Pension fund buy-ins (2nd pillar)

Anyone who works in Switzerland sooner or later comes across a word that is worth a lot of money: buy-in. It has nothing to do with settling a debt — it is the option of voluntarily paying money into your own pension fund (the 2nd pillar, BVG) to close gaps in your retirement provision and, at the same time, reduce your taxes. It is one of the most effective planning tools in the Swiss system, but it has to be used methodically.

How provision gaps arise

Your retirement savings in the pension fund are built up through the annual credits paid in over the course of your career. But almost no one has a straight-line path: people who arrived in Switzerland as adults, worked abroad, took career breaks, worked part-time or received sharp salary increases end up with accumulated capital that is lower than the amount theoretically expected for their age and salary.

This difference between your actual capital and the maximum possible capital under the fund’s regulations is the buy-in gap: the amount you can, in principle, pay in voluntarily to bring your position up to the maximum.

The twofold benefit

A buy-in is attractive for two reasons that work together:

• retirement benefit: it increases your accumulated capital and therefore your future pension or retirement lump sum;
• tax benefit: within the statutory limits, the amounts paid in as a buy-in are deductible from taxable income in the year of payment.

For middle-to-high incomes with high marginal rates, the immediate tax saving can be considerable. That is why many people plan their buy-ins for their highest-earning years.

The limits and rules to observe

A buy-in is neither unlimited nor always freely available. Some constraints are decisive:

• the maximum amount is the one set by the pension fund, which issues the calculation of the available gap;
• anyone who has made early withdrawals for home ownership must, as a rule, repay them first before being able to buy in with tax effect;
• there are specific rules for people arriving from abroad during their first years of residence;
• the capital paid in is restricted retirement savings: it is not freely available and remains subject to the rules of the 2nd pillar.

The three-year lock-up on lump-sum withdrawals

There is one rule you need to know before paying in, not afterwards. If, after a buy-in, you withdraw the pension fund benefit as a lump sum within a certain period (generally three years), the tax advantage of the buy-in can be called into question by the authorities. In practice: anyone who plans to draw the 2nd pillar as a lump sum in the near term — for retirement, starting a self-employed activity or leaving Switzerland for good — must plan buy-ins well in advance of that withdrawal, otherwise they risk losing the benefit.

The staggering strategy

Concentrating a single large buy-in in one year is almost never the best choice. Because income tax is progressive, spreading payments over several years often makes it possible to reduce a larger share of income taxed at the high marginal rate. Staggering planned over the years leading up to retirement combines the tax benefit with the rebuilding of retirement provision, while avoiding unnecessarily exceeding thresholds.

Mistakes to avoid

• Buying in without the fund’s official calculation, paying in more than allowed.
• Ignoring the three-year lock-up and withdrawing a lump sum straight after a buy-in.
• Forgetting home-ownership withdrawals still to be repaid.
• Concentrating everything in one year instead of staggering to maximise the saving.

Buy-ins and the other pillars

The 2nd-pillar buy-in has to be seen within your overall retirement provision. Alongside it, pillar 3a offers annual deductions with a different logic, and the choices between a pension and a lump sum at retirement have a significant effect on your final taxation. Looking at a single tool in isolation almost always leads to sub-optimal decisions.

How we work at SIH ONE

We help people and families resident in Switzerland to read their retirement situation, calculate their buy-in potential together with the fund, plan the staggering of payments according to income and coordinate the 2nd and 3rd pillars while respecting the timing constraints on withdrawals.

Want to understand whether and how much it makes sense to buy into your pension fund? Discover our services for private clients and set up a tailored retirement and tax strategy.