Second Pillar: All you need to know to retire in Switzerland
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We have studied the first pillar in the previous post in the series. Now, it is time to study the second pillar. The second pillar is an occupational pension for people working in Switzerland.
While the first pillar covers everybody’s basic needs, the second pillar covers a larger part of your salary. It is an occupational pension. If you never worked, you will never pay anything for this, and you will never receive anything from this. It is significantly more complicated than the first pillar.
In this article, I give you all the important details on the second pillar. I will also help you understand what you can do to improve it.
The Second Pillar
The second pillar is your work pension.
In French, it is called Loi fédérale sur la prévoyance professionnelle vieillesse, survivants et invalidité (LPP). In German, it is Bundesgesetz über die berufliche Alters-, Hinterlassenen- und Invalidenvorsorge (BVG). As you can see, the Swiss government is very good to make short names… But, we will simply call it second pillar in this article.
This second pillar is a pension for every people who worked in Switzerland and paid into the LPP. Every Swiss employee of at least 24 years with an annual salary of more than 21’150 CHF contributes to the second pillar. It is directly deducted from your salary and transferred to your pension fund. The contribution is a percentage of your salary.
Interestingly, your employer will at least match your contribution. Some employers contribute more than this. As an independent, you must pay both the employee and employee parts.
How much you pay for the second pillar depends on your age:
- 25 to 34 years old: 7%
- 35 to 44 years old: 10%
- 45 to 54 years old: 15%
- 55 to 65 (64 for women) years old: 18%
The percentage deducted from your salary depends on the part your employer is paying. All the contributions to the second pillar are pre-tax. It is an essential fact. You will pay the taxes when you withdraw your second pillar.
As you get older, you put more and more into your second pillar. It means that the last years matter a lot in the calculations of your second pillar pension. It is a bit dumb because the first years are the ones that are the most important for compound interest. So, we should actually contribute more in the early years.
The first pillar was global insurance. You are paying for other people. But the second pillar is a physical account, in your pension fund, with your name. So this is your money.
There is another big difference. Your pension fund is related to your current employer. Each employer chooses its pension fund provider. It means that when you change company, you will likely change pension fund as well.
Some companies will have a better option for the second pillar than others. Most second pillar providers are extremely conservative. But there are a few good ones that allow investing your money in stocks.
Vested Benefits
If you change employer, you must transfer your contributions to the new pension fund. But if you do not directly switch to a new job, you will transfer the funds into a vested benefits account.
If you lose or quit your job, you must transfer the funds into a vested benefits account. This account will be locked until you get a new job (and a new pension fund) or reach retirement age. Even if it is in your name, there is not much you can do with it. In some cases, you can choose how the money is invested. But, you cannot move money in or out.
If you become unemployed, you can also choose to continue contributing to the pension fund. In that case, you can transfer your assets to the Substitute Occupational Benefit Institution. This could be an option to avoid a gap in your pension fund.
If you retire early, you will keep the money in a vested benefits account as soon as you quit your job. It will stay there until the official retirement age. Vested benefits accounts can be withdrawn up to five years before retirement age.
If you leave Switzerland, you will have the choice to withdraw the money or keep it until retirement. Depending on the country you are leaving to, different conditions may apply.
Vested benefits accounts are generally much better than pension funds. For instance, you can take a look at finpension. They offer excellent vested benefits accounts.
If you want to know more, I have an article about all you should know about vested benefits.
Mandatory vs. Extra Mandatory
Now starts the complicated part about the second pillar. We have to distinguish between the mandatory insured salary and the extra-mandatory salary.
We will only be talking about the yearly salary here. The mandatory insured salary is the salary between MIN and MAX.
- MIN is 7/8 of the maximum of the first pillar, 24’675 CHF.
- MAX is three times the maximum of the first pillar, 84’600 CHF.
If your salary is between 21’151 CHF and 28’200 CHF, your mandatory insured salary will be 3’525 CHF. Everything higher than MAX is the extra-mandatory salary. So, the maximum mandatory insured salary is 59’925 CHF (MAX-MIN).
