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How Does Switzerland's Retirement System Work?

Switzerland boasts a comprehensive retirement system comprising different pillars. The objective of this system is to ensure financial security in old age, providing a certain level of protection in cases of disability or death.


Understanding the basics of retirement planning is essential for better preparation and a more relaxed approach to this phase of life. This article marks the first installment of a blog series on 'pension planning.' It offers a brief overview of the various pillars. Subsequent blog posts will delve extensively into each specific area.


In Switzerland, social security is a comprehensive and reliable system designed to prevent economic hardship and poverty. It includes social insurance, supplementary benefits, and social assistance. These components are structured to ensure comprehensive social protection for all citizens.


The primary pillar of this social security system is retirement provision, ensuring financial independence for older individuals upon retirement. This retirement provision is divided into three pillars:

  • I Pillar: Old-age and survivors' insurance (OASI)

  • II Pillar: Occupational Retirement Planning

  • III Pillar: Private Retirement Savings

Each of these pillars has distinct roles, funding methods, and management by different institutions.


Old-age and survivors' insurance (OASI)

The first pillar of the Swiss retirement system is the Old-age and survivors' insurance (OASI). OASI is compulsory for all residents of Switzerland and forms the foundation of the Swiss pension system. It guarantees a minimum income in retirement, survivor's benefits, and disability compensation. Contributions to OASI are made jointly by employers and employees. The contribution amounts depend on income, and the percentage or the income scale for self-employed individuals is legally prescribed. The retirement age in OASI is currently 64 for women and 65 for men. The pension amount is determined by the number of contribution years and the average income during that period.


Occupational Retirement Planning (ORP)

The second pillar of the Swiss pension system is the mandatory occupational benefits, commonly known as the pension fund, covering retirement provisions. ORP is obligatory for all employees who reach a specific income threshold, also referred to as the entry threshold or minimum annual salary. Contributions to ORP are also made by employers and employees. Under certain circumstances, employees can make additional contributions to enhance their retirement provisions, known as 'purchasing into the pension fund.' Contribution amounts are based on income and are limited to a specific amount.


All ORP limits (as of 2023):

  • Minimum annual salary (ORP entry threshold): CHF 22’050

  • Coordination deduction: CHF 25’725

  • Upper limit of annual salary: CHF 88’200

  • Maximum coordinated salary: CHF 62’475

  • Minimum coordinated salary: CHF 3’675


The pension amount in ORP depends on the contribution amounts, the number of contribution years, and the conversion rate.


Private Retirement Savings

The third pillar of the Swiss retirement system is private retirement savings. It offers individual options to bridge the gaps in the first two pillars. There are various forms of private provision, such as Pillar 3a, allowing tax-advantaged contributions to a private pension scheme, and Pillar 3b, offering flexible savings options like life insurance, mutual fund savings plans, or savings accounts.


Maximum amounts for Pillar 3a (as of 2023):

  • Employed individuals with a pension fund: maximum CHF 7’056

  • Employed individuals without a pension fund: 20% of net earned income, maximum CHF 35’280

The assets from the third pillar can be withdrawn at the time of retirement or at the earliest, five years before the ordinary retirement age. However, there are exceptional cases where early withdrawal is allowed, such as purchasing or building real estate or starting a self-employed activity.


Conclusion

Switzerland's retirement system is governed by numerous rules and regulations. Pension institutions are legally obliged to meet appropriate capital requirements and establish reserves for future payments. The government also oversees the system to ensure it meets the population's needs. The system is extensive, offering Swiss citizens a wide range of options for financial security. However, challenges exist. One of the significant challenges is the aging population and the consequent increase in retirees. This leads to higher financial requirements, questioning the system's sustainability. Another issue is the increasing mobility of the Swiss population. Many individuals frequently change employers or work as self-employed, leading to inconsistent contributions to the retirement system. This results in gaps in provisions and uncertain pension claims in old age.


Despite these challenges, Switzerland's retirement system is overall stable, providing reliable security for its citizens in old age. The combination of state, occupational, and private provisions is a crucial element in ensuring financial security in retirement.


Given the broad legal financial security in old age, it is essential to understand one's rights and options and tailor an optimal pension package. This not only ensures financial security in old age but also allows customization based on individual preferences and often provides opportunities for tax savings. Azzurra Consulting AG can assist you in planning your retirement and guide you on maximizing your options. Contact us today for a consultation!

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