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The retirement system of Switzerland is a system with three pillars. Each pillar is paid differently and will cover different needs. The first pillar is the state pension.
If you are working in Switzerland, it is essential to know these three pillars. Even if you do not plan to retire in Switzerland, it is essential to understand how they work. It will help you plan your retirement.
In this post, I am going to talk in detail about the first pillar. This post should contain everything you need to know about the first pillar to be able to retire in Switzerland. I am also going to provide an overview of the three pillars system.
I am going to use the French acronyms in this post. But the figure at the top of this post has the acronyms in English as well.
Introduction to The three pillars
Here are the three pillars of retirement in Switzerland:
- The first pillar (state pension). This first pillar will grant a pension to every Swiss employee after retirement. It is a state pension between 1175 CHF and 2350 CHF per month if you worked every year since you were 20 years old. Each employee in Switzerland finances this pillar.
- The second pillar (occupational pension). The second pillar will grant a pension to every Swiss employee after retirement. You will only receive money from this pension only if you worked and had an annual salary of more than 21150 CHF (currently). You will pay for this pillar with a deduction of your salary each month.
- The third pillar (private pension). The third pillar is a personal saving system. While the first two pillars are mandatory, the third pillar is optional. You can only save a certain amount each year into the third pillar. The exciting part is that this amount has tax advantages.
Every pillar will improve your quality of life after retirement. The first pillar is only there to cover your basic needs. The second pillar should cover about 75% to 80% of your last salary. And the third pillar, which is optional, should help you cover the missing part of the second pillar.
The first pillar
The first pillar is a state pension. Every Swiss person that is registered to this global insurance will receive this pension. The Assurance-Vieillesse et Survivants (AVS) insurance is what makes the first pillar. This insurance covers the basic needs of every people in Switzerland after retirement.
This pension is paid by every Swiss employee (and independent people) after 17 years old, through a deduction on their salary.
You pay for the AVS insurance together with two other insurance: The insurance for invalids (AI) and the insurance for when you serve in the army (APG). Each month, 8.4% of your raw salary is going to the AVS, 1.4% to the AI insurance, and 0.45% for the APG insurance. For a total of 10.25%.
Employees are paying half of the full contribution. And the employe is paying the other half. Therefore, you should see a deduction of 5.125% each month for these three insurances together.
For completeness’ sake, I should also talk about Unemployment Insurance. It is not directly related to the retirement system. But you will also pay for it month after month. You will also pay 1.1% of your salary (0.5% if you get more than 148’200 CHF per year) for it. It will cover the needs, for some time, of people who lose their job and are unable to find a new one.
Unemployed people also have to pay for this fee. People who do not have a salary have to pay the minimum fee of 478 CHF per year, starting from their 20 year birthday. There is an exception if their spouse is paying at least twice the minimum fee (956 CHF) per year.
If you have a significant net worth, the minimum fee will increase. For instance, with a one million net worth, you will have to pay 2054.60 CHF (as of 2020) as a minimum each year. There are exceptions if paying this fee would reduce your living standard too much. You can use this calculator to see exactly how much is the tax for unemployed people.
How much will I get from the first pillar?
The full pension is a minimum of 1175 CHF per month, up to a maximum of 2350 CHF per month. How much you get depends on several factors:
- How much income you got during your working life.
- The number of years you have contributed to the first pillar.
- Contributions for caring for children or relatives.
First, the amount of your salary determines the amount of the full pension. The minimum pension is up to a salary of 14’100 CHF per year. To reach the maximum pension, you will need to have an average annual salary of 84’600 CHF. You can see in the previous image how that scales. Between those two milestones, the full pension scales linearly.
The second factor is how many years you paid the AVS insurance. To get the full pension, a man should pay for 44 years and a woman for 43 years. If you have missing years, you will receive a pension prorated for the number of years you have paid the insurance.
