As part of measures designed to balance the books, the Federal Council has greenlit plans to reform the tax and pension system in Switzerland. Under the proposals, the tax benefits of investing in second and third-pillar plans will be cut significantly.

How can paying into Swiss pensions lower my taxes?

Currently, anyone who wants to save on their Swiss tax return can do so by investing money in their second (BVG) and third-pillar (private) pensions. Around 7.000 francs can be paid into private plans every year, a value which can then be deducted from your annual salary or earnings when calculating income tax.

In a system that primarily benefits expats and those who have left Switzerland temporarily, residents with gaps in their second pillar payments can top these up by a set amount each year. These payments are also deductible, leading to massive tax savings, especially for middle to higher earners.

Under the current system, in theory, the government gets this lost tax revenue back when workers retire and claim their second and third pillar back as a lump sum, which is then charged what is called capital withdrawal tax. However, pensioners are able to circumvent most of these charges by taking out their pensions in stages or by spreading their private pensions among multiple plans.

How will new Swiss tax reform proposals affect my pension?

Now, the federal government wants to make this system less beneficial to retirees by increasing how much they pay when they withdraw their benefits. In the future, instead of a flat rate, the federal capital withdrawal tax will be charged based on how much the retiree was earning in the year they started claiming their pension.

For instance, under the current system a worker who had a salary of 140.000 francs a year when they turned 65, and hoped to withdraw 350.000 francs from their second and third pillar pensions, pays 6.580 francs in federal withdrawal tax. With the new system, individuals with this level of pay would be charged 17.800 francs - not to mention cantonal withdrawal taxes, which are often much higher.

Lower earners in Switzerland would benefit from tax reforms

The proposed change would affect middle and higher earners the most: an individual with a final working income of 250.000 francs a year hoping to withdraw 350.000 francs in retirement assets would pay 29.000 francs as opposed to 6.850. Lower earners would pay roughly the same, with a 60.000-franc-a-year worker paying 3.940 francs on their 250.000 franc withdrawal, as opposed to 3.650. Those earning less than this upon retirement would pay less tax.

Fundamentally, those who withdraw their pension as a lump sum would pay the same withdrawal tax as those who claim theirs gradually, practically eliminating the tax benefit of withdrawing the pillars in stages.

High-time pension tax benefits are scrapped, argues SP

The plans, greenlit by Finance Minister Karin Keller-Sutter (FDP) as part of a wider scheme to balance the federal books, are expected to earn the government a quarter of a billion francs a year. The council argued that the provision would help support federal and retirement finances and make pension taxes more progressive.

The proposal already has some support, with Social Democratic Party National Councillor Sarah Wyss telling 20 Minuten that it was high time that the system was reformed. She argued that pensions should primarily be used to fund life after work, rather than as a “tax-saving vehicle” for the affluent. She argued that the rich have been able to avoid millions in taxes thanks to the scheme and that therefore all tax benefits for retirement funds should be “eliminated.”

Swiss banks and insurance firms fear deterioration of pension finances

Others are not so sure, with Centre State Councillor Erich Ettlin arguing that the tax benefits are the only reason so many invest in their pension in the first place, calling the proposal a “breach of good faith.” "Anyone who paid in in the belief that this would bring them tax advantages would feel betrayed," added FDP National Councillor Andri Silberschmidt.

Swiss banks and insurance providers have also baulked at the plans, with Association of Private Banks director Jan Langlo calling the reforms “scandalous.” He warned that fewer people would pay into private pension funds if the plans passed, hurting their long-term financial health and making retirees more dependent on first and second-pillar pensions. 

When would the proposed tax changes come into force?

As part of the austerity measures proposed in Switzerland, the plans are expected to be drafted in 2024 before going out for consultation in January 2025. If they follow the same timeline as the budget cuts, the changes could come into force as early as 2027 - if they survive parliament and the ever-present possibility of referendum.