Here are a few examples with different yearly salaries:
- 20’000 CHF: Not eligible for the second pillar (less than 21’150 CHF)
- 25’000 CHF: Mandatory insured salary of 3’525 CHF (less than 28’200 CHF)
- 30’000 CHF: Mandatory insured salary of 5’325 CHF
- 50’000 CHF: Mandatory insured salary of 25’325 CHF
- 84’600 CHF: Mandatory insured salary of 59’925 CHF
- 100’000 CHF: Mandatory insured salary of 59’925 CHF and Extra-mandatory salary of 15’400.
So what is the difference between these two parts?
I mentioned the contribution rate for the second pillar. These were the contributions to the mandatory part. The contributions for the extra-mandatory part depend on your pension fund and your company.
Another difference is the interest rate. The law sets a minimum interest rate of 1% on your mandatory contributions. But there is no minimum for the extra-mandatory portion. Your pension fund can offer better (or worse) interest on it. It is generally a bit better on the extra-mandatory portion. This interest is the only way your second pillar account money will grow. It is not a great interest rate. But there is nothing you can do about it. It still beats Swiss banks currently.
The last difference is the conversion rate. This rate will define how much pension you can get from the capital. The law sets a minimum conversion rate of 6.8% for the mandatory portion of your capital. Again, there is no minimum for the extra-mandatory part. Your pension fund will set the conversion rate. Generally, it is significantly worse than the conversion rate on the mandatory part.
1e pension plans
There is a third component for the second pillar, the 1e pension plan. This plan offers better investments for persons with very large salaries. It is not well-known because very few employers have such a plan.
If you want to know more, read my article about the 1e pension plan.
Insurance for death and disability
The second pillar also acts as insurance in two cases.
In the case of disability, the insured person will get a disability pension. The basis for the pension is all the assets accumulated and the sum of all the future credits. But they will not take interest into account for future credits. It is great insurance in case of a serious accident.
In the case of death, the surviving spouse will get 60% of the deceased’s full disability pension. However, there are some conditions for eligibility. There should be either the duty to provide for children or be at least 45 years old and the marriage lasted at least five years. If these conditions are not met, the surviving spouse will only get three years of pension.
In both cases, the government will review the pension every two or three years based on the beneficiary’s cost of living.
If you want more details, I have an entire article explaining what would happen to your retirement benefits if you died.
How much will I get from the second pillar?
Once you reach retirement age (65 for men, 64 for women), you can get your second pillar. You have three options:
- An annuity
- A lump sum
- A lump and an annuity
Here is where the conversion rate becomes important. The annuity will be computed using the conversion rate. If you convert 200’000 CHF with a conversion rate of 6.8%, you will get a 13’200 CHF pension each year.
If you take a lump sum, you will pay capital taxes, and if you take an annuity, you will pay income tax on top of it. For the extra-mandatory part, the conversion rate will depend on your pension fund.
Whether you should choose between these options is discussed below.
Should I take an annuity or a lump sum?
There is no definite answer to this question.
It will depend on the conversion rate at the age of your retirement. And how much you expect to get out of the capital each year if you manage it yourself. Generally, if you were to invest the amount into stocks, you would do, on average, better than the current conversion rates. However, there is a risk with stocks, whereas the conversion rate is guaranteed. In the end, you will have to do the math yourself, depending on your situation.
If you do not invest your money or get lower returns than the conversion rate, you should probably opt for the annuity. It also depends on how much you need that money. Maybe you have planned to use that large sum for something specific. But be careful about considering the taxes.
Inheritance and second pillar
Now, I said that the second pillar was your money. This is true. But there is a case where you could lose this money. Or, at least, your family could lose this money.
If you die before retirement, the inheritance of the second pillar depends on whether you have it in a vested benefits account or pension account.
First, if you have it in a standard pension account and if you die, this money can be passed to your spouse or your legal heirs. This is the standard way of inheritance.
However, if you do not have heirs or a spouse, this will not be distributed according to the inheritance law. For instance, your parents will not be eligible. And this money will get back to the canton. So, if you have no heir or spouse, you may consider your second pillar differently.
