How to benefit from Pillar 2 buybacks and tax savings

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How to benefit from Pillar 2 buybacks and tax savings

Gilles Panchard - Financial Planner<br/>LO Patrimonia SA<br/>Lombard Odier Group

Gilles Panchard

Financial Planner
LO Patrimonia SA
Lombard Odier Group

Article published in Bilan, 11 December 2019

The end of the year is approaching: take the opportunity to improve your pension planning and reduce your taxes. Many people already have a Pillar 3 account and thus benefit from a tax deduction on voluntary savings towards their retirement provision. However, the deductible amounts are limited. For example, the maximum amounts for 2019 are CHF 6,826 for a tied Pillar 3 account (3a) set up by an employee or by someone who is self-employed and affiliated with a pension fund (“small contribution”). Note that employees and those who are self-employed without a Pillar 2 occupational pension may contribute a maximum of 20% of their income from gainful employment provided that this does not exceed CHF 34,128 per year (“large contribution”).

Buybacks of Pillar 2 contribution years are also possible, and this option is often under-used, by individuals, despite its advantages. Whilst the primary objective of these buybacks is to enable you to maintain your standard of living in retirement, they are also an attractive way for you to optimise your asset situation. For instance, legislators aim to encourage pension provision and stipulate that buybacks are entirely exempt from tax on the contributor’s income.

A simple principle

The principle behind buybacks is that they enable someone who has, or is making pension provision, to make up a shortfall in earnings compared with their current salary conditions. In other words, if you are 45 years old today and have a salary of 100,000 CHF you can theoretically buy back years of contribution. Thus it would be as if you had contributed to your pillar 3 with salary of 100,000 CHF back when you were 25. Of course, some special conditions apply to the calculation.

In practice, buybacks by private individuals involve making one or more payments to remedy their occupational pension shortfall. There may be various reasons for this shortfall. It may be due to significant salary variations; gaps in the number of contribution years due to periods with no work or a change of employer; a change to an existing pension plan; the creation of a new pension plan; or even the consequences of a divorce.

Whilst the primary objective of Pillar 2 buybacks is to enable you to maintain your standard of living in retirement, they are also an attractive way for you to optimise your asset situation.

Tailored to every age and profile

You can implement this strategy at any age: a young executive who has been promoted with an increase in salary will have more opportunities for buybacks. By buying back contributions, the executive can improve his 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 in the best possible conditions.

Finally, a self-employed person close to retirement may, for example, set up a “catch-up” strategy for the first years of their working life, when they only contributed the minimum amount. Be careful, though: if you want to take part of your retirement assets in the form of capital, you must complete your buybacks at least three years before you actually retire.

It should also be remembered 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).

You can implement this strategy at any age: a young executive who’s been promoted, a 50-year-old manager looking for an early retirement in the best possible conditions or a self-employed person close to retirement.

Particularly attractive for business owners and the self-employed

Although occupational pension plans are often neglected by business owners and the self-employed, they offer several ways to reduce their tax burden, while offering appropriate insurance coverage.

In addition to or instead of joining the mandatory occupational pension scheme, the business owner cum shareholder may opt for supplementary occupational pension cover (for themselves and/or their staff). Ordinary contributions are tax deductible throughout the entire pension formation phase.

It is also possible to buy back contribution years. These buybacks correspond to years when they were not affiliated to the occupational pension scheme, or were not affiliated under similar conditions. They are fully deductible from the contributor’s taxable income, and the money used to finance the buyback is deducted from their taxable assets. These acquisitions contribute to fiscally efficient overall management of the assets of 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, as mentioned above) to limit the overall tax burden, rather than leaving them in a private portfolio, where they would be subject to the maximum tax. 

Although occupational pension plans are often neglected by business owners and the self-employed, they offer several ways to reduce their tax burden, while offering appropriate insurance coverage.

Plan well with a professional

Naturally, you should finance such buybacks primarily with excess savings, as your assets are then blocked in the pension fund. It is therefore essential that you schedule such buybacks in line with your life plans.

In addition, if you are allocating a significant amount to a buyback, it is important to analyse whether it is most efficient to close the gap with a one-time payment or to spread the buybacks over several tax years. Indeed, the tax impact will be different depending on whether you make a single payment of 300,000 francs or a payment of 100,000 francs over three different years.

Those who are self-employed people and business owners should also clarify certain factors with a professional. They need to precisely determine the salary amount (with or without a bonus), the contribution rate and the age at which savings contributions begin, whilst respecting the legal principles applicable to occupational pension provision. They also need to bear in mind that the calculation of the maximum amount of buybacks may vary from one pension fund to another.


Finding the right financing

Since the first buyback is financed with cash and cash is not always available, potential contributors need to work out how to finance it. Business owners may use any available cash, which is not needed to run their company, to pay themselves a dividend. The available cash is thus transferred to the shareholder cum business owner so that he can be reinvest in his occupational pension plan without being taxed.

In the case of other businesses that have a variable remuneration component, the 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 savings potential since they are considered both employers and employees with regard to the pension fund.

In all such cases, the Swiss system of buying back contribution years offers a double advantage and can play a part in improving retirement benefits whilst benefiting from tax deductions.

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.

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