The third factor is when you care for children below the age of 16 or care for relatives. During the years when you are in this situation, you cannot have contribution gaps. So even if you did not pay during this time because you had no income, it will not count as a gap in your contributions.
The first pillar and marriage
Importantly, a married couple cannot receive two full pensions, only 150% of a full pension (3525 CHF per month). Fortunately, the minimum is 200% of the minimum pension (2350 CHF per month). IT is really unfair to married couples with both a large income. But a lot of things are unfair to married couples in Switzerland (taxes, for instance).
This pension also covers the case of widowed people. If the dead spouse were eligible for a pension, the surviving spouse would receive this pension.
In the case of divorce, several things need to be considered. First, each spouse will get a pension based on half the combined income during the years of marriage. The care contribution credits are also divided in half. If one of the divorced spouses dies without having retired, the other spouse will get 80% of the deceased pension.
The first pillar and early retirement
The first pillar only covers official retirement, at the age of 65 for men and 64 for women. If you want to retire earlier, you can ask for the pension one or two years in advance. However, this means you will get a reduced pension of 6.8% per year of advance. You can also take it later, as seen in the next section.
If you want to retire earlier than two years before the official retirement age, you will only be eligible for the pension when you reach the retirement age. Before that, you will have to rely on your net worth to cover your expenses.
Optimize your first pillar
There is not a lot you can do to optimize your pension coming from the first pillar. Since it is mandatory, you are already paying it.
It is very important to avoid any years when you do not pay the AVS insurance. All these years will significantly reduce the amount you will receive. If you go to a foreign country for a long time, you should continue to pay the minimum each year to avoid penalties.
Even if you are living abroad after your retirement, you should receive your pension. But the country where you retire should have a social security agreement with Switzerland. When you are studying, you should also pay the minimum to avoid any missing years. If you missed a year of contribution, you could pay for it in the next five years. After five years, you cannot compensate for it anymore.
If you want to increase your pension, the biggest thing you can do is increase your salary. It may not be evident, and you should probably try to increase your income regardless of the pension.
There is one other thing you can do to increase your pension. You can delay the time at which you start to take it. If you delay the pension by one year, you will get a pension increased by 5.2%. It increases to 10.8% for two years, 17.1% for three years, 24% for four years, and 31.5% after five years (maximum delay). It is a gamble on your life expectancy. If you expect to live until 100 years old and you can afford to delay the pension, you should delay it for five years.
I do not account for the first pillar in my net worth. There are several reasons for this.
- You do not only pay this insurance for you. It is a global social insurance. The people with more salary will pay more for people with a smaller salary.
- Then, since I plan to retire in Switzerland, I will never be able to touch the capital, only the pension.
- I am not entirely confident it will still exist once I reach the official retirement age.
However, I should maybe account for this in my computation of my Financial Independence (FI) ratio. Since it is a guaranteed pension after retirement age, you will need less money stashed for your needs. But it is a bit weird to account for it, and I still have not done it. Indeed, it is only starting at the official retirement age. And your retirement may begin early.
Another argument for not accounting for it is that it may not be solvent once I reach retirement age. It is a somewhat pessimistic point of view. But the population is rapidly aging, and Swiss couples have fewer and fewer children. I prefer to ignore it for now in my strategy, and I will rethink it when I am closer to retirement. If you are optimistic about it or you are close to retirement, you should account for the first pillar in your retirement strategy.
The first pillar is the first part of the Switzerland retirement system. It should cover the basic need of every retired Swiss person. Employees are paying it from their salary. Unemployed people are paying a minimal amount each year. The pension is quite low (2350 CHF per month at most).
Most people cannot live only on this pension after retirement. The other two pillars are here to complete your needs during retirement.
In the next post in this series, I cover the second pillar. It is an occupational pension that should include a more significant part of your salary in retirement.
To learn more about the three pillars system, read about the second pillar.
What about you? Do you have any tips regarding the first pillar? Or regarding the three pillars system? Do you have any questions about the first pillar?