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Pillar 2 buybacks: maximising your tax deduction in Switzerland
Gilles Panchard
Financial Planner LO Patrimonia SA Lombard Odier Group
Thomas Wyss
Head Wealth Planning Lombard Odier & Co AG Zürich
Pillar 2 buybacks form a key strategy for optimising your taxation in Switzerland. In addition to making up for missed contributions, they offer significant tax advantages.
Pension assets are not subject to either income tax or wealth tax. Being managed separately and segregated from other banking assets, their tax advantages tend not to be optimised.
In this article we explore the mechanisms, advantages and strategies for maximising your Pillar 2 buybacks while benefiting from tax deduction.
What are Pillar 2 buybacks?
A Pillar 2 buyback, or occupational pension scheme, is an essential pillar of the Swiss retirement system. It is designed to supplement Pillar 1(AVS or old-age and survivor’s insurance/AI or disability insurance) in order to guarantee sufficient income after retirement. Pillar 2 buybacks refer to the voluntary disbursements that are issued to address contribution shortfalls, often caused by career breaks or changes in salary.
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The tax advantages of Pillar 2 buybacks
One of the most attractive features of Pillar 2 buybacks is the tax benefits they offer. The amounts used for buybacks are fully deductible from your taxable income, which directly reduces your tax burden. Furthermore, the funds used to finance the buyback are drawn from taxable assets, providing double tax optimisation. In addition, when the pension benefit is paid in the form of capital, it is taxed separately from other income at a reduced rate. It is important to stress that an initiative proposed by the Federal Council is pending before Parliament and could lead to a rise in federal tax on pension benefits received in the form of Pillar 2 (and Pillar 3A) capital.
Example: if you buy back CHF 30,000, 50,000 or more, this amount is deducted from your taxable income and could save you thousands of francs in tax, depending on your tax rate.
How do Pillar 2 buybacks work?
Pension funds calculate your buyback capacity according to your age, income and years of missing contributions. Once the amount has been determined you can make a single payment or spread your payments over several years.
1. Spreading buybacks
Rather than paying out a large sum all at once, it is often better to spread buybacks over several tax years. This allows you to maximise the positive fiscal impact each year.
2. Using surplus funds
The buybacks can be financed out of surplus liquidity such as bonds or dividends. This avoids tying up funds that are needed for other projects.
3. Planning in accordance with your personal circumstances
Every situation is unique. Business owners and the self-employed, for instance, can buy back years when no contributions were made, thereby reducing their taxable income and optimising their overall tax liability.
Restrictions and deadlines to be aware of
It is important to note that three years must elapse between a buyback and the withdrawal of lump-sum benefits from the part of the pension cover relating to the buyback. This includes withdrawals to purchase a property or take early retirement. In addition, from a tax point of view, any buyback followed by a capital payment within three years is not tax-deductible from the contributor’s income. This rule is designed to prevent tax evasion.
Specific cases: business owners and the self-employed
Thanks to Pillar 2 buybacks, business owners and the self-employed have unique opportunities to optimise their taxation, for instance by setting up a ‘bel étage’ tax-deductible buy-in pension scheme.
By buying back missing years, they can reduce their taxable income while boosting their pension assets. Furthermore, buyback amounts are deducted from taxable assets, providing double tax optimisation.
There are several sources of financing available for Pillar 2 buybacks:
Annual bonus or dividends: ideal for professions with variable remuneration.
Surplus liquidity: business owners can use their surplus cash flows to gradually finance their buybacks.
Conclusion
Pillar 2 buybacks are a powerful retirement planning tool that optimises your taxation and strengthens your overall wealth. Nonetheless, very careful planning and a good understanding of the fiscal rules are essential. By working alongside tax and pension planning experts, you can maximise the advantages of this strategy and secure your financial future.
At Lombard Odier, our system of consolidation and integrated management enables us to work with you to rethink the architecture of your company’s pension fund and your pension plan and/or your vested benefits account. This approach covers all your assets. High-return financial assets are therefore allocated to your pension account, while low-return assets with the potential for capital appreciation are allocated to your private account. Consequently, you can benefit from better after-tax performance without any increase in risk.
Thanks to our expertise in Switzerland, we implement strategies tailored to your circumstances across the entire pension framework, including Pillar 2 supplementary pension buy-in schemes, Pillar 1e flexible-strategy senior management company plans and bel étage tax-deductible buy-in pension schemes.
important information
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (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 marketing communication.
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