Buy into the pension fund: close gaps and save on taxes

If you want to provide for your old age financially, you have two options: buying into an occupational pension fund or paying into a private pillar 3a pension plan. In both cases, you can benefit from tax advantages.

A voluntary purchase into the pension fund (pillar 2) involves contributing a voluntary additional amount on top of the already legally prescribed monthly payments being made by the employer and the employee.

Unfortunately, there is no one answer, as any recommendation always depends on your individual situation. The prerequisite for a voluntary purchase into the pension fund is a gap in your coverage, a shortfall that may have arisen due to longer stays abroad, studies, part-time employment, breaks for having children or pay increases. Such gaps quickly exceed the annual amount that can be paid into pillar 3a. In the case of the pension fund, you can pay the shortfall in a single year or spread payment over several years, i.e., exactly when it is most beneficial from a tax perspective.

Although you are allowed to pay into pillar 3a every year, there is a limit on the annual amount. This maximum for employees for 2025 is CHF 7,258 for employees affiliated with a pension fund. If you do not contribute this amount in the calendar year, you can still pay it in retroactively within ten years, provided this gap in pillar 3a arose after 1 January 2025 . The potential amount you are allowed to contribute to the pension fund – assuming the same salary and employer – generally remains the same.

Whether you buy into the pension fund or pillar 3a, the tax advantages are the same.

The amounts you contribute can be deducted from your taxable income in the year in which they are deposited. During the contribution period, the pension capital tied up in the pension fund and in pillar 3a is also exempt from wealth and income tax.

Which option is most suitable always depends on your personal circumstances. Here is an overview:

You are free to choose when to make a contribution. Unlike with private pension provision, the following applies when buying into a pension fund: the later, the better – but not too late.
From a tax perspective, it is worth making additional payments during the years in which you earn a high taxable income. These are often the last ten years of employment before retirement.

It is thus advisable to start thinking about buying into a pension fund from around the age of 50 and to plan for possible purchases. To avoid higher rates of taxation, it also generally makes sense to spread larger payments over several calendar years.

First and foremost, it is the tax savings on the purchase that make up the return on a pension fund purchase. The less time you have the pension assets tied up, the higher their average annual return. In addition, taxable income is generally highest in the years before retirement, so tax deductions are particularly worthwhile at this time due to the higher progressive taxation. Risks such as reallocations, any restructuring measures or changes to the law can be better evaluated over a shorter period of time – and you stay flexible in the event that you need the financial resources elsewhere.

In a year in which you earn little or can otherwise claim high costs against tax, for example for the renovation of a property, it makes little sense to make a large purchase into the pension fund. If you withdraw capital within three years of making the deposit instead of drawing an annuity on retirement, you will have gained nothing: for one thing, the taxes you originally saved must be paid back, and for another, the purchase amount may not be paid out as a lump sum during these three years.

The main factor in minimizing your tax burden is whether you withdraw the pension fund assets as a lump sum or as an annuity.

The one-time lump-sum withdrawal with subsequent annual withdrawals from free assets is generally more advantageous from a tax perspective, as it is only taxed once – regardless of the remaining assets – and at a lower tax rate. However, after the withdrawal you must pay tax on the capital as assets and, depending on the investment, on the returns as income. The annuity from the pension fund, on the other hand, must be taxed in full as earned income.

Another option to save on taxes could be to move, as the taxation of lump-sum payments varies greatly between Swiss cantons and municipalities.

Caution is advised when buying into the pension fund if the financial situation of the pension fund is uncertain, i.e., if its assets do not fully cover the pension entitlements of the insured persons. If there is such a shortfall, interest may not be paid on the capital. In the event of a partial liquidation of the pension fund, there is even a risk that part of the accumulated capital will be lost. A pension fund can be considered healthy if its coverage ratio is 100 percent or more.

If you want to have the pension assets paid out in full as a lump sum at a later date, you should clarify in advance whether this is possible. Last but not least, you should also check the pension fund’s contractual benefits in the event of death before making a purchase, especially if you are an unmarried couple. Different death benefits may apply to cohabiting partners and all pension assets, including payments into the pension fund, may even be forfeited. In such cases, you should carefully consider whether a purchase makes sense and meets your own needs.

Buy-in contributions generally count as part of the extra-mandatory assets, on which a lower interest is often paid. The conversion rate on these assets is also usually lower than for mandatory assets. Vested benefits that have not been transferred to the pension fund must also be taken into account and declared.

Buying into the pension fund is not as simple as it seems at first glance. You need to take many factors into account and weigh the advantages and disadvantages. It makes sense to address the issue in good time – around 10 to 15 years before retirement – particularly if you are contemplating early retirement.

You will find important and helpful information in the pension fund regulations, or you can contact the experts at your pension fund directly for personal advice.