Repurchasing the second pillar: less taxes, more assets (the full guide)

One morning, you wake up and you are 60 years old. Only a few years left before you retire. A well disserved rest after a life of hard work.  

Excited by this idea, you calculate your future pensions. Just because, out of curiosity. 

And then…you are taken aback. 

You tell yourself: “if only I had known…”  

But known what? That it is never too early to start saving money. 

And one of the best ways of increasing your 2nd pillar pensions and capital is to buy back years in your 2nd pillar.

It is also one of the least well-known one. I prepared a little article to tell you everything about this peculiar practice, typical of the Swiss system. 

BVG Buy backs : A practice presenting numerous benefits 

A long-term benefit: that of improving your future benefits. But also, and perhaps especially, an immediate benefit: saving on taxes.

 Finally, a medium-term benefit: make your savings grow. 

In the following lines, we will go over…  

  • What exactly repurchasing contribution years means? 
  • In what situations you can repurchase them? 
  • The three elements to consider before investing your money in order for your repurchasing to always be beneficial.
  • The simple trick that can make you save over 30% in taxes. 

 What is repurchasing of the second pillar? 

To understand this, quick reminder: the income for your retirement is insured by a social system based on three pillars. 

The first pillar is financed by the active workforce. It is paid out in pensions to current retired persons. 

You pay for others. And once you retire, others will pay for you. 

The second pillar consists of scarifying part of your monthly income, which you will be able to use later.  

 In the meantime, this money is placed in a pension fund or, in some cases, in a vested benefits account

This personal saving is mandatory for all employees once on 1st January following their 24th birthday but can be started earlier if your employer is generous, in principle from the age of 21..  

The third pillar, entirely optional, can be contracted by anyone in gainful employment (employed or self-employed). 

In a few words, BVG buy-backs are the difference between what you should have contributed if you had always worked under the same salary conditions (salary, contribution rate, interest, etc.) compared with what you actually contributed. The difference between what you should have contributed and what you did contribute is equal to the buy-back potential.

 What situations allow for a repurchasing of your LPP? 

  • You worked aboard before moving back to Switzerland. 
  • You interrupted your professional career (either to dedicate your time to an independent project, or take care of your family, for instance). 
  • You and your spouse got divorced and the separation of property scheme created a gap (or should I say a crater?) in your second pillar
  • You recently changed employers and you went from a simple mandatory regime to a supplementary regime
  • You negotiated a salary raise. First of all, congratulations! Secondly, it is possible to repurchase the amount you could have saved if you always have had the highest salary.   

Example: between 25 and 30 years old, you make 5,000 CHF per month. Between 30 and 35, your salary is 7,500 CHF. You can repurchase what you could have saved if your income was 7’500 CHF between your 25 and 30 years of age. 

How LPP/BVG buy-ins are created over time in your pension fund

Is repurchasing always attractive? Yes, if you pay attention to the following three aspects. 

Investing money and making it grow before receiving it later on, while saving immediately on taxes, is always advantageous. 

As long as you are aware of the potential impact of these three elements. 

The solidity of your marriage 

Nothing is more sacred than love. But the advisor in me must remind you that all you need is not (only) love.  

In case of a divorce, half of your second pillar will go to your (ex) sweetheart. This element is to be taken into consideration before placing all your savings in your LPP account. 

Occupational pension planning is a long-term project. So is your marriage? Perfect. Long live love! 

How stable your company is? 

 Your employer negotiates the conditions of your professional fund. But what happens if he goes out of business? 

Will you need to find a new pension fund?  

Will you have access to your money without changing the withdrawal conditions? 

This question is worth answering before adding money to your LPP account.

Your pension fund’s solidity. 

 You might say: “But Noé, what are you talking about, I did not pick my fund!” 

It is true, you did not choose it. But you have to make sure it holds water. 

 How? By checking certain vital parameters of your pension fund:

  • The current coverage rate
  • The return on your savings in recent years
  • Current conversion rates
  • etc.

 If we had to keep one essential criterion, it would be the coverage rate of your pension fund. Its what now? Its coverage rate. Please allow me to explain… 

Your pension fund receives money, invests it, makes it grow… in short, your pension fund has wealth. Or assets in other words.  

But it also owes you money. Just like it owes money to dozens, if not hundreds of thousands of other people. 

If the pension fund can pay all the pensions and/or capitals at once, it is considered to have a 100% coverage rate.  

Which is reassuring.  

 It highly unlikely that everyone suddenly asks for their money, but this rate nevertheless serves to provide information to about the pension fund’s financial health.  

If the rate is above 100%, all the better. 

Understand how your pension fund works and its financial health so that you can assess whether it would be worthwhile to make LPP/BVG purchases

 If the rate is below 100%, then your pension fund will have to stabilize its finances. How will this impact your saving? Surprise. 

And while surprises are nice at Christmas or for your birthday, this is not the case for your savings. 

That being said, other factors can be taken into account when judging a pension fund’s quality.  

But the coverage rate is one of the most important ones. It is also the easiest to judge.   

 Get in touch with us if you want us to help you make a health check-up of your pension fund if you are having doubts about its reliability. 

Do you wish to repurchase saving years and you duly factored in the three elements we just discussed? Well, we can now move on to the last part of the article.  

The tip to save as much taxes as possible when repurchasing your second pillar. 

Firstly: to take advantage of tax benefits, second pillar repurchasing must occur at least three years before you retire. 

 Then: in order to maximise your savings, space out your repurchasing. 

Take someone living in Froideville. This person wants to repurchase 100,000 CHF of savings. Let’s see how much they will pay in taxes after five years in the three following situations if we assume that after all deductions his taxable income is CHF 120,000.  

1st case: no buyback with a salary of CHF 120,000: they keep this amount and does not repurchase anything. After five years, they paid a little over 177,000 CHF in taxes. 

2nd case: buyback only in the first year of CHF 100,000 with a salary of CHF 120,000: the repurchasing at once allows them to save more than 25,000 CHF in taxes. 

3rd case: buy CHF 20,000 every year for 5 years on a salary of CHF 120,000: the repurchasing in several times allows them to save 37,000 CHF in taxes.

Examples of figures showing a split LPP/BVG purchase rather than a single purchase

 Finally, if you wish to repurchase years of saving, do it when you risk being imposed the most. 

 For example? Your career is thriving and you were promised a significant raise. In this case, wait until you receive your new salary before investing.  

Conclusion: small regular repurchasing for big savings 

We have gone over the three advantages of an LPP repurchasing.  

Short-term: you save on taxes. 

Medium-term: you make more of your money. 

Long-term: you benefit from a higher pension. 

To make the most out of these advantages, you have to make sure your pension fund is solid. Just like the company you are working for. And, if possible, just like your romantic relationship as well. 

 Finally, we demonstrated that it is advisable to pay small amounts in several times rather than one big amount at once. 

The best, as usual, is to have a personalised repurchasing plan, prepared by a professional. 

At FBK Conseils, we can accompany you in your savings repurchasing in order to maximise your benefits. 

In other words: less taxes, more assets!