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By Luigi Galante, Founder of Elite Office SA and the Elite Fondations pension institutions
Episode 2 of the six-part series devoted to the risks and opportunities of early or deferred retirement through occupational pension provision.
The aim is to highlight, progressively, the main questions to consider within the framework of the second pillar, rather than to address every aspect of ideal financial and tax planning for retirement, which would also involve analysing third-pillar arrangements, life insurance policies, mortgages, investments, gifts, real estate, companies and inheritance agreements. This series is independent of the type of pension institution. Its purpose is simply to explain, with nuance, the various mechanisms offered by occupational pension provision. However, one fundamental rule must always be borne in mind: the pension regulations are decisive in all cases.
It is important from the outset to distinguish between the reference age under the OASI system and the regulatory reference age under occupational pension provision. The former corresponds to the ordinary retirement age under OASI. The latter refers to the age at which, under the pension regulations, retirement benefits generally become payable. These two concepts do not necessarily coincide. Thus, when reference is generally made to the gradual alignment of women's retirement age with that of men, this concerns the OASI reference age. Under the second pillar, however, it is the pension regulations that determine the regulatory reference age, as well as the conditions governing early or deferred retirement.
The transition to retirement does not always involve a complete and immediate cessation of employment. In many situations, insured members prefer to gradually reduce their working hours, ease their workload towards the end of their careers or organise a smooth transition between employment income and retirement benefits. This intermediate phase offers genuine opportunities, provided that the various mechanisms of the second pillar are clearly distinguished, particularly the maintenance of the insured salary, the continuation of risk benefits, the possibility of making voluntary pension buy-ins following a reduction in working hours, partial retirement, or simply maintaining pension fund membership without withdrawing capital.
In principle, when an insured member reduces their working hours, their OASI salary also decreases. Depending on the pension plan, this reduction in OASI salary may lead to a decrease in the insured salary. However, there is no automatic correlation between the two. Everything depends on how the pension regulations define the insured salary. This distinction is important because certain pension institutions specifically allow the effects of reduced employment to be mitigated to some extent. Where the insured salary is reduced by no more than 50%, the insured member may remain covered for both retirement savings and risk benefits on the basis of their previous insured salary. This option is also available to self-employed individuals. It may be offered from the age of 58 until the regulatory reference age at the latest, regardless of the regulatory age for early retirement.
During this period in which the previous insured salary is maintained, pension regulations generally provide that disability and death benefits continue to be calculated on the basis of the previous insured salary. However, it should be recalled that risk coverage ends upon reaching the OASI reference age. Nevertheless, solutions now exist under which death coverage can continue beyond the age of 65. All contributions arising from the maintenance of the insured salary are borne by the insured member. The employer may wish to contribute to these payments in whole or in part, in which case the pension regulations must provide for this possibility. Since the employer's participation in these contributions is entirely voluntary, the employer may decide to amend the pension plan and cease contributing towards the portion of the insured salary that is being maintained. In such cases, amendments to the pension plan apply to all insured members. This is therefore not a fixed mechanism, but rather an arrangement that remains linked to the pension structure established by the employer.
Maintaining the previous insured salary also has a direct impact on voluntary pension buy-ins. Since the insured member remains insured on the basis of their previous insured salary, the scope for buy-ins is calculated on that basis rather than on the salary or income actually received. Buy-ins made before the reduction in the insured salary are not called into question. It should also be added that this principle applies where a significant reduction in the OASI salary results in a substantial decrease in the insured salary, for example by 80%. This clarification is essential because it demonstrates that a substantial reduction in employment does not automatically call into question buy-ins for previous years that have already been made. A comparable situation may arise where an insured member has two employers and ceases employment with one of them: even if early retirement is envisaged, a transfer to a vested benefits account may, upon request and provided that the pension regulations allow it, be considered without calling into question previously completed buy-ins.
It should also be noted that, in the event of a salary reduction, meaning where a decrease in the OASI salary is accompanied by a reduction in the insured salary, the pension institution may retain the excess pension assets. However, the insured member may invoke Article 13 of the Vested Benefits Act (FZG/LFLP) and request that these excess assets be transferred to a vested benefits account or vested benefits insurance policy. A reduction in employment therefore affects not only future contributions but may also influence the treatment of a portion of the pension assets already accumulated.
Partial retirement is subject to its own specific rules. The determining factor is the reduction in the OASI salary or the relevant salary. Pension regulations must provide for partial retirement from at least the age of 63, although they may offer this option earlier, from the age of 58 and up to the age of 70. In principle, the initial reduction in the OASI salary must amount to at least 20%, unless the pension regulations specify a lower percentage. A partial withdrawal of retirement capital may subsequently be decided after the corresponding reduction in the OASI salary. After reaching the regulatory retirement age, the amount of retirement benefits that an insured member may receive can, where permitted by the pension regulations, exceed the proportional reduction in income or OASI salary. From a retirement planning perspective, it is advisable to carefully assess cash flow requirements both during partial retirement and in preparation for full retirement, in order to determine the most appropriate percentage reduction in salary. The maximum number of partial capital withdrawals is three, regardless of the number of pension plans held with the same employer. The tax advantages of such an arrangement can be significant, since several successive withdrawals may reduce the overall tax burden compared with a single payment, provided that the maximum tax rate has not been reached. However, the salary reduction must be permanent; it cannot be implemented solely for the purpose of obtaining a tax advantage.
