The self-employed and SME owners: asset protection and tax-efficient investment during the coronavirus crisis

Entrepreneurs and self-employed people tend to focus on the development and success of their business, often neglecting private pension provision. However, Swiss laws offer working people in Switzerland very interesting opportunities for tax optimisation through appropriate use of their pension – especially in the second pillar. Savings contributions for the restricted second and third pillar and voluntary purchases of contribution years can be deducted directly from taxable income, for example, while dividend or interest income on accumulated retirement assets is not taxable. Pension assets are also exempt from wealth tax and are protected in the event of bankruptcy – meaning they cannot be claimed by creditors. What's more, when the retirement capital is withdrawn, the payment is taxable as income but separately at a rate that varies greatly from canton to canton.

Better performance through optimised pension provision

In addition to payments into the normal occupational pension scheme, solutions in the area of management pension plans for salaries above CHF 127,980 offer very interesting optimisation opportunities for entrepreneurs.

They can choose between a single strategy under the non-mandatory portion of the BVG (generally for insured salaries from CHF 0 to CHF 24,885 and over CHF 85,320) and the individual 1e plan for insured salaries over CHF 127,980. This offers entrepreneurs and, if need be, their management staff more autonomy in determining their occupational pension provision by allowing them to build up additional pension capital on an individual basis and, depending on the plan, even to decide on their own investment strategy. In addition, the equity allocation in these plans can be significantly higher than in conventional pension fund solutions. This makes a lot of sense for younger plan participants in particular, as their investment horizon is longer.

With a suitably structured plan, there is considerable potential for tax optimisation. We find time and again that the self-employed are only insured on a basic level, or only insure part of their variable remuneration.

The role of asset management in pension provision

In order to optimise returns after tax, all assets must be analysed – both unallocated private assets and dedicated pension savings. Thanks to Lombard Odier’s modern technology platform, it is possible to display and manage both restricted pension and free private assets on a consolidated basis. This enables individual investment vehicles to be correctly allocated to portfolios from a tax perspective. In practice, that means putting high-income investments like coupons and dividends in the pension portfolio, while the private account contains assets with upside potential. This methodology results in an average additional return of around 0.5% to 1.5% per year – without any increase in risk.

COVID-19 underlines the importance of competitive and tax-optimised asset accumulation for the self-employed and SME owners. The timely transfer of balance sheet value created from a business to pension assets forms an important basis for this and requires prudent planning. The costs of such a plan are largely offset by the tax savings achieved.

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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