The ABCs of retirement planning: key pension facts

Pillar 1 forms the basis of Switzerland’s three-pillar principle for pension planning and is also referred to as the state pension. It consists of OASI, i.e. old-age and survivors’ insurance, as well as invalidity insurance – also abbreviated to IV. Thanks to OASI/IV, the Swiss government guarantees a basic minimum income in retirement and offers protection in the event of invalidity or death. OASI works according to a solidarity-based contribution system. This means that current pensions are financed by the salary contributions paid by the active population in employment. If the pension benefits are not sufficient to cover minimum living costs, supplementary benefits take effect. These benefits are financed by the federal government and the cantons through taxpayers’ money.

Avoiding contribution gaps

Even though the OASI pension is compulsory, the amount is not the same for everyone when they retire. Some people may receive a lower pension, for instance if they temporarily leave Switzerland, miss contributions during their studies or take a break from work to have a family. During this time, they usually receive a lower salary or no salary at all. This can lead to a lower average OASI income and insufficient contribution years, which will have a direct impact on their future pension. You should always pay careful attention to this and make sure you avoid contribution gaps. Gaps generally result in a pension reduction of 2.3% for each missing contribution year – on a permanent basis.

To try and obtain a full pension, you will need to compensate for contribution gaps. In some cases, it’s possible to make an additional payment into your pension fund up to five years after the gap arose.

The full maximum pension is CHF 2,450 for single persons and CHF 3,675 for married couples (as at 2024), and is achieved with an average annual income of CHF 88,200 or more. According to an analysis of the average OASI pensions of retirees, the current amount is CHF 1,862 for men and CHF 1,883 for women.

Pillar 2 – also known as the pension fund or OPA – is governed by the Federal Act on Occupational Old Age, Survivors' and Invalidity Pension Provision (OPA). It is intended to supplement the OASI pension. Together, pillars 1 and 2 should enable pensioners to maintain a reasonable standard of living after retirement.
A conversion rate is applied to determine the OPA pension you are entitled to receive after retirement, based on the assets accumulated. The rate is currently 6.8% for the mandatory scheme.

The basic rule is: retirement assets × conversion rate = annual pension.

Nonmandatory occupational insurance is when your pension fund offers better benefits than the statutory minimum, for example if you earn more than CHF 88,200 per year. If pension funds offer nonmandatory benefits, an individual conversion rate applies, which is usually much lower than the standard rate of 6.8%. Detailed information can be found on your pension fund statement or obtained from your employer’s pension fund.

When you retire, you can decide whether your retirement assets should be paid out as a monthly pension, as a one-off lump sum or as a combination of the two. The lump sum can also be paid before retirement age if you choose to make an early withdrawal. However, this is only possible under strict conditions. The amount can be used for projects such as buying a home or starting your own business, but you do not have complete freedom to use the capital however you like.

Avoiding gaps in cover

Paying retirement assets into pillar 2 is mandatory for all employees from 1 January of the year after they turn 24, provided they receive a minimum wage of more than CHF 22,050 per year (as at 2024). Anybody earning this minimum wage is also insured against the risks of death and invalidity from 1 January after they have reached the age of 17. Breaks from work, temporary part-time work or salary increases can result in a pension fund gap, which can be filled by making a pension fund purchase.

You can find out how high your potential is for making voluntary purchases by checking your pension fund statement, which you receive once a year. However, voluntary purchases are not worthwhile for everyone and should only be envisaged once you have paid the maximum annual amount into pillar 3a to build up private retirement savings. What is more, if you make a pension fund purchase, capital withdrawals will not be permitted for three years. Otherwise, the tax advantage will be retroactively canceled, and you will have to pay back the tax saved. To ensure that making a voluntary pension fund purchase pays off from a tax perspective, you should seek advice or clarify any open questions and requirements with your pension fund.

Pillar 3 gives everyone with an earned income subject to OASI contributions the opportunity to save additional retirement assets during their career and to close pension gaps in retirement. Pillar 3 is divided into pillar 3a and pillar 3b. The main differences concern the tax advantages and regulations. Building up private retirement savings is voluntary, and it is up to each individual to decide how much to pay in. You can take out a pillar 3a retirement solution with a bank or an insurance company.

There are advantages associated with both types of pillar 3 accounts. The best solution depends on your individual situation. It makes sense to divide pillar 3a savings between several pillar 3a accounts, as this gives you tax advantages in most cantons when withdrawing assets in different years.

The three pillars are the foundations of the Swiss pension system and are intended to safeguard your standard of living in retirement. However, this will not automatically be the case. A pension gap can quickly arise due to a lack of contributions to pillars 1 and 2. In order to maintain your former standard of living, it is important to close any gaps, for example by making payments into pillar 3a.