Switzerland retirement system is based on a system with three pillars. Each pillar is paid in a different manner and will cover different needs. If you are working in Switzerland, it is important to know these three pillars. This will help you plan your retirement.
In a series of posts, I will try to give you enough information on these three pillars. The goal is that you have a good understanding of how they work. And also what you can do with them to improve your retirement. In this first post of the series, I will introduce the system and talk about the first pillar.
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.
The three pillars
Here are the three pillars:
- The first pillar (state pension). This first pillar will grant a pension to every Swiss employee after retirement. This is a pension between 1175 CHF and 2350 CHF per month, if you worked every year since your 20 years old. This is financed by each employee in Switzerland.
- The second pillar (occupational pension). The second pillar will grant a pension to every Swiss employee after retirement. This pension will only be granted if you worked and had an annual salary of more than 21150 CHF (currently). This financed by a deduction of your salary each month.
- The third pillar (private pension). This 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 interesting 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 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 of their salary. In fact, you pay for the AVS insurance together with two other insurances. 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%. These deductions are paid half by the employee and half by its employer. Therefore, you should see a deduction of 5.125% each month for these three insurances together.
For completeness sake, I should also talk about the Unemployment Insurance. Although they are not generally grouped together, 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 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. Unless their spouse is paying at least twice the minimum fee (956 CHF) per year. If you have a large net worth, the minimum fee will increase. For instance, with a one million net worth, you will have to pay 1947.50 CHF of the minimum fee each year. There are exceptions when paying this fee will reduce your living standard too much.
How much will I get ?
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 two factors.
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 for.
This pension also covers the case of widowed people. If the dead spouse was eligible to a pension, the surviving spouse will receive this pension.
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). This 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 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 years of advance. You can also take it later, as seen in the next section. If you want to retire earlier than two years before official retirement age, you will only be eligible for the pension when you reach the retirement age.
Optimize your first pillar
There is a not a lot you can do to optimize your pension. 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 can pay it in the next 5 years. After 5 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 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 rent by one year, you will get a rent increased by 5.2%. This increases to 10.8% for 2 years, 17.1% for 3 years, 24% for 4 years and 31.5% after 5 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 5 years.
Personally, I do not account for the first pillar in my net worth. There are two reasons for this. The first one is you do not only pay this insurance for you. This 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. 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 start early.
Another argument for not accounting for it is that it may not be solvent once I reach retirement age. This is somewhat pessimistic, but the population is rapidly aging and Swiss couples are having fewer and fewer children. I prefer to ignore it for now in my strategy and I will rethink about 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 three pillars 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 actually 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 will cover the second pillar. This is an occupational pension that should cover a larger part of your salary in retirement.
What about you ? Do you have any tip regarding the first pillar ? Or regarding the three pillars system ? Do you have any question for the first pillar ?