For a vested benefits account, it is simpler. It is based on the standard inheritance procedure.
How to optimize your second pillar?
Compared to the first pillar, there are a few things you can do to optimize your second pillar.
Voluntary contributions to the second pillar
You can make voluntary contributions to the second pillar to fill contribution gaps.
Like for the first pillar, you can have holes in your second pillar. Contribution holes (or gaps) can happen in several cases. For instance, if you started contributing late due to your studies or were unemployed for some years. If you leave Switzerland, you will stop contributing too. Finally, it generally happens because your salary is higher now than before. Therefore, you could contribute more now because your salary would have allowed you to contribute more.
You can fill these holes (or contribution gaps) by voluntary contributions. These contributions are pre-tax, too, so this will reduce your taxes. However, your employer will not match them. Moreover, voluntary contributions are always extra-mandatory. Finally, these contributions are locked for three years. It means there is no way to withdraw them before. You can ask your pension fund how much you can contribute to filling the gaps. There is an annual limit on how much you can contribute. They will also give you directions on how to perform these voluntary contributions.
If you can do it, I think it is a good way to increase your pension and lower your taxes. However, you need to be sure whether you should contribute to your second pillar or not. Be sure of your actions because this money will be locked for years. It is also money that will not return a lot of interest. But it is a safe investment. You can think of it as a long-term bond investment.
If you compare the second pillar to investing in the stock market, the second pillar will only be interesting in the short term. It will provide nice tax savings, but the interests are so low it will not return much after that.
If you want more details on the subject, you can read whether you should contribute to your second pillar or not.
Taxes
When you withdraw the second pillar, you will pay taxes on the withdrawal. This is at a better rate than if you had been taxed in the first place. But this is still a non-negligible part.
One essential thing is where you live when you withdraw your second pillar. This is what will matter for the second pillar. There can be a huge difference between different cantons. Moreover, you will also pay a wealth tax that can vary from canton to canton.
If you want to compare the implications of where you live on your second pillar withdrawal, you can try to look at this calculator. It will tell you how much you will pay taxes on your second pillar if you take a lump sum.
When you do the calculation, you need to take taxes into account. This could help you decide between a lump sum and a pension. And you may want to consider this when you move to a new place.
Change employer
Another thing you can do is choose a company with a better pension fund.
Of course, this is impractical, and the pension fund should probably not be the main argument for choosing a company over another. But this could make a significant difference in your retirement. You can also ask your company if there is an option for investing more in the second pillar. Indeed, at some companies, they give you the choice of how much to invest in it. And some companies can even match your extra contributions.
Increase your income
As for the first pillar, increasing your salary will increase your contributions to the second pillar.
Then, it will increase your final pension. Do not forget that contributions to the second pillar are pre-tax. But of course, increasing the salary is not always possible or even what you want. And increasing your salary is an obvious choice if you can do it in good condition.
Withdraw the second pillar before retirement
You can withdraw money from your second pillar before retirement (early withdrawal).
The main reason for early withdrawal is to buy a house. Indeed, you can withdraw your second pillar money to build or buy a house. It will reduce your pension accordingly. But it can help you to have the funds for the downpayment on your house.
However, this will only work for your primary residence and the place where you live! You cannot use your second pillar for a secondary residence. If you work in Switzerland and live in a neighboring country, you can use this money to buy a house abroad. But again, you will have to live on this property.
The same applies if you want to start your own company. You can also withdraw the money if you are leaving Switzerland. The other reason is early retirement. You can withdraw your second pillar five years before retirement age.
The case of leaving Switzerland is the most complicated. It will depend on where you are going. If you leave for an EU country, you will only be able to withdraw the extra-mandatory part of your second pillar. But that will depend on exactly the country where you are going.
There are some limitations and rules to these early withdrawals. The minimum withdrawal is 20’000 CHF. If you sell the house you bought with the second pillar, you must repay what you withdrew.
Voluntary contributions into your second pillar after early withdrawal will not be tax-free. After you have reached the same amount as before the withdrawal, they will be tax-free again.
