Retirement: save on taxes with staggered withdrawals

Around the start of your retirement, you’ll usually withdraw the capital from your pension accounts. You can save on taxes by staggering these withdrawals over a period of years.

When you draw your benefits from your pension fund and pillar 3a, you pay tax at a progressive rate. These rates vary according to canton and municipality. In most cantons, you can avoid paying higher rates of tax if you withdraw your benefits in stages, i.e., spread the payout over several years.

This is possible for your pension fund assets. This makes sense, especially if the payout amount is high, but you should consult your employer and the pension fund beforehand.

Staggered withdrawals are easier in the case of pension benefits from pillar 3a. If you have paid into several pillar 3a accounts or custody accounts over a long period, it may be worthwhile withdrawing the benefits in such a way that you close the accounts in stages over several years. A pillar 3a account or custody account can only be withdrawn in full. The Swiss Federal Tax Administration does not impose any restrictions on the number of 3a accounts. However, the cantonal tax authorities can view individual cases as tax avoidance or impose restrictions based on current tax practice.

When you retire and withdraw your pension benefits as a lump sum, a special tax is due – the capital withdrawal tax, also called tax on lump-sum payouts. Because the tax rate on capital withdrawals is lower than for your income tax, this is referred to as a reduced tax.

The tax on capital withdrawals is levied irrespective of your income. If the federal, cantonal and municipal tax rates are added together, the tax on capital withdrawals is usually between five and ten percent of your pension benefits.

The amount of tax depends on the payout capital. Bear in mind that payments to married couples are assessed jointly in most cantons. In addition, payouts from occupational pension plans, vested benefits accounts and pillar 3a are added together if they are made in the same tax year. Due to the tax progression in Switzerland, this can lead to very high taxes.

As with your income tax, progressive rates are used in most cantons for the taxation of capital withdrawals. The higher the amount to be taxed, the higher the percentage tax burden. The amount of tax on capital withdrawals also depends on where you live. As with income and wealth tax, the federal, cantonal and local authorities levy different rates. You also have to take church tax into account. Even the progressive taxation of your capital can depend on where you live. This means that in some cantons, such as Zurich, tax progression on capital withdrawals starts later than at federal level.

Some cantons have begun to treat income and capital withdrawals uniformly. Large capital withdrawals are taxed at the same rate as small sums. This can have a noticeable impact on high six- or seven-figure amounts.

Cantons and municipalities sometimes charge very different rates for capital withdrawal tax, which can even double the tax burden on large sums. There are various ways to optimize this burden.

One is to stagger the withdrawal of benefits. By spreading the payout over several years, you avoid paying higher rates of tax on your capital. For example, you should not withdraw your pillar 3a assets in the tax year in which you withdraw capital from your pension fund.

You can withdraw pillar 3a capital five years before you reach normal retirement age, but also up to five years after the reference age, if you can prove that you are gainfully employed. If you are married or in a registered partnership, it makes sense to have a joint plan for your payouts, as they are taxed jointly in the same year.

Another possible strategy: relocation of residence

Another option is to move your place of residence before drawing pension benefits – and thus save on taxes. However, you should check the tax requirements in the relevant canton before making your decision. In addition, you may have anticipated certain tax conditions in your canton of origin in terms of income and wealth tax or housing costs, which will now change completely when you move. It is also important that you move every aspect of your life to the new place of residence for several years, otherwise the tax authorities may assume that you are evading tax.

It sounds simple: when you retire you draw on your pension capital. But there are many ways to optimize taxes when planning for retirement.
However, because many different factors determine your tax burden – and thus your retirement income – it is important to plan your retirement in good time. The age of 50 may be a good time to think about tax and other aspects of your retirement provision.