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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Very informative article, thanks!
Are the contributions to the second pillar paid from all sources of income? E.g. you are employed at a company (with contributions to 2pillar deducted automatically), but might have additional income from investments or freelance projects?
Hi Corinne,
If you are employed by several companies (with a salary and contract), you will pay second pillar with both.
However, if you have a salary and a side income like me, you will only pay the second on the salary.
Hello Baptiste,
Do you have advice or ressources to help employees evaluate the 2nd pillar pension plan offered by their employers? If I go on my pension plan website (PKG) I can access their investment portfolio reporting updated monthly, is this what I should use to evaluate the plan?
Mine seems to have 24% CHF bonds, 4% foreign bonds, 11% corporate bonds, 8% swiss equities, 28% global equities (world +emerging), 20% real estate, 1% cash. Is this standard?
Can I take those numbers/ratios and consider the amound in my 2nd pillar invested the same way?
Thank you
Hi Doryan
Except from thethe documents provided by them directly, there is not much. I think the investment portfolio is useful, but what is really useful is how much they distribute to you. If you have been with the company for many years, you can see this information with the pension declaration that you should receive once a year. In these declarations, you should see the interest rate they gave you. This is interesting to see the history of interest payments.
If your company is not too small, you should have employee representatives for the pension fund. You should contact these representatives to ask them questions about the pension fund. One question could be what were the historical interest rate.
As your 2nd pillar, I believe you should be able to do that. however, I consider my entire second pillar as bonds because (at least on the mandatory part), the interest rate is guaranteed.
Hello,
I enjoy the information and articles on your site. Thank you for taking the time to enlighten people in Switzerland.
This is the first year I will make enough money to be able to contribute to LPP. By October, I should have over the minimum entry amount (approx. 22,000), but my company says I can only start paying LPP as of next year because they do the calculations at the end of this year. So basically, I feel like this year is lost because I was also planning to maximize my 3a piller.
Is this normal procedure to have to wait until the end of a year and only start contributing the following year?
Hi Julie,
Thanks for your kind words.
In most cases, the company will communicate salary changes to the pension fund. And the pension fund in turn is going to communicate how much the company should deduct from the pension.
Usually, changes of in ou out of the system are indeed done at the end of the year. I am afraid this seems “normal” to me. In the long term, this should not make much difference. And you will be able to compensate for this lost year by doing a voluntary contribution later on.
It’s indeed more disappointing for the 3a which is more interesting. What you could do is instead invest the money you were planning to put in the 3a.
Okay thank you for your response. I am paying my 20% allowance into my 3a, but I think I may just hang on to the money I was going to use for the LPP and 3a and do a buy back on the LPP when I get a chance. I enjoy the thought of investing in my retirement and the tax benefits that come with the LPP and 3a. I have a small chunk of money I want to use to invest, but I am hesitant about the market. It’s been quite up and down lately. Plus I’m not personally investing my money, as I wouldn’t know where to start and how all that works. I put some money into investment packages they offer at the bank, but since I’ve started investing last year, I have only seen losses at this stage (the 3a as well).
Thank you again for your response. I will continue trying to learn more and more, and your site is a big help for me, since it’s in English and well written.
While they are not all bad, check the fees of these investment packages. Some are absolutely horrible.
And indeed, since last year, most people are in the red, including me. We just have to go through this.
With your income, I am not sure it’s really worth it to put money in your second pillar. This is really only interesting for the tax advantages that come with high income.
Thank you for the information. The lady at the bank said the fees were not too bad. Also, I figured many others are in the red, so I am not too surprised. As for the buy-back topic, I am married. My husband has a much higher salary than me. Does it matter which LPP I put it in? Would it be more advantageous for us to do a buy-back on his LPP or would the tax benefits work out the same if I put it into a buy-back on my LPP? And what would be best in the long-run?
Bankers are not going to tell you their fees are atrocious :) That’s something you need to find yourself.
If you are doing a joint tax declaration, it should not matter in which second pillar you put the money. However, since your husband has a higher salary, he likely has more gaps, so you could together contribute more to his.