Be careful that after 50 years old, you are limited in what you can withdraw. After 50, you can only withdraw the amount when you are 50 or half of what is available. The limit is the maximum of these two numbers. Finally, withdrawals are only possible every five years.
Reporting
Every year, you should receive a report from your pension fund telling you many things. It will give you information about how much you contributed, the mandatory and extra-mandatory parts… It also predicts how much you will have by retirement. You should not bother too much about the predictions. But it is interesting, nonetheless.
This report differs for each pension fund, but most information will be the same. For instance, here is my redacted report from 2017:
As you can see, there are tons of numbers here. It will also cover things like death or pension in case of handicaps. If you are married or divorced, you will have more information than me.
If you are lucky, you will receive reports more often. And if you are fortunate, your pension fund will have a web portal where you can see this information online. It will depend on your pension fund. My new second pillar company updates its online portal monthly. I can track it much better now.
You should always keep these reports if you receive them in the mail (I scan them). They contain important information for your financial future.
Accounting for your Second Pillar
If you are tracking your net worth (and you should!), you may consider the second pillar inside it.
I integrate my second pillar in my net worth and count it as bonds. Since it is a very safe and conservative investment, counting it as bonds in my net worth makes sense. Adding your second pillar to your net worth will give you a better picture of your assets.
FAQ
What is the second pillar in Switzerland?
The second pillar is an occupational pension. Every person who works in Switzerland and receives a salary of more than 21000 CHF per year is eligible for this pension.
How much will I receive from the second pillar?
How much you will receive will depend on how much you contributed. It will also depend on your last salary. Finally, some second pillars have better conditions than others. You can ask your second pillar provider to estimate how much you will receive at retirement.
How can I optimize my second pillar?
You can make some voluntary contributions to your second pillar. But remember that these contributions will be locked in your second pillar until you can withdraw them. You can also increase your salary to increase your second pillar contributions.
Conclusion
The second pillar is the second part of the retirement system in Switzerland. It will cover a larger portion of your salary in retirement than the first pillar. While the first pillar is for everybody, the second pillar is only for employed people.
How much you get at retirement will mostly depend on your salary. Under normal circumstances, with your first and second pillars together, you should gain a pension of about 70 to 80 percent of your salary. If you want to complete this, you must use the third pillar. I will cover the third pillar in the next post of this series. It is an optional part of the retirement system but has many advantages.
To continue learning about the retirement system in Switzerland, read about The Third and Final Pillar.
What do you think about the second pillar? Do you have tips to optimize it? Do you have any questions regarding the second pillar?
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Hello,
Thanks for the great Article.
1) If I Voluntary contribute in second pillar now which will have 3 years lock-in period, does that still apply if I leave Switzerland before the lock-in period ends?
2) If I withdraw the second pillar investment for buying a house, how much will be the withdrawal tax compare to marginal tax that I had saved while investing? are the taxes different for mandatory Vs Voluntary contributions?
3) if I withdraw the extra-mandatory portion of the second pillar after lock-in period, I pay the withdrawal tax. But would I be able to save tax if the next year I again make Voluntary contributions? I understand from your article that for mandatory portion, I wont until I re-invest up to what was before, but not sure if the same thing applies to extra-mandatory portion.
Hi Mihir,
1) I am not sure, but I believe it still applies. You would only be able to get the “unlocked” money out when leaving. And you would have to request the remaining locked money later
2) The taxes are depending on which canton you are living in. They will apply a progressive tax. If you have a large marginal tax rate, the withdrawal tax will be much lower.
3) I believe it’s the same for the extra-mandatory portion. Everything you withdraw for any reason must go back before you get more tax advantages.
Is the inheritance situation different when the case happen before your retire vs when you already retired drawing pension?
I can’t find a definite answer, but all I can find seems contradicting what you wrote about the inheritance. For example https://www.vermoegenszentrum.ch/fr/conseils/articles/qui-herite-des-capitaux-de-prevoyance-et-des-assurances-vie
Could it be that vested benefits accounts are inherited according to a normal inheritance law but not 2nd pillar?
