and employers and is financed by contributions from employers and employees. The “PK” supplements the AHV pension and should cover about 60% of the income. This means that higher earners should definitely take care of private pension provision. The PF is often the largest saved asset, but is often neglected. Pension fund benefits vary from employer to employer, so a comparison before changing jobs is worthwhile. Pension funds are financed by the so-called capital cover method, i.e. you pay into the PF. The pension fund in turn invests the capital. When you retire, you can often choose between a pension or capital or a mixture. The pension is calculated according to the conversion rate (conversion rate in % x your capital = annual pension; 6.8% x CHF 100’000 = CHF 6’800/year).

The occupational pension plan allows the continuation of the accustomed standard of living in an appropriate manner. It is mandatory for part of the working population with an annual income of at least CHF 22,050. The compulsory insurance ends at 88,200, but pension funds can also insure higher salaries. This is referred to as the extra-mandatory pension plan.

For the compulsory part of the occupational pension plan, the law makes detailed specifications for the pension funds. In particular, it defines the minimum benefits to which insured persons are entitled. In the non-mandatory part, the pension funds have a great deal of leeway. However, they may not under any circumstances fall below the benefits defined in the law for compulsory insurance.

Insured salary or coordinated salary: As the second pillar, the occupational pension scheme builds on the first (AHV). Therefore, not the entire income is insured in the occupational pension plan, but a so-called coordination deduction is made (CHF 25,725; covered by the AHV). The highest insured salary in the compulsory occupational pension scheme is accordingly CHF 62,475, (88,200-25,725).

Financing of the PF: The occupational pension is financed by the so-called capital cover method. That is, you save your capital with your pension fund. This capital is then invested and the resulting profits are credited as interest. In addition, there is the possibility to make voluntary purchases. The amount of the contributions is determined by the pension fund. The law stipulates that employers must pay at least half of the contributions for their employees. Often, employers make higher contributions and/or there is the possibility of paying even higher contributions yourself.

Your contributions, vary, depending on your age. The law provides for minimum contributions here:

The interest on retirement assets in the mandatory occupational pension scheme may not be lower than the minimum interest rate set by the Federal Council. It is 1 percent (since 2017). In the non-compulsory part, pension funds may apply a different interest rate.

What is a conversion rate? In the mandatory occupational pension plan, the conversion rate is set by law. The pension funds may not fall below this rate. This is why it is referred to as the minimum conversion rate. It is 6.8 percent (since 2005). In the case of non-compulsory occupational pension plans, the conversion rate is set by the pension fund itself.

What happens when I change jobs? If you start a new job, you usually also change to the pension fund of your new employer. In this case, the existing credit balance, the so-called vested benefits, must be transferred to the new pension fund. If you do not immediately start a new job, you must deposit the credit balance with a vested benefits institution until you resume employment or retire.

Early withdrawal: Surely you have heard of someone withdrawing their PF to buy a home. The law stipulates that you can withdraw your PF assets for owner-occupied residential property or for a step into self-employment (only private companies). Depending on where you move to, you can also withdraw your PF assets.

It is important to consider occupational pensions as part of the overall retirement picture and prepare for the future early to ensure a comfortable retirement. By combining the first and second pillars of retirement planning, you can ensure that you have enough money in retirement. The practice here often talks about 60% of your income before retirement. However, you may have a higher capital due to extra-mandatory contributions and a “good PF” and purchases. Nevertheless, especially from an income of over 100,000/year, private pension provision becomes important. More about this later. Conversely, if you only work part-time or have repeated interruptions, you can have a relatively low PF even with a good income. In this case, private pension provision is all the more important.

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