Switzerland is considered a tax haven by many because their taxes are lower than average. The taxation system is complex without being confusing, and pensioners benefit rather well from the Swiss 3-Pillar pension scheme, as well as from other low/non-applicable taxes. If you are looking to retire in Switzerland, then investing in pensions is a very good idea. In this article, you will discover how you may fully benefit from the Swiss tax and pension system.
1st Pillar Pay-As-You-Go system
You pay into the 1st Pillar retirement scheme if you are living in Switzerland. When you reach retirement age, you receive a monthly payment in an amount that is considered adequate for the minimum standard of living. You may postpone your payments by as many as five years if you wish to keep working. Widows and orphaned children will receive a payout if the Swiss citizen passes away unexpectedly. If you are living in Switzerland and you are not yet retired, then this is the mandatory pension that you have to pay.
2nd Pillar – Paid into by yourself and your employer
If you are self-employed, then payments into this pension scheme are voluntary. If you are working, then payments into this scheme are compulsory by both you and your employer. It is an occupational pension and the amount paid into it reflects your current wages, which means it helps secure your current standard of living for when you are retired. You are paid monthly after reaching retirement age, and you may postpone payments for five years after your retirement age. If you pass away prematurely, then your pension will pay out if it is linked out your life insurance, and it may partially pay out to your widows and orphans. If you are hoping for full payouts to legal heirs, then it is possible, but you will need to consult a professional regarding how the system works.
3rd Pillar – Pension investments with tax benefits
You may voluntarily contribute to this type of retirement fund, and there are tax incentives to help you save money in the long term. If you pass prematurely, some/all of your pension fund is paid to your legal heirs. You get a one-time payment when you retire, but you may postpone payment for five years after the legal age of retirement. There are also some circumstances where you may be paid five years in advance, but seek professional and financial advice before trying to make withdrawals as you may undermine the value of your pension.
Side Note – The path to understanding your pension scheme
The details given above are as short and efficient as possible. Each Pillar has hundreds of different facets that may affect you or your loved ones. For example, is dying before retirement considered premature passing? And do non-orphaned dependents receive payouts from 1st Pillar retirement schemes? If you wish to fully understand and use these pension schemes to the fullest, then contact Belgravia Wealth for further advice.
Third Pillar pension scheme are great for expats
Many expats choose to invest in 3rd Pillar retirement schemes because they are often too late to receive full payments from 1st and 2nd Pillar retirement funds, and because pillars 1 and 2 generally only make up 40% of your salary. People who have lived in Switzerland all their lives have had plenty of time to pay into 1st and 2nd Pillar pension schemes, but people who move to Switzerland are often behind, so they invest in 3rd Pillar pension schemes to ensure they have a robust amount to retire on, and that they can continue to live the same quality of life as they did while working. Many expats also use SIPPs to transfer their pension from places such as Britain to Switzerland, which helps to ensure they are not short of cash when they retire.
Four types of tax relief when paying into Swiss pension schemes
Number One - Invest a certain amount into your 3rd Pillar scheme for tax relief. The amount you can invest for tax relief changes every year, but it helps you save today on your taxes. Add it into your 3rd Pillar tax scheme, and you do not have to pay tax on it this year, but you may have to pay a lower tax rate on it when you receive the money upon retirement.
Number Two - Even if the money you receive is taxed when you finally retire, the interest on the money you have invested will not be taxed, which is the second way your Swiss pension scheme may save you money. For example, if you put CHF100 into your 3rd Pillar pension, and that 100 earns you an extra 5, then only the 100 is taxed when you get it back and the 5 is tax free.
Number Three - The third way your pension may help you save on tax is by investing so that your income is low enough to stop you entering a higher income-tax band. There is a certain amount you may invest into your 3rd Pillar pension fund that is tax deductible. If you are about to crest over the threshold of your income tax bracket, you may be able to invest some money and deduct it from your tax bill so that you do not have to pay the higher rate of tax. Not only does it save you from paying a higher tax rate, but the money you invest also comes with all the tax benefits mentioned above.
Number four - A less-commonly mentioned fourth type of tax relief is from your employer. Your second-tier pension scheme includes contributions from your employer, but many pension planners forget to mention that the money paid by your employer is also tax free. It may not make much difference to you, but it is yet another way that taxes are avoided in Switzerland.
Are taxes unforgiving for pensioners in Switzerland?
Some people consider Switzerland to be a tax haven because of their low rates, but things are getting tighter as time goes on. Cantons are independently deciding to make life harder for tax payers. For example, places such as Zürich, Appenzell Ausserrhoden, Schaffhausen, Basel-City and Basel-Land have abolished laws where foreigners may pay a lump-sum amount of tax when entering the country in order to save on taxes while living there.
Plus, even though the three-pillar retirement system helps people save on taxes, there are still taxes that pensioners will have to understand and deal with. There is all applicable income tax, plus there is gift tax, inheritance tax and capital gains tax on wealth and assets. Plus, the rule differs from Canton to Canton, which means people ten miles down the road from you may be paying far less tax.
On the plus side, the transfer of wealth to your spouse is tax-free in Switzerland (in all Swiss Cantons), and in many cases, your direct ancestors and offspring enjoy tax-free wealth transfers too. Furthermore, even though you pay capital gains tax on the profit you make from the sale of real estate, you are unlikely to pay capital gains tax on the profit you make from trading stocks and bonds.
To make sure you're making the most of your Swiss pension, don't hesitate to seek guidance from your financial adviser today.