Pension planning
Pension planning: tips on saving taxes
Do you want to prepare for retirement and save taxes at the same time? Find out how with these tips for your pension fund and pillar 3.
Content:
Content:
- Thanks to pillar 3a, you can deduct several thousand francs a year from your taxable income.
- Voluntary payments into a pension fund reduce your tax burden.
- Opting for the staggered withdrawal of your pension assets reduces your taxes, as the tax burden is borne on payout.
- Your tax bill will be impacted by the way in which you withdraw the assets from your pension fund: as a pension, a lump sum or a combination of both.
- To the conclusion
Payments into a pillar 3a account or custody account are voluntary, flexible and encouraged – as well as being an easy way to save tax. The principle is straightforward: You pay money into your pillar 3a account and deduct the amount from your taxable income for the same year. The rising credit balance and any interest earned on it are free of tax until they are withdrawn. Neither income tax nor wealth tax is deducted. You will have to pay tax if you withdraw your savings after retirement or make an early withdrawal. However, this capital withdrawal tax is lower than income tax.
This possibility for saving tax with pillar 3a is an option for all employed persons who earn an income subject to OASI contributions, as well as for unemployed persons who receive replacement income. The contributions you can pay in are subject to a statutory maximum amount per year, which is modified annually. In 2024, the limit is 7,056 francs if you have a pension fund. Otherwise, it is 20 percent of your net income (maximum 35,280 francs). There is no minimum contribution.
How much can I save on taxes with pillar 3a?
You benefit twofold when you pay into pillar 3a because you are providing for the future and reducing your tax burden. Calculate how much you can save on taxes.
When people are looking for ways to save tax on pension planning, their pension fund is not the first thing that comes to mind. This is because payments into the mandatory 2nd pillar of the Swiss pension system are deducted directly from their salary by their employer, while the other half is financed by the employer. From the employee’s point of view, everything has already been taken care of.
However, there is an option that can save you tax: making voluntary purchases into your pension fund. In principle, you can deduct these payments from your taxable income. In the same way as for pillar 3a, pillar 2 assets and income are exempt from income and wealth tax until retirement.
Voluntary payments can only be made if there is a contribution gap in your second pillar. Gaps can be explained by a break in employment, a reduction in working hours, a divorce, studying, time abroad or immigration. A gap also arises if you change jobs, if you earn a higher income or if your new pension fund offers better conditions than your previous one. In principle, the benchmark is your current income. This means that if your savings balance is less than the amount you would have earned during the maximum possible insurance period on your current salary, there will be a gap.
Advantages of making staggered purchases into your pension fund
Assumption: single, no dependent children, Evangelical Reformed Church, resident in Olten, gross annual income of 80,000 francs (2023 tax rates. For the sake of simplicity, flat-rate deductions have been applied for social insurance and taxes to calculate taxable income).
Purchase into pension fund in CHF | Purchase into pension fund in CHF | Tax savings on a one-off pension fund purchase in CHF | Tax savings on a one-off pension fund purchase in CHF | Tax savings on staggered pension fund purchases in CHF | Tax savings on staggered pension fund purchases in CHF | Tax benefit on staggered pension fund purchases in CHF | Tax benefit on staggered pension fund purchases in CHF |
|---|---|---|---|---|---|---|---|
Purchase into pension fund in CHF | 1× 80,000 | Tax savings on a one-off pension fund purchase in CHF | 12,300 | Tax savings on staggered pension fund purchases in CHF |
| Tax benefit on staggered pension fund purchases in CHF |
|
Purchase into pension fund in CHF | 2× 40,000 | Tax savings on a one-off pension fund purchase in CHF |
| Tax savings on staggered pension fund purchases in CHF | 20,100 | Tax benefit on staggered pension fund purchases in CHF | 7,800 |
Purchase into pension fund in CHF | 4× 20,000 | Tax savings on a one-off pension fund purchase in CHF |
| Tax savings on staggered pension fund purchases in CHF | 21,300 | Tax benefit on staggered pension fund purchases in CHF | 9,000 |
It’s not only when paying money into a retirement savings account that clever planning can help you to save taxes. There are also ways to reduce your tax burden when withdrawing capital.
Should you opt for a pension or a lump-sum withdrawal?
When your retirement capital is paid out, you can choose between a pension, a lump-sum withdrawal or a combination of the two. A pension is subject to income tax in full, whereas if you opt for a lump-sum withdrawal, tax is only due on the interest earned on the assets paid out. A lower, one-off capital withdrawal tax is payable on the capital. Nevertheless, you should also consider the advantages of a lifelong pension and other criteria such as protection for surviving dependents or the ability to finance your personal objectives.
Staggered withdrawal
Pillar 3a retirement assets are not taxed until they are paid out either. The credit balance of a 3a account must be withdrawn in full all in one go, and is subject to capital withdrawal tax. Due to the tax progression in most cantons, it makes sense to have several 3a accounts and to stagger the withdrawals to reduce your tax burden. This will allow you to withdraw pension fund assets one year, then to close your pillar 3a accounts one after the other in other years. If you are no longer gainfully employed, you must withdraw the balance of your 3a accounts when you reach the reference age.
For this strategy to work, you need to open several pillar 3a accounts during your working life. Ideally, you should open a new account as soon as you reach a balance of around 50,000 francs. If you are planning to opt for a lump-sum withdrawal from your pension fund, make sure you stop making voluntary purchases at least three years in advance so that you don’t lose out on tax benefits. Pension funds also offer the option of withdrawing funds in several different years, provided that you take partial retirement in stages in consultation with your employer, and that you permanently reduce your workload each time. However, capital withdrawals may comprise a maximum of three steps. Each step consists of all the withdrawals made within a calendar year.
How is your retirement provision?
The free UBS Pension Check gives you a reliable overview of your current financial situation. Based on the results, you can optimize or increase your private retirement savings.
Although pension planning with pillars 2 and 3 is widespread among the working population, people are rarely familiar with all the details regarding taxes. Since deposits and withdrawals are made for the long term, there is a lot of money involved. Consequently, the tax implications deserve a lot of attention. With clever planning, you can benefit from two advantages at once: you can make provision for your old age whilst saving taxes at the same time.
Disclaimer
Disclaimer