One thing you have to do is compare both second pillars. Some pension funds are MUCH better than others. So, you should put the money into the best of the two.
Hello,
Thanks for all the great info and insights on your blog!
I will be leaving Switzerland to an EU country without the 2nd pillar setup (Czech Republic) at the end of the year. By the time I leave, there will be less than 20k in my 2nd pillar account.
Moving to a country without the compulsory 2nd pillar should enable early withdrawal of the full amount, is that correct?
Alternatively I could use the 2nd pillars to fund a purchase of a primary residence, or repay part of the mortgage, correct?
How does the amount come into play – I understand the minimum is 20k, but what if the total amount is less than that, is the requirement waived if I want to withdraw ALL the funds?
Is it possible to use the 2nd pillar towards purchase of a primary residence before moving out of Switzerland?
Thanks a lot!
Michal
Hi Michal,
I am glad you like my info and insights :)
I am not an expert at leaving Switzerland since I don’t intend to. But my understanding is that it depends on whether the two countries have a social security agreement. If they do, then second pillar must stay and it will be paid as regular pension once a person leaves. The mandatory and extra-mandatory part can also be handled differently. I would recommend you talk directly with your pension provider.
Normally, you should be able to use your second pillar to buy a primary residence regardless of what you are going to do in the future. But it seems short to be able to do that in seven months (unless everything is faster in the Czech Republic).
Hi, when leaving Switzerland to an EU country, is it possible to withdraw only the 2b part and transfer the 2a to the Vested Benefits? Thank you
Hi Carlos,
What’s 2a and 2b?
Hello,
Nice article, thanks.
1. What papers are required to receive the full 2nd pillar when leaving Switzerland for a non UE country?
2.can the money be transferred to a Swiss bank account or it had to be a bank account from the new country where one moved?
Thanks.
Hi Nata,
Thanks :)
1. I don’t know, I am guessing this depends on each second pillar pension company.
2. This depends on each company. Some companies will gladly do the transfer any place, but some pension providers will be more difficult.
This is something that you have to clear out with your current pension provider to be sure.
Hello, Can you use your second pillar to cover the buy-in holes? Thank you for clarifying it. Regards
Your question does not make sense :) The holes are in the second pillar, you can’t use the second pillar to fill the holes in itself.
Hi Baptist,
first of all compliments for the blog, I found it very useful!
Here my questions:
1) was the conversion rate of 6,8% reduced to 5,6% recently?
2) Should the conversion rate for mandatory and extra mandatory be mentioned in the yearly report we receive?
Thank you!
Hi FF,
1) No. But the 6.8% is only on the mandatory part of your second pillar.
2) I am not sure, but I believe most pension providers will write it down there. But since it could change, I am not sure it’s mandatory for it to be here. They should provide it somewhere though.
With the current discussions going on about the BVG reform would you still consider the pillar 2 as a safe investment on the level of bonds? There seems to be a lot of uncertainty what the BVG is going to look like in the future. Especially for people with a long time until retirement this might be considered considerable extra risk.
Hi WK,
I still think of it as bonds. I don’t see the second pillar disappear. But I see the conversion rate getting lower and lower each year.
The main issue for me is if they don’t allow lump-sum withdrawals. That’s going to be an issue in which case we can’t really consider them as bonds.
And even if I consider them as bonds, I don’t plan to invest particularly in them.
Do the contributions to Pillar 2a affect the tax rate?
For example, if my gross income is 100.000 and I pay a particular tax rate, will paying 10k to pillar 2a change my tax rate to be determined based on my gross income of 90k (and 10k is tax-free in pillar 2a)?
Hi Mohit,
No, it does not affect the rate.
The tax rate is progressive, it does not apply the same tax rate to the entire income.
For instance, it could tax 1% of the first 10K, 2% of the income between 10K and 20K, 3% between 20K and 40K, and so on.
So, removing 10K will just go lower in the scale. The advantage is that you are removing the most taxed income first since tax is progressive.
So, in your example, the 90K will still be taxed as before. So, if you have 90K income or 90K income and 10K tax-free, you should be taxed in the same way.