3 pillars, this is the basis of the Swiss pension system ! The 1st pillar is called state welfare, generally active and inactive contribute to this pillar in order to cover their vital needs at retirement age. This pillar breaks in the middle AVS (old-age and survivors’ insurance) and IV (disability insurance). The 2nd pillar is called occupational pension, because the contribution is dependent and linked to remuneration. Once again it breaks down into LPP and LAA thus taking into account the risk of old age, death and disability. Finally, the 3rd pillar, which corresponds to a individual pension which should make it possible to maintain the same standard of living as during the period of activity.
These 3 pillars are enclosed in the Federal constitution art. 111 Old-age, survivors’ and invalidity insurance. This indicates, in fact, the importance of each of these three pillars. In this article we will mainly focus on the BVG which must be complemented by a linked 3rd pillar, if you want to keep the same lifestyle!
Who contributes to the BVG?
The LOB is financed at least in equal parts between the employee and the employer. Since 1985 the LPP (Law on Occupational Welfare) is mandatory for employees who pass the entry threshold. Self-employed workers can decide to join the LPP on an optional basis. This pillar is highly regulated and certain access conditions must be met.
As an employee
Not all employees contribute to the BVG, some criteria must be met, such as the entry threshold which in 2022 amounts to CHF 21,510.-. Here, an annualized salary should be considered.
For example, for a permanent employee with a gross monthly salary of CHF 5500, – who stays with the company for only 3 months, he has to contribute to the BVG. Indeed, his annualized salary is CHF 66,000 over 12 months, exceeds the entry threshold of CHF 21,510, – for 2022, even if his salary within the company is CHF 16,500, – in the 3 months.
There is also a maximum salary beyond which there are no mandatory LOB contributions. These thresholds change because they take into account the maximum AHV pension. When this 1st pillar annuity changes, these 2nd pillar thresholds also change.
As a freelancer
Self-employed workers are not subject to any obligation to contribute to the 2nd pillar. Likewise for employees below the BVG minimum threshold, but also for employees hired for a period of less than 3 months. For self-employed workers who benefit from high incomes, the subscription of an optional LOB can be of interest in terms of tax deduction.
Indeed, the insurable income in a non-compulsory BVG pension fund can be equal to maximum of CHF 860’400.-, or 10 times the maximum BVG salary. 25% of this ceiling can be allocated to savings contributions, or possibly CHF 215,100, which will be deductible from taxable income. Therefore, even with a lower professional income of CHF 200,000, the deduction granted for the Optional BVG is more interesting compared to the deduction granted to the self-employed worker not affiliated with the 2nd pillar who contributes to the tied pension.
You can also read our article: What are the compulsory insurances for a company in Switzerland?
What does your occupational pension cover?
The occupational pension covers the 3 Risks of old age, death and disability. At retirement age, the insured receives an annuity calculated according to various parameters linked to his savings contribution. This evolves with age throughout your career.
Before the age of 25, no savings contribution is due, only the contribution to cover the risks of disability and death must be paid. Therefore, from the age of 25, the insured must pay a part of his insured salary as a scalable retirement bonus:
- from 25 to 34 years the contribution of the old-age pension is 7%;
- from 35 to 44 years the contribution of the old-age pension is 10%;
- from 45 to 54 years old, the contribution of the old-age pension is 15%;
- from 55 to 65 for men and from 64 for women, the pension contribution is 18%.
For example, a 36-year-old employee with an annual salary of CHF 50,000.- contributes 10% of CHF 24,905.-, or CHF 50,000 of annual salary from which the coordination deduction of CHF 25,095.- is deducted. For a 46-year-old worker, the contribution will be 15%, or 5% more, including an additional 2.5% to be paid by the employer. In fact, as mentioned above, the the funding of the contributions takes place at least in equal parts. Indeed, older employees represent a greater financial burden on companies.
As an employer, you need to take out a professional pension contract for your employees. Compulsory pension contract and extra-compulsory insurance with higher old age bonus, higher insured salary, our consultants will help you see things more clearly!