Pension Fund Buy-Ins: A Complete Guide

Most employees of Swiss companies must be enrolled in an occupational pension fund. Certain situations can result in there being a gap between your pension fund benefits and your current income. You can make additional contributions to your pension fund to close these gaps.

In this guide, moneyland.ch explains how to make voluntary contributions to close gaps, and what to consider.

How can I find out if I have a gap in my pension benefits?

If you have a gap in your pension benefits, it will appear on your annual pension fund statements. Look for the field titled “Maximum possible buy-in” or similar. This field is called “Maximal mögliche Einkaufssumme” or similar in German, and “Rachat maximal possible” or similar in French. This field shows the gap in your pension fund. 

The amount shown is the maximum amount that you can pay in by making voluntary, lump-sum contributions. You are also free to make smaller payments towards closing the gap.

It is important to note, though, that the amount shown on your pension fund statement is just an estimate. The actual amount you will be able to contribute can be lower than the provisional estimate. Among other factors, your pension fund will account for retirement savings you may have in vested benefits accounts and the pillar 3a when calculating the maximum amount you can actually pay in.

If, in particular, you have a substantial amount of pillar 3a savings, the actual amount you can pay in to close your pension fund gap may substantially differ from the amount shown on your statement.

How can I make a voluntary contribution towards closing a pension gap?

Making voluntary buy-ins using your freely available money is relatively easy:

• Submit the form: Typically, occupational pension funds provide a buy-in form that you have to fill out and submit for approval. Some pension funds make the form available on their website. You may also be able to obtain and submit the form through your employer.
• Transfer the money: Your pension fund will calculate the exact amount you are eligible to contribute, and determine whether your proposed contribution fits into that limit. If they approve your application, they will send you their bank account information. You can then send the money to their bank account using a bank transfer.
• Get the tax certificate: At the end of the calendar year, your pension fund will send you a tax certificate detailing your total voluntary contributions within that year. You must submit this certificate along with your tax declaration in order to receive the tax deduction.

What are the advantages of making voluntary contributions to close pension gaps?

Paying in money from your freely available savings to close pension gaps has two main advantages:

• Tax deductions and exemptions: You can declare any voluntary buy-ins when filling out your tax declarations. The amount is deducted from your taxable income in full. Once the money is credited to your pension benefits, it no longer counts towards your taxable wealth, and the interest earned does not count as taxable income.
• A higher pension: Depending on your pension fund, making voluntary buy-ins to close gaps can result in your receiving pensions that are closer to your pre-retirement income. However, this is not always the case. You can find more information under the points to check before closing pension fund gaps.

What are the disadvantages?

Buying into your pension fund is not always beneficial. Before you make voluntary contributions, you should carefully consider these aspects:

• Inflexibility: Once you contribute money to your pension fund, you can no longer access that money until you either reach retirement age, or meet the criteria for early withdrawals. The criteria for early withdrawals are largely identical to those that apply to the pillar 3a.
• Opportunity costs: Swiss pension funds are a relatively secure investment, with benefits guaranteed by the LOB Guarantee Fund. However, the interest paid by most occupational pension funds is fairly modest. Historically, major stock market indexes have largely delivered better returns than most Swiss pension funds. It is important to consider possible opportunity costs. The pillar 3a can provide an alternative, as it has the same tax benefits but gives you more freedom to choose how assets are invested (using pillar 3a savings accounts, retirement funds, or asset management, for example).
• Your situation can change: Which pension fund you have plays a decisive role in determining whether or not closing pension fund gaps will benefit you, and how. But pension funds are linked to employers. If you change employers, you will have to participate in your new company’s pension fund, which may have very different terms and conditions than your current pension fund. If you are not employed in Switzerland when you retire, your only option will be to withdraw your benefits from a vested benefits foundation as a lump sum.
• Impact of marriage and divorce: Unlike regular assets, pension fund benefits cannot be regulated by a marital agreement. If marriage or divorce are considerations, it is important to check whether buying into your pension fund fits into your overall financial plan. In some cases, voluntary contributions can also be used to narrow the gap between two spouses' pension benefits.

Are there any limitations on voluntary buy-ins?

Before you make additional, lump-sum contributions towards closing your pension benefits gap, there are a few important limitations you should understand:

• Three-year hold on withdrawals: After you make a voluntary buy-in, you have to wait three years before you can make a standard lump-sum withdrawal or an early withdrawal for housing, self-employment, or leaving Switzerland. 
• Early withdrawals for real estate must be repaid first: If you have made early withdrawals for home financing, you must repay the amount withdrawn first, before you can make voluntary buy-ins to close the pension gap.
• Limitations for new arrivals: In the first 5 years after moving to Switzerland, your pension fund buy-ins cannot exceed 20 percent of your insured salary.

What should I check before closing gaps in my pension fund?

In Switzerland, many aspects of the pension model, terms, and conditions are decided by the occupational pension fund itself. Financial solvency also varies between pension funds

Before you make any voluntary contributions to close pension gaps, it is very important to carefully check these points:

• Pension fund solvency: Your pension fund’s financial solvency ratio is normally shown on your annual pension fund statements. This figure is called the “Deckungsgrad” in German, and the “Degré de couverture” in French. Some pension funds include this figure on your annual pension fund statements. Otherwise it is usually published on the pension fund’s website. A solvency ratio of 100 percent or more shows that the pension fund is solvent. The further above 100 percent the ratio is, the more financially healthy the pension fund is.
• Pension model: Some pension funds let you receive an old-age pension that is based on both compulsory and voluntary contributions. In this case, closing the gap in your pension benefits results in a higher pension. But there are also pension funds that require you to withdraw benefits resulting from extra-obligatory contributions as a lump-sum at retirement. In this case, making voluntary contributions does not result in a higher pension, though it does add to the capital you will receive as a lump-sum.
• Disability and survivor’s pensions: Whether or not buy-ins will result in higher disability and survivor’s pensions depends on your pension fund. If, for example, your pension fund already includes supplemental life insurance that extends disability and survivor’s pensions to match your actual salary, then making voluntary buy-ins will not result in higher pensions. It is also important to check who could receive a survivor’s pension.
• Inheritance: Some pension funds pay out your benefits to your heirs if you die. Others do not. Among those that do, the rules governing which heirs can inherit your benefits vary. It is helpful to check how your money will be inherited before turning it over to your pension fund.

Can I use pillar 3a savings to close gaps in my occupational pension fund?

Yes. If you have pillar 3a retirement savings, you can withdraw these assets early for the purpose of closing gaps in your pension fund. The money is transferred directly from the pillar 3a retirement foundation to your occupational pension fund. Because the assets remain in tax-sheltered retirement saving vehicles, the transfer does not affect your taxes at all. You cannot claim tax deductions. You do not pay any retirement capital withdrawal tax, as the assets remain within tax-privileged retirement savings.

Transferring assets from the pillar 3a to your pension fund can make sense if you are nearing retirement age, and want to close your pension fund gap in order to receive a higher pension. However, that only works if your old-age pension accounts for both compulsory and voluntary contributions.

More on this topic:
Compare Swiss vested benefits accounts now
Compare Swiss pillar 3a accounts now
Compare Swiss pillar 3a funds now
How to choose the right pillar 3a retirement saving solution
Swiss occupational pension funds explained
The Swiss three-pillar retirement system explained