Everything you need to know about the 2nd Swiss Pillar: Contributions, Withdrawals and Taxation

To begin with, let us recall how the three-pillar system of the Swiss pension plan works before we focus more specifically on the 2nd pillar.

Understanding the Three-Pillar System in Switzerland

Swiss pension planning is based on a three-pillar model, designed to provide comprehensive financial protection for residents and cross-border workers:

• First pillar – AVS (Old-Age and Survivors’ Insurance) : This is the mandatory public insurance intended to cover basic needs in retirement.
• Second pillar – LPP (Occupational Pension Law) : This pillar is intended to maintain the standard of living in addition to the first pillar. It is funded by contributions from employers and employees.
• Third pillar – Individual pension : Optional, it allows everyone to save privately with tax advantages to prepare for retirement according to their personal needs.

Who Must Contribute to the 2nd Pillar?

Employees in Switzerland

Contributions to the 2nd pillar are mandatory for all employees in Switzerland who meet certain specific conditions:

• Minimum age : Employees start contributing as of January 1 following their 17th birthday, but at that age, contributions only cover risks of death and disability. Starting at 25, contributions also include retirement savings, which helps prepare for future pension income.
• Minimum income: This contribution requirement applies only to employees whose annual income exceeds CHF 22,050. If the income is below that amount, they are not subject to mandatory coverage under the 2nd pillar.
• Minimum employment duration : Lastly, the obligation also applies to employees with an employment contract lasting more than three months. In this case, even temporary or seasonal workers must contribute to the 2nd pillar if their contract exceeds this duration.

Self-employed Workers

Self-employed individuals are not required to contribute to the 2nd pillar. However, they may do so voluntarily by joining an occupational pension institution. This approach is strongly recommended to ensure adequate social protection and effectively prepare for retirement.

Special Cases

• Multiple jobs : If you hold several jobs whose combined income exceeds the insurance threshold, you may request optional coverage. It is up to you to contact the occupational pension institution of your choice and inform your employers so that they can pay the corresponding employer contributions.
• Part-time workers : Even with a part-time job, if income exceeds the minimum threshold, 2nd pillar membership is mandatory. 

The 2nd Pillar and Vested Benefits

What Are Vested Benefits?

Vested benefits is a mechanism that ensures your occupational pension rights are preserved when you change employers or temporarily stop working. Your pension assets are then transferred to a vested benefits account, where they continue to grow until you resume work or reach retirement age.

When Should You Use the Vested Benefits Account?

• Job change : If you leave your job and take another, your 2nd pillar assets are usually transferred automatically to your new employer’s pension fund.
• Work interruption : In case of a career break (sabbatical leave, prolonged unemployment, etc.), your funds are transferred to a vested benefits account.
• Leaving Switzerland : If you leave Switzerland to settle in a European Union or EFTA country, the mandatory portion of your pension assets must remain in Switzerland in a vested benefits account until retirement age.

Advantages of the Vested Benefits Account

• Preservation of rights : Your pension rights are preserved and continue to earn interest.
• Flexibility : You can choose the financial institution with which to open your vested benefits account.
• Investment options : Some institutions offer investment options for your vested benefits assets, potentially yielding higher returns than the minimum interest rate.

Investing in the 2nd Pillar: An Opportunity Worth Considering

Why Invest More in the 2nd Pillar?

• Tax optimization : Voluntary contributions (buybacks) in the 2nd pillar are deductible from taxable income, thus reducing your annual tax burden.
• Increasing the pension : By increasing your pension capital, you ensure a higher retirement pension.
• Attractive returns : 2nd pillar funds generally benefit from stable returns, protected from market fluctuations.
• Buying back missing contribution years : If you have contribution gaps (for example, a late start to your career in Switzerland), you can fill them by making additional payments.

How to Invest in the 2nd Pillar?

Some pension funds allow you to choose a savings plan with higher contributions, thereby increasing your retirement capital.