However, the idea that maintaining the insured salary and partial retirement are entirely incompatible requires some qualification. In principle, they should not be implemented simultaneously within the same arrangement, but this does not mean that one permanently excludes the other. One mechanism may precede or follow the other, provided that the first arrangement has ended and the new situation is reassessed at the time of the application. In practice, the insured member's specific circumstances must therefore always be examined when they request the new arrangement, taking into account the applicable pension regulations, the insured salary at that time, the level of employment and any benefits already received.
The situation becomes even more complex when several pension plans coexist under the same employer. In such cases, a partial capital withdrawal cannot be assessed separately for each plan. It must be calculated according to the percentage reduction in the OASI salary applied to the total pension assets. For example, if three pension plans hold a combined total of CHF 2,250,000 and the OASI salary decreases by 20%, the maximum permitted withdrawal will be CHF 450,000, which must then be distributed proportionally among the different plans. The insured member cannot therefore use the existence of multiple pension plans to artificially multiply the number of withdrawals.
Another question arises regarding retirement benefits paid in the form of a pension. Unless the pension regulations provide otherwise, the law also limits retirement benefits paid as a pension to three stages. However, the regulations may allow a greater number of stages for pension payments. Accordingly, if the pension institution expressly wishes to do so, greater flexibility may be offered to insured members.
Having multiple employers also requires certain distinctions. While each employer is generally assessed separately from an occupational pension law perspective, the situation differs for tax purposes. Indeed, an insured member cannot make an unlimited number of partial benefit withdrawals. As discussed in the first episode, a consolidated approach is required when examining all lump-sum withdrawals. Similarly, withdrawing a partial retirement benefit from pension plan A does not necessarily prevent a buy-in into pension plan B. However, if the insured member subsequently increases their employment level under plan A, the calculation of the buy-in capacity under that plan must take into account the retirement benefit already paid. Finally, it should be noted that, in certain circumstances, a self-employed individual may withdraw their entire retirement capital early while continuing their professional activity. Conversely, where an insured member has fully retired from employment with one employer and subsequently takes up new employment, the new pension institution must take into account the retirement capital already received and deduct it from the future buy-in capacity under the new pension arrangement.
Another possibility exists where an insured member interrupts their employment without withdrawing their retirement capital. Under Article 47 paragraph 1 of the Federal Act on Occupational Old Age, Survivors' and Invalidity Pension Provision (BVG/LPP), pension institutions may offer insured members the possibility of maintaining retirement savings and risk coverage to the same extent as before, or on the basis of a lower salary. The insured member may choose to maintain both savings and risk coverage, or only one of these components. In certain cases, they may even simply leave their retirement capital with the pension institution without paying savings or risk contributions. It should also be noted that the salary taken into account for risk coverage may differ from the salary used for retirement savings.
This mechanism applies to pension institutions providing mandatory occupational pension coverage under the BVG/LPP and, in principle, to pension institutions offering combined mandatory and supplementary coverage. It is not necessarily available in pension institutions operating exclusively in the supplementary pension sector, although in practice this possibility is often provided for in their regulations. For a long time, this continuation of coverage was considered subject to a maximum duration of two years until the regulatory retirement age. However, a Federal Supreme Court ruling issued in 2024 invalidated this two-year limit. At this stage, it cannot therefore be ruled out that the removal of this restriction may also extend, depending on the circumstances, to supplementary occupational pension provision, although each pension institution may still define its own limit or choose not to impose one.
By default, contributions relating to this continued coverage are borne by the insured member. However, the employer may decide to cover all or part of these contributions. This mechanism may also be useful in situations other than the end of a professional career, particularly in the case of a sabbatical or an absence related to education or training. Nevertheless, an important distinction must be made: where employment is permanently discontinued, certain pension institutions may only allow the continuation of savings credits, without risk coverage. In all cases, if the insured member demonstrates an intention to resume professional activity, for example by registering for unemployment benefits or providing concrete evidence of an intended return to work, continued risk coverage is possible.
It should also be clarified that buy-ins made before and during continued pension membership under this provision are generally permitted. However, some uncertainty remains from a tax perspective, particularly for pension institutions providing exclusively supplementary coverage, following the removal of the two-year limit. In principle, the tax authorities should follow the case law of the Federal Supreme Court. Nevertheless, it cannot be ruled out that they may adopt a more restrictive interpretation in certain cases. Finally, it should be recalled that some tax authorities do not accept continued pension coverage under Article 47 BVG/LPP where the insured member has already reached the early retirement age stipulated in the pension regulations without being registered as unemployed.
Reducing employment without disrupting pension provision is therefore possible, provided that the available mechanisms are clearly distinguished and not artificially combined. Maintaining the insured salary, continuing risk coverage, partial retirement, maintaining pension coverage, holding multiple pension plans and managing excess pension assets: each of these tools follows its own specific logic. The true flexibility of the second pillar lies in their coherent combination and in assessing the individual circumstances at the time the application is made.
In the next episode, I will examine an often-feared but crucial question: what really happens to occupational pension provision when a career is interrupted following dismissal shortly before retirement?