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By Luigi Galante, Founder of Elite Office SA and the Elite Fondations pension institutions
Episode 3 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.
Planning for early retirement often assumes a certain degree of career continuity. However, this continuity can sometimes be abruptly interrupted by dismissal at a critical age. Such a disruption does not mean that the entire pension planning strategy collapses, but it does require the strategy to be reviewed promptly, taking into account the various instruments available under occupational pension law.
Let us consider the case of an insured member who made voluntary pension buy-ins until the age of 60 and is dismissed at the age of 61. The pension regulations provide for early retirement from the age of 58. However, this insured member had intended to continue working and will therefore register for unemployment benefits.
The first point must be clearly emphasised: buy-ins for previous years made before dismissal are not called into question. What becomes decisive, however, is how the insured member organises the next stage: transferring their pension assets to a vested benefits arrangement, maintaining membership with their former pension institution (Article 47a or Article 47 BVG/LPP) or with the Substitute Occupational Benefit Institution (Article 47 BVG/LPP), potentially followed by a return to employment and a transfer to the pension institution of their new employer, or alternatively taking early retirement. For buy-ins made at the age of 62, the three-year tax-related blocking period under Article 79b paragraph 3 BVG/LPP and its tax consequences must be taken into account when a lump-sum benefit is being considered.
Where the conditions for payment of a termination benefit are met, transferring the assets to vested benefits institutions is often the first solution. In our example, these conditions are satisfied because Article 2 paragraph 1bis of the Vested Benefits Act (FZG/LFLP) entitles an insured member who leaves their pension institution between the minimum age for early retirement and the reference age to a termination benefit, provided that they continue working or register with unemployment insurance.
The insured member may divide their termination benefit between two separate vested benefits institutions and retain their assets there (Art. 12 para. 1 of the Vested Benefits Ordinance, FZV/OLP), within the time limits prescribed by law. This division can offer two advantages.
The first is tax-related. Splitting pension assets between two separate vested benefits institutions makes it possible to plan withdrawals over two different tax years and thereby reduce the overall tax burden compared with a single payment, provided, of course, that the maximum applicable tax rate on lump-sum benefits has not already been reached. In this situation, it may even be advisable to divide the capital unequally between two vested benefits institutions, in order to adapt each withdrawal to the applicable tax brackets and, where possible, benefit from a more favourable tax rate on the smaller capital amount.
An insured member has pension assets of CHF 2,200,000, which they wish to withdraw over two separate tax years.
Equal division: CHF 1,100,000 and CHF 1,100,000
In many cantons, a capital amount of CHF 1,100,000 is already sufficient to reach, or come very close to, the maximum marginal tax rate applicable to lump-sum benefits. In such a situation, withdrawing the capital in two equal instalments provides only a limited tax advantage, or none at all.
Unequal division: CHF 500,000 and CHF 1,700,000
An unequal division may prove more advantageous. A withdrawal of CHF 500,000 may benefit from a lower average tax rate than a withdrawal of CHF 1,100,000. Since the second instalment of CHF 1,700,000 will in any event be taxed at a rate close to the maximum, the overall tax burden may be lower than with an equal division.
In many cantons, an unequal division of capital may therefore result in a lower overall tax burden than an equal split. However, the outcome depends on the canton concerned and the tax scales applicable at the time of withdrawal.
The second advantage concerns cash flow management. It is not always necessary or advisable to have access to the entire capital at the same time. A first portion of pension assets may be withdrawn to cover liquidity needs during the initial years of retirement, while the second remains invested and available for a later stage. Genuine retirement planning therefore involves determining not only how much to withdraw, but also when the funds will actually be needed.
In certain circumstances, it is also possible to hold two accounts with the same vested benefits institution where they arise from separate vested benefits cases, for example when the assets originate from two different pension institutions. However, this technical possibility must be distinguished from the tax treatment. Holding several accounts with the same vested benefits institution does not mean that the tax authorities will agree to treat the withdrawals independently for tax purposes.
Similarly, the fact that an insured member is affiliated with several vested benefits institutions simultaneously does not allow them to make an unlimited number of staggered withdrawals. Tax planning for withdrawals must therefore be analysed separately from the mere possibility of opening multiple accounts.
Finally, a particular feature of the current system should be noted. Retirement benefits held in vested benefits arrangements generally become due when the insured member reaches the reference age. Their withdrawal may only be deferred for a maximum of five years if the insured member proves that they are continuing to work (Art. 16 para. 1 FZV/OLP). As a transitional measure, however, individuals who reach or have reached the reference age between 2024 and 2029 and are no longer employed may defer payment until 31 December 2029, but no later than five years after reaching the reference age. From 1 January 2030, it will therefore no longer be possible to retain vested benefits assets beyond the reference age without continuing gainful employment.
Since 1 January 2021, a particularly important new option has become available to older individuals whose employment relationship is terminated at the employer's initiative (whether through dismissal or where the employee resigns at the employer's request): continued pension coverage with the same pension institution under Article 47a BVG/LPP. This legislative amendment aims to allow the individuals concerned, after two years of continued coverage and provided that the early retirement age stipulated in the pension regulations has been reached, to receive their retirement benefits in the form of a pension. They are therefore no longer forced to receive a vested benefits payment (resulting in a subsequent lump-sum payment) or to take early retirement.
