How the second pillar of Swiss pension works (cross-border guide)

Context

In a nutshell

• The second pillar (LPP) is mandatory for all Swiss employees and employers
• At the end of 2022, the beneficiaries of old-age pensions were 894 thousand people
• The minimum conversion rate is currently 6.8%

Key facts

• What: Compulsory occupational pension (LPP) to maintain the standard of living at retirement
• When: Data updated at the end of 2022, current rate 6.8%
• Where: Applicable throughout Switzerland for all employees
• Who: 4.6 million policyholders, 1,300 social security institutions
• Amount: Median income CHF 1,744, average CHF 2,206 per month

The Swiss pension system is based on three pillars. The first, the AVS, guarantees the coverage of vital needs through the contributions of active people. In the second pillar, on the other hand, everyone saves for themselves: policyholders pay contributions to finance their pension at the time of retirement. The so-called occupational pension, governed by the LPP, is mandatory for all employees and their employers.

Who is obliged and who is not

Wages between the entry threshold and the upper limit amount, i.e. between CHF 22,050 and CHF 88,200, are compulsorily insured. Several employers also insure salaries that exceed 88,200 francs: in this case we are talking about over-compulsory, optional and higher-than-compulsory social security. Most policyholders have a

Operational details

In a nutshell

• The tendency to withdraw capital is growing strongly: from 5.8 to 13 billion in 10 years
• Two federal votes rejected the conversion rate reduction
• The rate fell from 7.2% in 1985 to the current 6.8%

Key facts

• What: Mechanism for converting capital into income
• When: Reduced rate between 2005 and 2014
• Where: Compulsory and super-compulsory regime throughout Switzerland
• Who: Pension funds and collective foundations
• Amount: Capital withdrawals increased from CHF 5.8 billion to CHF 13 billion

How the conversion of capital into rent works

Next to the capital that is gradually saved during professional life with contributions from policyholders and employers, there is investment income, the so-called third party taxpayer. At the time of retirement, the old-age credit is converted into an annuity by means of a minimum rate, which concerns the mandatory part. In 1985, this rate was 7.2%: this means that for every 100,000 francs saved, the pensioner at that time received an income of 7,200 francs per year. Currently, the rate is 6.8%.

The last time the rate was reduced was between 2005 and 2014, due to two main factors. The first is the increase in life expectancy, which requires the payment of annuities for a longer period of time. The second is the reduction in interest rates, which has an impact on the financing of the annuities themselves.

The regime

Useful planning tools

To estimate your pension strategy, use the pension planner and the pillar 3 simulator.

Key points

In brief

• The second pillar allows choosing between a lifetime annuity and capital withdrawal
• The supra-obligatory pension scheme enables accumulating more savings
• The third pillar complements the first two with flexible solutions

Key facts

• What: Choice between annuity and capital for retirement
• When: At the time of retirement
• Where: At your pension fund
• Who: All LPP insured persons approaching retirement
• Amount: Depends on the accumulated capital and the applicable conversion rate

How to decide between an annuity and capital withdrawal

At retirement, each insured person must decide how to use their old-age savings accumulated in the second pillar. The first option is a lifetime annuity, paid until death and remaining of fixed amount. The second option is capital withdrawal, which can be in full or in part. The choice depends on various factors: personal financial situation, health status, family needs, and risk appetite.

Those who choose the annuity have the certainty of a fixed monthly income for life but give up flexibility in using their assets. Those opting for capital withdrawal can decide how to invest the received sum but assume the risk of depleting resources before death. It is also possible to combine both options, withdrawing part of the capital and converting the rest into an annuity.

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