If you earn a fairly high Swiss salary, you may find that the pension fund contributions you make – and the resulting pensions – do not accurately reflect the salary you earn.
The reason for this is that contributions to your Swiss 2a pension fund are based on your fixed salary. They do not account for bonuses and other variable portions of your salary. Another reason is that pension fund contributions are only levied on a portion of your salary (your “coordinated salary”).
As a general rule: the higher your salary, the bigger the gap between your coordinated salary and your actual salary. This results in many executive employees receiving an old-age pension which is much lower than 80% of their employed salary.
Executive pension plans are one tool which employers can use to extend their employee’s retirement savings. Executive pension plans are offered by some 2a occupational pension funds as an optional insurance. It can also be taken out as a separate policy from an insurance provider.
What is an executive pension plan?
Executive pension plans work much like Swiss occupational pension funds. You make regular contributions based on the portion of your salary which is not serviced by your pension fund. The cost of capital-building premiums is typically shared between employees and employers, much like pension fund contributions.
The purpose of an executive pension plan is to compensate for the portion of your salary which is not accounted for by your pension fund.
If you receive a large part of your salary in the form of an annual bonus, for example, an executive pension plan lets you set aside a portion of your bonus as retirement savings. Typically, your average bonus over several years is used to calculate your premiums.
Executive pension plans are based on the 2a category of retirement savings, just like occupational pension funds. Your equity in an executive pension plan is subject to the same rules which govern all 2a retirement assets. That means you can withdraw part of your assets towards buying a home under certain conditions and you can cash out your assets when you move from Switzerland to a country which is not a European Union (EU) or European Free Trade Association (EFTA) member.
Contributions to 2a savings are tax deductible, and 2a savings are not accounted for when calculating wealth tax. Assets are taxed at a special rate when you withdraw them upon reaching the legal age.
Executive pension plans are provided through employers, and when you leave your employer you normally have to terminate your plan. The cash value of the plan can then be transferred to your new employer’s pension fund or placed in a vested benefits account (if you become unemployed or move from Switzerland to an EU or EFTA member country). Splitting the assets between two vested benefits accounts can help you space out withdrawals to avoid being bumped into a high tax bracket.
In addition to retirement savings, executive pension plans may also provide disability insurance and life insurance which extend the coverage you get from your occupational pension fund. You normally pay additional premiums for these coverages.
Depending on the terms and conditions of your policy, you may be able to make voluntary contributions to your plan in addition to regular contributions.
Disadvantage of executive pension plans
The biggest disadvantage of executive pension plans is that it can only be taken out by employers on behalf of employees. You cannot normally take out an executive pension plan on your own. If your employer does not offer this insurance and you cannot convince them of its benefits, you will not be able to get it. In most cases, employers take out executive pension plans from their pension fund.
Employers considering taking out executive pension plans for their employees would do well to get multiple quotes and compare premiums in relation to benefits.
Executive pension plans can help fill the gap in 2a retirement saving contributions for employees who receive high or variable salaries. They also allow employees to benefit from the full tax-saving potential of the 2a retirement savings category.
If you earn a more average salary and want to save more than your 2a pension fund allows for, the 3a category provides a flexible option for voluntary retirement savings. You can use the interactive 3a retirement savings account comparison to find the account which pays the most interest.