Our dear politicians, benevolent but as smart as protozoa, think (a little too much) about our old age.
This is why, in a few years, we will probably all be forced to receive our compulsory pension assets in the form of an annuity.
What can be done to prevent this programmed tragedy?
An alternative is the one advocated by Jerome: using his 2nd pillar to buy your own homeThe problem is that not everyone necessarily aspires to become a homeowner... In addition, it is possible to withdraw all of one's pension fund assets only up to the age of 50.
Other possibilities are available to us:
- set up on your own
- leave permanently abroad.
But here too, not everyone is cut out to become independent or leave Switzerland.
By looking at the problem from every angle, I finally discovered another flaw in the system that can be exploited: the vested benefits account.
What is free passage?
A vested benefits account is an account into which the pension capital that you have accumulated is paid. in the event of temporary (or permanent) interruption of gainful activity.
If you leave your pension fund without joining another one, the pension cover must be maintained by paying the pension assets into a vested benefits institution (this is a legal obligation).
Typical situations are unemployment, a long stay abroad, resuming training, a baby break, etc.
The vested benefits account is tax-free until withdrawal. When paid out, the capital is taxed at a reduced rate (as for capital withdrawals from a pension fund or a 3rd pillar account).
Procedure
This is roughly how you can go about withdrawing your 2nd pillar (the day when this is no longer authorized) via free passage:
You leave your job shortly before the legal retirement age, for example at 58 (of course without looking for a new one - your servant is not a masochist!).
After resigning, you transfer your pension fund assets to two vested benefits accounts (this is the maximum number of accounts permitted by law).
Please note: the two accounts must be opened with different foundations or banks, otherwise the procedure could be considered tax evasion!
It is possible to withdraw your vested benefits at the earliest 5 years before the ordinary AVS retirement age, or 60 years for men and 59 for women.
The possibilities for prior withdrawal of vested benefits are the same as for the 2nd pillar, namely:
- Home ownership or mortgage repayment
- Final departure abroad
- Become independent.
So, when you reach the age of 60, you withdraw the assets from your first vested benefits account and, at the age of 61, those from your second account.
This procedure is called a staggered withdrawal and saves a fair amount of tax.
From this point on, you can freely dispose of your pension assets and invest them yourself in dividend-increasing stocks in order to create your own pension.
Example of tax savings in the event of staggered withdrawal:
Calculator used:
https://www.postfinance.ch/fr/particuliers/assistance/outils-calculateurs/impots-capital-deuxieme-pilier.html
- Capital amount: CHF 800,000
- Tax address: 1000 Lausanne
- Marital status: married
- Without children (means: the children are adults)
- Religion: Reformed
Result without staggering: Taxes (federal and cantonal) = CHF 101,191.
Result with staggering: Taxes (federal and cantonal) = CHF 86,078.
This represents a tax saving of more than CHF 15,000 thanks to the staggered payment plan.
Conclusion
I only recommend the proposed solution to park your pension assets for a few years, given the low interest rates offered on vested benefits accounts (currently 0.2% maximum).
This is why I would only consider this procedure from around age 55.
Before this age, I would favour other solutions, namely accessing property or becoming independent.
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Your article comes at just the right time, following the proposal by the LPP commission to lower the minimum LPP interest rate to 0.75%.
Link : https://www.admin.ch/gov/fr/accueil/documentation/communiques.msg-id-72032.html
This is all becoming a real farce. A little longer like this and these miserable forced accounts will no longer bring in anything, or worse, will be subject to negative rates.
This LPP is a real theft organized on a large scale on the backs of workers and employers. And no one says anything, everything seems normal. I don't understand how people can submit like this. And here I'm not even talking about the AVS or the LAMal. Social insurance in Switzerland has only one purpose: to enrich insurers and/or managers!
In short, thanks for your article. I find that it is a less good alternative than real estate which allows you to do it much faster and brings you much more income. In addition, I would not use it from the age of 58 either, because from this age you can apply for early LPP retirement. While you're at it, if you've held out until now, you might as well take advantage of it... At least let this big sh... be of some use!!!!
On the other hand, I find your idea interesting for the 50-57 age group who are no longer old enough to use the LPP to acquire (or amortize) a property and who are not close enough to receive an early LPP.
All means are good to recover the money that was scandalously stolen from us!!!
The aim of the State, which is thereby pursuing a public interest, is to ensure that citizens reach retirement age, when they generally no longer have income from a salary, have sufficient means to meet their needs and do not depend on public aid. In Switzerland, the State has set up a system based on 3 pillars:
– the 1st pillar is the AVS, which is a monthly pension paid by the AVS fund from retirement age. The amount of the pension depends only on the years of contributions (and not on the amount of contributions). The contribution is proportional to income. Higher incomes thus support lower incomes. The AVS is mainly financed by a levy on salaries (or the income of the self-employed). In this system, working citizens finance pensions more or less on a just-in-time basis. The problem with the AVS is that, in my opinion, it is a kind of “Ponzi scheme”, which can only work as long as there are enough working citizens, with a sufficient overall income base, to finance the pensions. However, due to the increasing life expectancy, on the one hand, and an unfavourable age pyramid, the AVS must be reformed at the risk of going bankrupt in the more or less near future. And any reform of course makes people grind their teeth…
– the 2nd pillar is occupational pension provision (LPP). The LPP is financed jointly by the employee and the employer (the employee's share is deducted from the salary and the employer's share is added). The employee can buy back LPP years (possible if he has not contributed all the possible years, if his salary has increased or if there is a gap, for example following the sharing of pension provision in the context of a divorce); buying back years is a good way (one of the rare ones) to make tax savings, since the amount of the buyback is deducted from the taxable income base and is no longer included in the wealth tax base. The LPP assets belong to the employee, who recovers them when he retires, or if he goes abroad or declares himself self-employed. Until now, the choice was given between an annuity or capital. The idea currently in the air is to tax the annuity; The aim is to put citizens under some form of guardianship, to prevent them from doing anything and losing their capital quickly, reducing the 2nd pillar to nothing and forcing the State to provide for its needs through public aid. The State's concern in this matter is certainly not unfounded; but it is still unpleasant to feel like you are under guardianship. Furthermore, over time, the remuneration of the contributed LPP assets (and therefore the amount of capital that can be withdrawn or the amount of annuity that can be received) decreases. I am not entirely sure I know the reason for this gradual decrease, but the funds, foundations and insurers that manage LPP assets regularly complain that they can no longer generate enough return to ensure the conversion rates.