I suspect that in the case one dies before retiring the 2nd pillar capital should be distributed according to normal inheritance law. However when a retiree, who was drawing the pension instead of taking a lump sum, dies than only the limited pension inheritance applies. What do you think?
I would very appreciate a link to the proper regulation (in FR or DE if not available in EN). Somehow I can’t find it. What I get are only interpretations which feel doubtful.
Best,
Hi,
That’s an excellent point and I am afraid I don’t have an excellent answer.
It seems you are right and that vested benefits accounts and second pillar accounts are treated differently. Second pillar will give a surviving pension to the spouse and/or children. While vested benefits can give the capital but seems like rules are different from standard inheritance.
I found one good reference on vested benefits: https://finpension.ch/en/vested-benefits-in-the-case-of-death/
I will have to research that more in details and refresh that article! Thanks for pointing that out.
Thank you for the reference. Starting from there I finally found the answers :-)
Indeed Vested Benefits is more favorable as the inheritance chain goes quite far, including your parents and siblings, see Art 15: https://www.fedlex.admin.ch/eli/cc/1994/2399_2399_2399/fr#art_15
However with 2nd pillar the situation is unclear as it is up to the pension fund how far the inheritance chain goes. The spouse and children are entitled by the law, but further relatives such as parents are subject to the regulation of the pension fund, see Art 20a: https://www.fedlex.admin.ch/eli/cc/1983/797_797_797/fr#art_20_a
So, out of curiosity, I have to check the regulation of my current pension fund. Unfortunately it’s not much helpful as nowadays no-one stay at the same job forever.
Every time you cancel an employment contract, you have an opportunity to transfer your 2nd-pillar capital to a “Freizügigkeitskonto”. Many banks and pension funds offer such accounts, a notable one is VIAC. In theory, you are supposed to transfer this capital to the pension fund of your new employer. But there are no legal means to enforce it.
Once your capital is on a Freizügigkeitskonto, you have a great degree of control. You can allocate up to 100% to low-cost ETFs. This enables higher long-term returns compared to a conventional pension fund with typically less than 45% in equities. Furthermore, it protects your capital from gradual redistribution to pensioners.
Hi karl,
This is correct. Vested benefits are much better at investing your money.
However, this remains a gray area, hence why I do not talk about this :)
Thank you very my much. This is the best article on the topic I’ve read so far. So clear and informative. I have few questions please:
1) When is the earliest I could withdraw my pension? I am now 56 and plan to retire 2 or 3 years from now.
2) Can I withdraw the whole amount as a lump sum?
3) I have six digits income, and the company have two pensions for me. One is called “pension fund” and the second is “supplementary pension fund”. What are the differences of the two? Can I consider both as my networth in my financial plan? Can I withdraw both 100% on early retirement in a lump sum?
Thank you very much for your answer. I would have paid few thousands CHF to get these answers from pension consultants.
Best regards,
Hi Samy,
1) I can’t believe I have not included that in the article :s The earliest you can get the pension is at 58. But this can depend on each second pillar of which the conditions may differ.
2) Currently you can yes, but there have been political talks about stopping that.
3) I think you are talking about the mandatory part (pension fund) and the extra mandatory part (supplementary pension fund). I am guessing that your company invests in a 1e pillar for the extra mandatory part. The 1e pillar is allowed to invest more aggressively the money of the second pillar. For you, it makes little difference in general (you can check the article for mandatory/extra-mandatory). You should be able to withdraw both in full as a lump sum.
(You can consider a donation :P)
Cheers
Many thanks… it’s all clear. This is very helpful. I’ve seen many sites and this the best I would rate.
Hi. By leaving Switzerland for the EU you may withdraw the extra-mandatory part. This sounds very good, since the mandatory part pays 6.8% and the extra-mandatory part pays only 5.0%. Is there any other way to remove just the extra-mandatory part to increase the percentage of annuity payment?
