corporate
Tax deductions: how to optimise Pillar 2 buybacks
LO Patrimonia SA
Lombard Odier Group
Lombard Odier & Co AG Zürich
Buying back Pillar 2 contribution years are often under-used, despite their advantages. While the primary objective of these buybacks is to enable you to maintain your standard of living in retirement, they are also an attractive way to optimise your financial situation, whether you are an employee, a business owner or self-employed. To encourage pension saving, Pillar 2 buybacks are entirely exempt from income tax.
A simple and attractive principle
The principle behind Pillar 2 buybacks is the ability to "catch up" on missed contributions. Simply put, if you’re 45 years old today and have a salary of CHF 100,000, you can theoretically buy back years of contributions. Therefore, it would be as if you had been contributing to your Pillar 2, on a 100,000 CHF salary since you were, for instance, 25 (or 18, depending on the rules of the pension institution). In practice, Pillar 2 buybacks involve making one or more payments to rectify your occupational pension shortfall. There could be various reasons for this gap. It could be due to significant salary variations; gaps in the number of contribution years due to periods of unemployment, a change of employer, or even a divorce.
Needless to say, the calculation is subject to certain condition. Your pension institution can inform you of your "buyback capacity", i.e. the total amount you can buy back, depending on your personal circumstances.
Planning Pillar 2 buybacks at the right time
If you are allocating a significant amount to a buyback, it is important to analyse whether it makes more sense to close the gap with a one-off payment (for example if you are nearing retirement age) or spread the buybacks over several years. The tax impact will be different depending on whether you make a single payment of CHF 300,000 or CHF100,000 a year for three years. It is often more attractive to spread Pillar 2 buybacks over several years.
Those who are self-employed and business owners should also clarify certain points with a professional. They need to precisely determine the salary amount (with or without a bonus), the contribution rate and the age at which saving contributions begin. They also need to bear in mind that the calculation of the maximum amount of buybacks may vary from one pension fund to another.
Naturally, you should finance Pillar 2 buybacks primarily with excess savings as your assets are thereafter tied into pension fund. Thus it is essential that you schedule buybacks in line with your life plans.
Read also: Passing on a family business in Switzerland: what options are open to entrepreneurs today?
Beware of the three-year retirement restrictions
Those who are considering Pillar 2 buybacks cannot receive lump-sum benefits from the part of their pension cover relating to the buyback for a period of three years after the buyback. In particular, no lump sums will be paid in place of an annuity for pension cover arising from the buyback if employment ceases within three years of the buyback.
The three-year restriction also applies to all other cash advances, particularly those made before retirement such as buying a property. In addition, from a tax point of view, any buyback followed by a capital payment within three years isn’t deductible from the insured person's income for tax purposes.
Read how to invest to realise your future and optimise taxation here
Build a strategy that suits you and your situation
You can implement a buyback strategy at any age: a young executive who has been promoted with an increase in salary will have more opportunities for Pillar 2 buybacks. By buying back contributions, they can improve their pension provision and benefit from tax savings.
Likewise, a 50-year-old manager can plan potential buybacks with a specialist in order to have an early retirement under the best possible conditions. Finally, a self-employed person close to retirement can set up a "catch-up" strategy to compensate the early years of their working life, when they only contributed the minimum amount.
Note that, if, at any age, you buy back years of contributions following a divorce to compensate for the part of the vested benefits transferred to your former spouse's pension plan, this is fully deductible from your taxable income (subject to abuse of this right).
Special conditions for business owners and the self-employed
Business owners and the self-employed can also buy back contribution years. These buybacks correspond to years when they were not associated with their occupational pension scheme or under similar conditions. These are fully deductible from taxable income, and the money used to finance the buyback is deducted from taxable assets. These acquisitions offer a fiscally efficient asset management approach for business owners and the self-employed, encompassing private assets, pension assets and cash.
Such global management is essential for business owners, as it enables them to avoid a "silo" approach, which is fiscally inefficient. For example, it makes sense to allocate the securities most exposed to taxation to a pension scheme (such as a supplementary plan) to limit the overall tax burden, rather than leaving them in a private portfolio, where they would be subject to the maximum tax.1
Read also: Managing family wealth: an interview with our Grandes Familles Internationales team
Finding the right financing for your Pillar 2 strategy
The first buyback is always financed with cash but this is not always available. As a result, potential contributors need to work out how to finance it. Business owners may use any available cash not needed to run the company to pay themselves a dividend. The available cash is just transferred by the owner and then reinvested into the occupational pension plan without being taxed.
In the case of other businesses that have a variable remuneration component, an annual bonus may, for example, be used to finance the first buyback. For self-employed professionals such as doctors, lawyers and notaries, the introduction of an occupational pension plan offers high tax-saving potential, as they are considered both employers and employees as far as the pension fund is concerned.
In all such cases, the Swiss system of buying back contribution years offers a double advantage allowing individuals to improve their retirement benefits while benefiting from tax deductions.
Discover the 6 key questions to plan for your retirement here
If you have any questions or are interested in knowing how this fits into an overall approach to your wealth, please do not hesitate to visit our dedicated expertise in Switzerland section and use the contact form to get in touch.
1 In compliance with the limits of the pension regulatory framework.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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