Points to Watch Out For

• Buyback limits : There are caps on the amount you can buy back, generally calculated based on your salary and your age.
• Fund lock-in : The amounts invested are locked until retirement age, set at 65 for men and 64 for women, except in specific cases (purchase of a primary residence, permanent departure from Switzerland, etc.) that we will address shortly.
• Impact in the event of early withdrawal : If you withdraw funds for a real estate purchase, you will not be able to make a buyback for three years.

2nd Pillar Withdrawal Options for Cross-Border Workers

At Retirement Age

• Lump-sum withdrawal : You can choose to receive your pension assets in one lump sum. This offers great flexibility for managing your finances, but requires careful planning to cover your long-term needs.
• Pension payment : You receive a regular income for life, ensuring financial security without having to manage the capital yourself.

Before Retirement Age

• Financing a primary residence : You can use your 2nd pillar to provide a down payment or amortize a mortgage on your main residence, even if it is located abroad.
• Permanently leaving Switzerland : If you leave Switzerland for a country outside the EU/EFTA, you may withdraw all your assets. If you settle in the EU/EFTA, only the extra-mandatory portion is withdrawable.
• Starting a self-employed activity : 2nd pillar funds can be used to finance starting your own business in Switzerland.

Restrictions and Conditions

• Limit of one withdrawal every five years : For early withdrawals related to home ownership or starting a self-employed activity.
• Restrictions after 50 : The maximum withdrawable amount may be limited to preserve part of your pension.
• Repayment obligation in case of resale : If you sell your property, the 2nd pillar funds used must be repaid to the pension fund.

Tax Implications for Cross-Border Workers

Taxation in Switzerland

• Withholding tax : When withdrawing a lump sum, a tax is withheld in Switzerland. The rate varies by canton.

Taxation in France

• Application of the tax treaty : 2nd pillar benefits are taxable in France for French residents.
• Tax rate : After a 10% allowance, a flat rate of 7.5% is applied to the withdrawn capital.
• Tax credit : To avoid double taxation, France grants a tax credit equivalent to the French tax due.

Social Contributions

• CSG and CRDS : Social security contributions may apply, unless you are affiliated with a foreign social security scheme.

Tips to Minimize Tax Impact

• Planning : Anticipate the withdrawal date based on tax rates and your personal situation.
• Optimization : Consider options such as splitting withdrawals or choosing the canton of withholding to benefit from lower rates.
• Professional support : Consult a tax advisor specialized in French-Swiss taxation.

Managing Currency Risk When Withdrawing the 2nd Pillar

Impact of Currency Fluctuations on the transfer of your retirement capital

• Market volatility for your CHF EUR conversion : The exchange rate directly affects the amount you will receive in euros when withdrawing your 2nd pillar. Market fluctuations can work in your favor or cause you to lose part of your capital.

Strategies to Optimize the Swiss franc to euro conversion of Your Retirement Capital

• Use specialized exchange services : Digital exchange platforms like Ben S. Digital Change offer competitive rates and lower fees compared to traditional banks which allows you to make significant savings when converting CHF to EUR for your capital. Additionally, you can use our currency converter available on our website or our app to simulate and estimate the amount you should receive
• Market monitoring : Stay informed about trends to choose the optimal time to convert. Ben S. Digital Change offers a EUR/CHF rate alert service to help you track market fluctuations and convert at the most advantageous time
• Split conversions : Spread out the transactions to smooth out the effects of exchange rate fluctuations.
• Expert advice : Consult professionals to develop a strategy suited to your situation.

The Swiss 2nd pillar is a fundamental element of your financial security as a Swiss cross-border worker. Understanding who must contribute, how vested benefits work, and the investment opportunities enables you to optimize your occupational pension. By staying well-informed and carefully planning your actions, you can maximize the advantages of your 2nd pillar while minimizing the associated risks and costs.

Useful Resources for Swiss Cross-Border Workers

• Federal Social Insurance Office (OFAS) : Official information on Swiss pension planning.
• Your employer’s pension fund : For details specific to your situation.