Retirement planning Semi-retirement: often the happy medium

Many are tempted by the idea of retiring early, though not everyone can afford it. A possible alternative is semi-retirement, allowing you to gradually reduce your working hours until you reach statutory retirement age or even beyond. Your options depend on the regulations of your pension fund. If these are limited, you could reduce your working hours. The most sensible decision will be determined by your goals and financial plan, which you would be wise to look into at an early stage. The year in which you turn 50 is often a good time to do this.

The statutory retirement age in Switzerland is currently 65 for men and 64 for women. A vote will be held this year to decide whether the age for women should be raised to that for men.

Statutory retirement age refers to the age from which AHV benefits are paid out without any penalties for early withdrawals. Whether women can receive their full pension when they retire at 64 depends on their pension fund's regulations. Some pension funds already operate as if the retirement age is 65 for women.

With the AHV (pillar 1), you can receive your pension up to two years early. However, this will permanently reduce your pension by annually 6.8 percent if you withdraw one year early, meaning that two years would cause a reduction of 13.6 percent. You must continue to pay AHV contributions during these same two years. Receiving your AHV pension early is often financially unattractive, which is why many who retire early choose not to do so.

However, payment of your AHV pension can also be deferred by up to five years. Additional amounts are set out for this on a staggered scale, meaning that your pension would be up to 31.5% higher if you wait five years. Anyone who works beyond statutory retirement age with a monthly income above the allowance of CHF 1,400 will continue to pay AHV contributions. However, these “solidarity contributions” do not lead to a higher pension. The AHV does not permit partial withdrawals in the case of semi-retirement.

You will hear the terms “pension gap” and “income gap” mentioned often in the context of retirement planning. Generally speaking, this means that, despite your benefits from pillars 1 and 2, you will have a lower income if you retire at the statutory age. This gap does not need to be closed entirely, as your expenses in retirement are also likely to be lower – though not by as much as you might assume. When it comes to your tax burden, this reduction in income is partially balanced out, for example, because you no longer need to pay tax on work-related expenses. However, health and care-related expenses tend to be higher as you get older. In the case of semi- and especially early retirement, this gap widens significantly. Those who retire early will find it widest during the years in which they receive benefits from their pension fund, but not yet from the AHV.

One way to close an income or pension gap is by paying into pillar 3a. If you open several 3a accounts, you can close them over the course of several years, which offers tax benefits. Pillar 3a accounts can be closed no sooner than five years before you reach statutory retirement age, and no later than five years after this age if you continue working.

If your last pension fund statement shows a contribution gap, you can also make voluntary purchases into your pension fund and thus increase your pension. It is best to close a contribution gap four to six years before you plan to retire. Your salary is likely to be highest at this point, maximizing the effect of voluntary contributions in avoiding progressive taxation and thus on your tax bill. Any advance withdrawals made to finance your own home must be repaid before making a pension fund purchase. You should also check the financial state of the pension fund, for example, by checking the coverage ratio, which should be above 100 percent. After you make a purchase, no capital payouts will be possible for the next three years – whether to finance your own home or as a lump-sum payment when you retire.

If you are thinking about semi-retirement, you should start by consulting the regulations of your pension fund to check if this is an option and, if yes, under what conditions. You can also gradually work fewer hours, though usually only by increments of at least 20 percent. Some cantonal tax authorities stipulate higher minimum increments; the canton of Zurich, for example, requires at least 30 percent. In some cases, there is also a statutory limit to the number of increments by which you can reduce your working hours each year and to the total number of increments itself. After reducing your working hours, it is usually not permitted to increase them again.

Should you opt for semi-retirement by reducing your working hours gradually, your pension fund may allow you to withdraw some of your retirement benefits early. You can also decide whether to receive them as a pension or lump sum. It is important to observe the requirements set by your canton's tax authorities here. Find out which is the most sensible option for you, ideally by consulting an expert.

Your financial needs and the conversion rate used by your pension fund to calculate pensions will determine whether it is sensible to start receiving your pension as soon as you reduce your working hours. Furthermore, if withdrawing a lump sum, you need to consider how you can invest the amount in a way that meets your needs.

If you continue to work beyond statutory retirement age, the regulations of your pension fund will determine how this affects your occupational pension. Some allow you to continue contributing, whereas others will only allow you to defer receipt of your pension. Both options increase your pension, albeit to varying degrees. As well as further contributions, continued interest payments and the higher conversion rate will mean higher retirement benefits. Taxation of capital payments would also be deferred in this instance. In principle, if you defer your retirement, you can continue making voluntary purchases in the second pillar if you have a contribution gap upon reaching statutory retirement age.

Depending on your employer and pension fund, there is another alternative to semi-retirement: reducing your working hours, either at once or in increments, while remaining fully insured. Throughout this period you will have to pay higher contributions into your pension fund and these must remain affordable, but your pension will not be lower when you eventually retire.

If you continue to work after reaching statutory retirement age, not only can you maintain your pillar 3a account, but you can also continue to pay into it and have the amounts deducted from your taxable income as before. If you contribute to a pension fund, you may pay up to CHF 7,056 into pillar 3a in a given year (as of 2024). If you no longer pay into a pension fund, you may pay up to 20 percent of your net income, or a maximum of CHF 35,280 per year (as of 2024).

As you can see, semi-retirement offers several financially sustainable ways to gradually reduce your working hours in a way that suits your needs. If you need help with any of these options, our UBS client advisors will be happy to assist you – simply make an appointment with just one click.