An insured member who is "dismissed" from the age of 58 may maintain their pension coverage with their existing pension institution to the same extent as before. The regulations may go further, for example by allowing continued coverage from the age of 55 or by permitting continued coverage on the basis of a lower insured salary.
An insured member making use of this provision must maintain at least disability and death risk coverage. In this case, their termination benefit nevertheless remains with the pension institution (Art. 47a para. 2 BVG/LPP). The insured member may also choose to continue paying savings contributions. Continued coverage ends no later than the regulatory reference age (Art. 47a para. 4 BVG/LPP). In practice, this age corresponds to 65 in most situations.
The insured member is responsible for financing the continued coverage. This therefore provides a genuine means of preventing a dismissal late in their career from resulting in a termination benefit or the payment of retirement benefits through early retirement, which they had not yet intended to take.
It should also be clarified that the insured member may exercise this right even if the pension institution has not yet formally amended its regulations to comply with Article 47a BVG/LPP.
As mentioned above, if continued coverage lasts more than two years, retirement benefits are, in principle, paid in the form of a pension. Consequently, anyone wishing to receive their retirement benefits as a lump sum must ensure that continued coverage is terminated before the two-year period expires.
Finally, it should be noted that Article 47a BVG/LPP does not apply to pension institutions providing exclusively supplementary occupational pension coverage. This restriction must be taken into consideration, particularly where an insured member has several pension plans or is affiliated with several pension institutions.
Let us now return to our insured member who was dismissed at the age of 61 after making their last buy-in at 60 and who, unlike in the previous situation, does not wish to resume employment.
Several situations must be distinguished.
If the insured member immediately withdraws their entire retirement savings capital as a lump sum, the three-year tax-related blocking period under Article 79b paragraph 3 BVG/LPP is not respected. The tax advantage of the recent buy-in can therefore no longer be preserved, and the consequences described in the first episode arise once again.
Continued coverage under Article 47a BVG/LPP may offer a different solution. Buy-ins made before or during this continued coverage remain, in principle, tax-deductible. However, Article 47a does not override the three-year blocking period in the event of a subsequent lump-sum payment.
Two time limits must therefore be coordinated: on the one hand, the three years since the last buy-in and, on the other, the two-year limit for continued coverage under Article 47a, beyond which retirement benefits must be received in the form of a pension.
In our example, the buy-in was made at the age of 60 and dismissal occurred at 61. Continued coverage for nearly two years may therefore allow the three-year period since the buy-in to expire while preserving, depending on the exact dates, the possibility of receiving retirement benefits as a lump sum. A difference of just a few weeks or months can be decisive.
Article 47a is not the only provision that may be relevant. Depending on the regulations, Article 47 paragraph 1 BVG/LPP may also provide a means of maintaining pension coverage. However, several situations must be distinguished.
The first is the simplest: the regulations do not yet provide for early retirement at the age at which employment ends, for example because early retirement is only possible from the age of 63.
In this case, an insured member who ceases to be subject to compulsory insurance before that age may maintain their pension coverage under Article 47 paragraph 1 BVG/LPP without facing the particular issue of having already reached the early retirement age. This situation therefore does not raise any tax-related difficulties.
A second situation arises where the age permitting early retirement under the regulations has already been reached, but the regulations nevertheless provide for the possibility of a termination benefit, even without continued employment or registration for unemployment benefits.
In this case, maintaining coverage under Article 47 paragraph 1 BVG/LPP is defensible from an occupational pension law perspective and allows the pension relationship to be preserved for the necessary period. In Federal Supreme Court decision BGE 150 V 12, the Court held that this provision may apply to an insured member over the age of 58 and that its application is not generally limited to two years, provided that the insured event of retirement has not yet occurred under the regulations. However, caution remains necessary in the case of exclusively supplementary occupational pension provision.
It is primarily from a tax perspective that this second situation becomes more delicate. Some tax authorities may consider that merely having reached the age at which early retirement was possible should already result in treatment corresponding to a retirement event. There may therefore be a difference between what is permitted under the regulations, occupational pension law and the interpretation adopted by the tax authorities.
Another aspect deserves emphasis. The minimum age for early retirement is set at 58. However, this does not mean that all pension institutions actually allow retirement from that age. The regulations may set the early retirement age at 60, 61, 62 or 63.
What may initially appear to be a disadvantage can turn into an advantage. Indeed, where an insured member is dismissed or ceases employment after the age of 58 but before the regulatory early retirement age stipulated by their pension institution, they are not considered to have retired. They may therefore receive a termination benefit and transfer it to a vested benefits institution.
This situation allows them to avoid the tax-related issue discussed above, which may arise where the insured member has already reached the regulatory early retirement age.
However, this possibility is limited to the age of 63. Pension institutions must provide the option of early retirement from that age at the latest. From that point onwards, entitlement to a termination benefit and its tax treatment may be assessed differently, reintroducing the tax risk mentioned previously.