Hi Ruth,
I do not think there is any other way. And keep in mind that is only if you leave Switzerland definitely. So, you can’t leave one year and come back one year later just to optimize your second pillar :)
Do you have an article overviewing/rating the second pillar accounts in CH?
Thanks!
Hi Kara,
No, I do not. You cannot choose your second pillar since it’s up to your company to choose it.
If you are not working or are self-employed, you will a vested benefits account. And in that case, I have talked about two great vested benefits accounts.
Hello,
I live in the United States and I am thinking about withdrawing my second pillar from Rendita in Winterthur. Will I have to pay the tax in Canton Zurich or in Fribourg, my native Hometown ? Thank you very much
Hi,
For people abroad, taxes are due based on where is the pension provider. So, in your case, you should pay taxes in Zurich if Rendita is domiciled there.
Hello!
Thanks a lot for your valuable information.
I have a small question concerning the calculation of the 2nd pillar.
I recently changed jobs and thus changed the pension fund.
I was surprised with the small amount that was transferred to my new pension fund…
I did a quick calculation.
300CHF (my monthly contribution/deductions (LPP) – mentioned on my salary slip)
36 months (working time)
The amount that should have been transferred is:
300*36*2= 21600 CHF.
However, only ~16500CHF were transferred.
Does the min/max insured salary play a role?
Is there anything I’m missing here or is it a mistake from the pension fund?
Thank you in advance!
AJ
Hi AJ,
Are you sure the 300 CHF per month is only for the second pillar? There are other deductions on your salary.
Are you sure that your employer is contributing the same as you? There are some cases where employees are allowed to contribute more but this extra contribution is not matched by the employer.
Did your salary change over time? If 3 years ago your salary was lower, you would have contributed less per month. The same would happen if you just crossed into the next age group (25-34, 35-44, 45-54, 55-65) where the contribution is increasing.
Now, if you take your 36 monthly salary slips and sum the contribution, you should have a number close to what is transferred. If the amount transferred is significantly lower, you could contact the previous pension fund to know where did the difference comes from.
Oh, so I’m not alone noticing this! My situation is similar, though different numbers. I got really surprised when I discovered that on my 2nd pillar account appears only 81% of the money (my contribution as indicated on pay slip, plus matching employer contribution). In your case it was 76%.
I questioned that, only to learn that:
– some amount is deduced for the insurance part
– there are brokerage fees
but I didn’t get the exact numbers yet! I guess both are expressed as % of the transfer
Dear Mr TPS,
Thank you for this very useful info.
I am planning to return to the UK this year (virus permitting!) having worked in Geneva for the last 15 years as a transfrontalier worker and was wondering if it is now possible to withdraw the 2nd Pillar now that the UK is no longer a member of the EU or EFTA. Do you have any news on that?
Also, I heard that there are organisations which help with the bureaucracy for a fee? Is that a good idea and where would I have to pay the tax at source?
Grateful for any advice,
Best wishes
Rich
Hi Rich,
Unfortunately, I have no idea. I have not researched the content of the Brexit deal.
You mean the bureaucracy to withdraw the second pillar? I am not sure you need it. I would expect this to be possible directly by talking to your vested benefits (maybe even second pillar) foundation.
You will pay the tax based on the domicile of your second pillar. This is where it gets interesting because some states are much more interesting than others. So, you could save money by transferring your second pillar money into a vested benefits account at valuepension and then a few years later cash it.
Thanks for stopping by!
OK thank you very much for the tip!
Hi Mr. TPS. Great article!
A quick question about the second pillar. My employer pays for me an annual fixed pension contribution rate of 8.5%. I can choose a pension contribution rate of 4.5%, 6.5% or 8.5% and I need to make this choice at the beginning of each year.
Though, I have no clue about what a wise choice would be in this case for me :)
Do you have any suggestion?
Thanks a lot in advance!
Roberto
Hi Roberto,
It will depend on your goals. If your goals are really long-term, it’s difficult to justify investing money in the second pillar since the returns are extremely low.
If you do not invest yourself, then it changes again since the second pillar is better than cash.
So, it depends on many factors.
I see, it makes a lot of sense. Thanks a lot for your help!