Early retirement: what do you need to know about retiring early in Switzerland?
After a long working life, many professionals dream of early retirement. But only those who get their finances on track in time can fulfil this dream. Comparis explains how to prepare for a carefree early retirement.
15.05.2023
iStock / Jacob Ammentorp Lund
1. Early retirement: lower pension, higher first pillar contributions
One in three working Swiss people dreams of receiving an early retirement pension. The normal retirement age in Switzerland is 64 for women and 65 for men. Even at the regular retirement age, there are worrying pension shortfalls due to social and economic developments. If you want to retire sooner (at the earliest after you reach the age of 58), you have to be well prepared. The financial impact of the decision to retire early is considerable.
As appealing as the idea may be, early retirement is costly because...
you lose your previous income;
there is no income for the calculation of the first pillar (state pension, also known as OASI) and the second pillar (occupational pension);
the paid-in capital must last longer.
As a result, your pension is significantly lower if you retire early than if you retire at the usual time. The OASI or state pension (possible no earlier than two years before the regular retirement age) is reduced by 6.8% per year. There is a similar reduction in the case of the occupational pension.
But it’s not only that. You must pay OASI contributions until you reach the ordinary retirement age. These contributions will be calculated based on your assets and 20 times your annual pension income. This can cost a lot of money (between 500 and 24,000 francs). If early retirees want to maintain their usual standard of living, there’s only one way to do it – early and systematic savings.
2. Go over the books in good time
You should take a close look at your own wealth and income situation at the latest at around 50 years of age. You should compare your expected pension (especially OASI and occupational pension) with your estimated expenses when you retire.
To do this, it is best to create a budget for when you are a pensioner. This should take into account changes in living costs such as the elimination of your commute, a smaller apartment, but also higher travel and health costs.
Many underestimate the need for a financial cushion. Are your expenses after retirement, for example, 2,000 francs per month higher than your income? Then with a return of 1% and a life expectancy of another 20 years, you need around 400,000 francs extra.
Saving such a sum in the remaining time is hardly realistic for many salary levels. In order to at least partly improve your pension as an early or partial pensioner (see last section), there are various options.
3. Plugging pension gaps in time: how it works
Voluntary contribution to the occupational pension
A good way to increase retirement savings is to make voluntary contributions to your occupational pension (second pillar). You can deduct these directly from your taxable income. There are also no taxes on income during the savings period.
It is best if you distribute contributions to the second pillar over several years. Payout is possible at the age of 58 at the earliest. Depending on the wishes of the insured person, this is either a one-time payout or a lifelong pension. Both options have pros and cons.
Pension or capital?
The one-time payout of capital is more interesting in the long run because the pension capital is taxed at a lower rate. In addition, the unused part goes to your children in the event of your death.
The lifelong pension, on the other hand, is subject to income tax. The surviving spouse receives only 60% of this, and your descendants will go empty-handed. This in turn speaks in favour of a lump-sum payout.
However, because you then have to invest the money yourself, it is riskier than the staggered pension payment. Depending on the occupational pension fund and your personal needs, you can also combine both options.
Advance withdrawal costs
Early retirees must expect to receive a lower conversion rate from the second pillar (occupational pension). This refers to the percentage of assets saved in the second pillar that is paid out to an insured person per year after retirement.
Example: based on the current conversion rate of 6.8%, retirement savings of 100,000 francs will yield an annual pension of 6,800 francs. A general rule of thumb is that the conversion rate is reduced by 0.2 percentage points for each year that you retire early. Future early retirees should find out exactly how much pension they can expect at each retirement age.
Pillar 3a: lower taxes, higher interest rates
In order to close pension shortfalls in the first and second pillars (OASI and occupational pension), employees can invest in pillar 3a. To do so, you pay a certain amount per year into a 3a pension account held with a bank or insurance company. Advantage: you can deduct money paid into pillar 3a from your taxable income.
Life insurance is also a type of private pension. You can take it out as part of pillar 3a and pillar 3b.
It’s worth starting early: this way you also benefit from the compound interest effect. Employees may pay in up to 7,056 francs per year. Self-employed people can pay in a maximum of 20% of their annual income, or up to 35,280 francs per year.
In the case of pillar 3a, this is also referred to as a restricted pension, as the capital may not be used until retirement (exceptions include purchasing owner-occupied residential property, leaving Switzerland or changing to self-employment). This means that you should only deposit freely available funds that you do not need in the longer term.
With 3a accounts, you receive a higher interest rate than on a standard savings account (see third pillar products from insurance companies and banks). But beware: interest rates for 3a accounts from banks vary. Just 0.5% more or less interest can make more than 40,000 francs difference over a working life, depending on the level of interest. If you want to save, you should definitely take a look at the 3a interest rates.
A 3a account can only be cancelled in its entirety. Because the payout is progressively taxed depending on the amount of capital, it’s worth setting up multiple 3a accounts. It makes sense to have up to five 3a accounts, which you can liquidate one by one over five years from age 59 (women) or 60 (men). This allows early retirees to fill their income gap while still saving thousands of francs in taxes.
Free accumulation of wealth
As an alternative or in addition to the second or third pillar, future early retirees can of course also build up unrestricted assets. Depending on the interest rate environment, for example, savings accounts, securities (e.g. fee-saving index funds) or a tax-advantaged one-time deposit with an insurance company are suitable for this purpose.
You need to set a monthly savings amount as early as possible, pay it in a disciplined manner and, if possible, do not touch it. Advantage: if you have saved enough assets, you don’t need to choose pillar 1 (OASI), pillar 2 (occupational pension) or pillar 3a to finance your early retirement.
Replace income gaps
Those who have not made sufficient provision for early retirement can only replace the lack of income. Some employers alleviate financial losses through bridging pensions or severance pay. You should ask about this in good time.
Depending on the interest rate environment, increasing your mortgage can also be a way to plug any financial gaps. However, the loan-to-value ratio must not be more than 65% and also not more than one third of the income as a pensioner at an assumed mortgage rate of 5%.
4. A good alternative: semi-retirement
Even with the greatest of discipline, it is not always possible to save the necessary financial buffer for a carefree early retirement. Partial retirement, on the other hand, is a more realistic option even for middle-income people. It can be done either in one or more steps.
Advantages:
Even half an income is usually still enough to pay OASI (pillar 1) contributions.
The expensive OASI advanced withdrawal is usually unnecessary, as earned income and the occupational pension are sufficient for living costs.
Semi-retired people can reduce their own OASI contributions and release their life partner from the obligation to pay contributions.
Those who prefer to (and are able to do so) can also work begin working part-time earlier and then remain employed beyond the age of 65. Several large companies in Switzerland promote this form of part-time employment. Contact your employer in good time.
The one-time payout of capital is more interesting in the long run because pension capital is taxed at a lower rate. In addition, the unused share goes to your surviving dependants in the event of your death.
100% of the life-long pension, on the other hand, is subject to income tax. This in turn speaks in favour of a lump-sum payout.
However, since you have to invest the money yourself, a lump-sum payout is more risky than the pension. Depending on the pension fund and your personal needs, you can also combine both options.
This article was first published on 12.04.2018