– the 3rd pillar is made up of citizens' savings, which are completely free in this regard. These savings can take various forms (real estate, bank accounts, securities, gold, insurance policies, etc.). The linked pillar called "3a" allows tax deductions and can be withdrawn under the same conditions as the LPP. Free pension provision is not subject to any constraints. Some do not have the means to set up a 3rd pillar. Among those who have the means, some are provident and set one up, and others are not and consume or burn all their income and savings (this last category leaves me perplexed).
In any case, people will probably have more and more difficulty financing their retirement and the State will have to take measures to limit the damage. It is a safe bet that active citizens will be asked to contribute more significantly, through levies or taxes. VAT will also probably be increased little by little. And the ants will perhaps end up losing out compared to the grasshoppers. Unfortunately, the future is not all rosy.
The question for those who are seeking financial independence and are making a lot of efforts in this direction is: how do you avoid ending up being the turkeys in the farce?
Thank you Laurent for this long clarification. There are four things you raise and on which I would like to bounce back:
1) “meet their needs and not depend on public assistance”:
The intentions behind the social security system in Switzerland were laudable. It was indeed a question of ensuring that people who did not have the means to survive after ceasing their professional activity (due to retirement or disability), could survive despite everything (namely especially at the beginning to feed themselves and find housing). But unfortunately this system was designed as an administrative monster, wanting to manage everything, for everyone (not just the poor). We do not help people to become responsible if we take care of everything for them. This works for very young children or people who have real physical or mental disabilities. Today unfortunately the State encourages Mr. and Mrs. Everyone to rely on it. So we should not be surprised if it does not work. Social security should only be used, like all insurance, in cases of real necessity. A risk that is almost certain to occur (like retirement) is not a real risk! If you know you're going on vacation in a year, you put money aside, you don't take out insurance for it. It's the same for retirement. And too bad for those who don't do it, it's up to them to take responsibility. There will always be a very minimal net of real insurance for this kind of case.
2) redemption of LPP years:
This reminds me of the children they try to kidnap by luring them onto a bus with sweets... They promise you tax breaks in exchange... for money that you've had a hard time earning and possibly previously extracting from your rotten LPP fund! I've never made a better decision than when I was able to withdraw a good portion of my pension fund to buy my main residence, which I then rented out. I have a return on it of more than 5%, not counting the real estate capital gain. No comparison with the 0.75% minimum LPP interest rate that's coming. I'll let you do the math over 30 years, with compound interest, what that could mean as a difference!!! The tax gain is so laughable in comparison!!!
3) reason for the drop in the remuneration of LPP assets:
simply because it has become unmanageable, too big, with too many actors and intermediaries involved. Also because the LPP has lost its original purpose. Indeed, unlike the AVS which is a totally solidarity system, the LPP was more of an individual pension type, that is to say that what you save, with your employer, belongs to you. This is still the case, but the problem is that the gains from your money are only very partially paid to you. The rest is used to pay the salaries of managers and the pensions of baby boomers. That's why it doesn't work anymore. We must drop this farce and only keep the bare minimum, that is to say the AVS. For the rest, everyone manages on their own!!!
4) how not to be the turkeys of the farce:
difficult indeed… I think that only the purchase or depreciation of a property, via its LPP capital, is effective. But be careful not to buy just anything…
Glad to have created the debate with my article :)
I agree with Jérôme that occupational pension provision has become a huge farce, a good idea at the start but which has degenerated into a huge money pit that makes people irresponsible. The whole thing is doomed to failure with the aging of the population and the fall in yields.
If, on top of that, we are to be prevented from one day withdrawing our hard-earned savings in the form of capital, it is really high time to circumvent the system, whether through home ownership or the solution I have proposed.
Revolution !!!
I just discovered this blog! I don't know how I missed your blog when I already read a lot of blogs about the FIRE movement and investing.
Using the vested benefits account to withdraw the assets is a very good idea. In any case, if you are thinking of retiring very early, you don't really have a choice but to use a vested benefits account. And so you shouldn't have any problems as long as you manage to retire before age 58.
Congratulations on the blog, it's a really impressive job.
Hello “poor Swiss” 🙂
Thank you and congratulations also for your new blog.
I share the same 4 particularities that you cite in your “about” page:
– starting from almost zero at the beginning of the path to financial independence
– different perspective compared to other FIRE followers given that we are European and especially Swiss
– follow the journey, even though I only started my blog in 2010, only ten years after I began this long journey
– transparency: I regularly communicate the financial and personal status of this trip
Anyway, have fun on your quest. It's long, but worth it.