Pension funds cut pensions of early retirees

However, most companies are far from taking advantage of the leeway offered by the Occupational Pensions Act (BVG). The BVG permits early withdrawal of retirement benefits from the age of 58. If one withdraws one's pension fund benefits early, the retirement capital is smaller than with ordinary retirement. The conversion rate is reduced, which is used to convert the capital into a lifelong pension. Most pension funds reduce the pensions of early retirees by 5 to 7 percent per year of early withdrawal. Consequently, those who retire at 63 instead of 65 will receive 10 to 14 percent less pension. This reduction in benefits can be compensated for with higher payments into the pension fund. The tax savings that insured persons achieve in this way reduce their costs of early retirement.

Great potential for optimization

As a rule, savings contributions to the pension fund may amount to up to 25 percent of the insured AHV annual salary. The following example shows how much an existing pension solution can be optimized: A 55-year-old company owner earns 280,000 francs a year. His current PF pension plan insures the salary up to 150,000 francs. The savings premium is only 15 percent of the insured salary. If the company owner simultaneously increases the savings premium to 25 percent and the insured salary to 280,000 francs, his annual savings contributions increase from 22,500 to 70,000 francs per year. The additional savings premiums reduce his taxable income, and the expansion of pension benefits also increases his potential for voluntary purchases. The company owner can now pay an additional 1.2 million francs or so into the pension fund and deduct this amount from his taxable income. With a voluntary purchase of 30,000 francs, he saves around 10,000 francs in income tax at a marginal tax rate of 30 percent. If he withdraws this amount at retirement, he incurs about 5,000 francs in withdrawal taxes. The return on the purchase is therefore 5,000 francs (excluding investment income).

A modern pension plan allows cadre employees to make purchases not only up to the amount of the regulatory benefits, but also for early retirement. This means that insured persons who have already bought in for the full benefits on ordinary retirement can make additional purchases.

Tax savings with a partial retirement

Because partial retirement is particularly common among managers in addition to early retirement, a modern management pension plan offers insured persons the option of drawing their retirement benefits gradually from the age of 58 and continuing to insure their full salary in the pension fund until the regular retirement age, which they have drawn up to that point. This is permitted by law, provided they earn no more than 50 percent less after reducing their workload. This means that retirement benefits are the same as without a reduction in working hours, and the tax burden is significantly reduced. The BVG stipulates that the employer must only pay its share of the pension fund contributions on the effective salary. The employee pays the remaining savings contributions and the risk premiums on the fictitiously insured portion of the salary. The employee may deduct these contributions from his taxable income. Thanks to continued insurance at full salary, insured persons can continue to buy into the pension fund in full and also deduct these voluntary contributions from their taxable income. If only the actual salary is insured, the savings contributions and also the purchasing potential shrink.

The company owner in the example calculation reduces his workload at 58 from 100 to 60 percent (see table below). His effective salary thus falls from 200,000 to 120,000 francs. If only the effective salary is insured, the owner can only deduct his savings contributions as an employee in the amount of 12,000 francs from his gross salary. Purchases into the pension fund are no longer possible. If the company owner remains insured at the previous salary, he can deduct employee savings contributions of 28,000 francs and continue to additionally reduce his taxes with purchases. Thanks to the higher savings contributions and a purchase of 15,000 francs, he saves 8,500 francs in taxes - per year.