For insured members who are no longer employed, it should nevertheless be borne in mind that vested benefits assets generally become payable at the reference age (Art. 16 para. 1 FZV/OLP), subject to the transitional arrangements applicable until 31 December 2029, as mentioned in the first part of this article.
Finally, careful consideration must be given to how the regulations distinguish between termination benefits and retirement benefits.
Some regulations provide for a termination benefit by default and a retirement benefit upon request. In this case, payment of a termination benefit after reaching the age permitting early retirement may be accepted under occupational pension law and case law. However, tax practice may adopt a more restrictive position based solely on the fact that the early retirement age has been reached.
Other regulations adopt the opposite approach, with retirement benefits paid by default but the possibility of requesting a termination benefit. Here again, occupational pension law may permit such a termination benefit, while its tax treatment remains uncertain.
These different situations demonstrate that it is not sufficient simply to establish that early retirement is possible. It is the regulations of the last pension institution that determine whether the cessation of employment constitutes a vested benefits event or an insured retirement event (BGE 150 V 12, consideration 5.2), subject to the entitlement to a termination benefit for an insured member who continues working or registers for unemployment benefits (Art. 2 para. 1bis FZG/LFLP). It is therefore necessary to verify which benefit applies by default, which alternatives may be requested and until what point a termination benefit remains possible.
For insured members who have made recent buy-ins, these distinctions can be decisive. Preserving the tax advantage of a buy-in therefore depends not only on the expiry of the three-year period, but also on the legal classification of the benefit concerned and whether or not the pension relationship continues.
Vested benefits arrangements are not intended to remain permanently separate from the insured member's occupational pension provision. When joining a new pension institution, all vested benefits held with one or more vested benefits institutions must be transferred to the new institution (Art. 4 para. 2bis FZG/LFLP).
However, if the accumulated pension assets exceed the amount that can be transferred into the new pension plan, the portion that cannot be absorbed (the surplus) may remain with the vested benefits institution.
Where the conditions are met, this surplus may once again be divided between two separate vested benefits institutions. The advantages are those already discussed: the possibility of organising withdrawals over two tax years where this continues to provide a tax advantage, and flexibility in managing future liquidity requirements.
There is therefore no need to repeat the entire rationale behind splitting the assets. The important point is that only the surplus that cannot be absorbed by the new pension institution may remain in a vested benefits arrangement.
If the insured member continues their professional activity as a self-employed individual, their pension assets may remain in a vested benefits arrangement and, where the conditions are met, be divided between two separate vested benefits institutions. In the event of a withdrawal, the three-year blocking period under Article 79b paragraph 3 BVG/LPP must be respected for buy-ins. Self-employed individuals may also voluntarily join the pension institution of their professional association or the Substitute Occupational Benefit Institution (Art. 44 BVG/LPP), enabling them to continue building up second-pillar pension provision.
The situation is different if the insured member establishes their own public limited company (SA/AG) or limited liability company (Sàrl/GmbH) and becomes an employee of that company.
As an employee, they must be affiliated with a pension institution where the legal conditions are met and must, in principle, transfer their vested benefits assets into the new pension relationship.
If the accumulated assets exceed the buy-in capacity of the new pension plan, the surplus may remain in a vested benefits arrangement. Planning for this surplus may then take into account both future taxation and liquidity needs during retirement.
Dismissal approaching retirement therefore does not automatically call into question buy-ins already made, nor does it mean that the insured member must immediately take early retirement.
Depending on the pension regulations and the insured member's personal circumstances, several options are available: transferring assets to a vested benefits arrangement, maintaining coverage with the pension institution under Article 47a BVG/LPP, maintaining coverage under Article 47 paragraph 1 BVG/LPP where the relevant conditions are met, subsequently joining a pension institution through a new employer, or finally, for those who wish to do so, taking early retirement, provided that the three-year blocking period has already expired.
The main challenge lies in coordinating these mechanisms. A recent buy-in requires careful attention to the three-year tax-related blocking period. Article 47a introduces its own two-year time constraint if the insured member wishes to receive a lump-sum benefit. Article 47 paragraph 1 may offer other possibilities, but its treatment depends in particular on the regulatory early retirement age and whether the pension regulations allow a termination benefit to be obtained without registration for unemployment benefits.
In most pension institutions, consideration can even begin at an earlier stage, when designing the pension plan itself. Where the group of insured members does not genuinely need an early retirement option, raising the minimum retirement age in the regulations may prevent unnecessarily complex situations from arising when employment ends.
Additional factors include the form of future benefits (pension or lump sum), their taxation and liquidity requirements during retirement. A decision that appears insignificant at the time of dismissal may therefore have major consequences several years later.
In the next episode, I will examine an often even more delicate situation: that of an insured member who chooses to cease working voluntarily. In the absence of dismissal, they cannot rely on Article 47a BVG/LPP. Can they still obtain a termination benefit or maintain their pension membership? And what happens to recent buy-ins if illness, disability or death occurs?