Early retirement: what you need to know

Most occupational pension funds allow their members to draw their retirement benefits early – from the age of 58 or 60. You can draw your OASI (old age and survivors’ insurance) pension from the age of 63. 

In the Swiss pension system, your OASI pension and occupational pension normally replace your earned income. If you stop earning a professional income before you reach ordinary OASI retirement age (known as the reference age), you'll have an income gap that needs to be bridged. Several options are possible:

Early withdrawal of occupational pension fund benefits

If you draw your occupational pension fund benefits early, your retirement capital will be lower than in the case of regular retirement because you'll have fewer contribution years and interest credits. In addition, the conversion rate used to convert your assets into a lifelong pension will be reduced. Pension funds generally cut the conversion rate by 0.15 to 0.2 percentage points per early withdrawal year. If you stop working two years earlier, you could easily lose out on more than 10 percent of your pension.

Early withdrawal of OASI pension benefits

Drawing your OASI pension early will also result in a lifelong reduction in your pension. If you take your pension two years early, it will be reduced by 13.6 percent. If you draw it one year earlier, you’ll lose out on 6.8 percent of your pension.

Drawing your pension early therefore only pays off if you die relatively early. What's more, early withdrawals drive up OASI contributions, which early retirees also have to pay (more on this below). Women born between 1961 and 1969 benefit from lower reduction rates.

How can I bridge my income gap if I take early retirement?

In the Swiss pension system, your OASI pension and occupational pension normally replace your earned income. If you stop earning a professional income before you reach ordinary OASI retirement age (known as the reference age), you'll have an income gap that needs to be bridged. Several options are possible:

Early withdrawal of occupational pension fund benefits

If you draw your occupational pension fund benefits early, your retirement capital will be lower than in the case of regular retirement because you'll have fewer contribution years and interest credits. In addition, the conversion rate used to convert your assets into a lifelong pension will be reduced. Pension funds generally cut the conversion rate by 0.15 to 0.2 percentage points per early withdrawal year. If you stop working two years earlier, you could easily lose out on more than 10 percent of your pension.

Early withdrawal of OASI pension benefits

Drawing your OASI pension early will also result in a lifelong reduction in your pension. If you take your pension two years early, it will be reduced by 13.6 percent. If you draw it one year earlier, you'll lose out on 6.8 percent of your pension. 

Drawing your pension early therefore only pays off if you die relatively early. What's more, early withdrawals drive up OASI contributions, which early retirees also have to pay (more on this below). Women born between 1961 and 1969 benefit from lower reduction rates.

Bridging pension

Many pension funds offer early retirees a bridging pension, which allows them to avoid withdrawing their OASI pension early. A bridging pension is particularly attractive if your employer contributes to it or if you think your life expectancy is considerably reduced. In most cases, however, early retirees have to finance the bridging pension themselves, with the pensions they draw being deducted from their accumulated pension fund assets. 

Further financing options 

Where possible, the best way to bridge the income gap between early retirement and regular retirement is with private savings, such as pillar 3a assets or vested benefits assets, which you can generally withdraw up to five years before reaching OASI retirement age. Assets from endowment insurance policies are also suitable – provided they are paid out during early retirement. Premature cancellation of the policy is often not worthwhile because it results in a loss. The surrender value is usually significantly lower than the total capital paid in. 
Depending on the situation, you can also increase your mortgage and use this money to bridge the income gap. However, many banks don't allow older borrowers to increase their mortgages because they don't meet the affordability criteria.

Your obligation to pay contributions won’t end until you reach your reference age. So if you take early retirement, you’ll still have to pay OASI contributions. This applies even if you draw your OASI pension early. OASI reform: the new rules governing your retirement.

The compensation office calculates the OASI contributions owed by non-gainfully employed persons on the basis of their assets and pension income. For example, if the assets of a single, early retiree amount to CHF 500,000 and their annual pension income is CHF 75,000, they must pay OASI contributions of CHF 4,399 per year. Depending on the compensation fund, there may also be administrative costs of up to 5 percent.

Important: The compensation office doesn’t automatically invoice early retirees for OASI contributions. Instead, early retirees must register with the local branch of the compensation office in their municipality of residence as non-gainfully employed. Otherwise, they run the risk of having gaps in their pension contributions. In addition, the compensation office can demand back payment of any unpaid contributions it detects in the last five years – together with interest on arrears of up to 5 percent. 

If you take phased retirement or continue to work part-time after early retirement, you can reduce your OASI contributions. Additionally, your contributions on your reduced income will generally cover your OASI obligations, as well as those of your spouse.
 

It can make a big difference financially whether you retire in January or December:

Payments into pillar 3a

If you’re a gainfully employed person but not insured in a pension fund, you may pay up to 20 percent of your income but no more than CHF 36,288 into pillar 3a each year. The later in the calendar year you retire, the more you’ll earn in the year of your retirement and the more you’ll be able to pay into pillar 3 and deduct from your taxable income.

Taxes on pension fund withdrawals

If you withdraw some or all of your pension fund assets as a lump sum, you’ll have to pay tax on the withdrawal in the year in which the pension becomes payable. The due date is normally the day after the termination of the employment relationship. Hence, if your retirement date is 31 December, your pension fund withdrawal won’t be taxed until the new year. This can make a big difference: if you withdraw your pension fund, vested benefits and pillar 3a assets over several tax periods, you can easily save several thousand francs in lump-sum payout tax.

OASI contributions in the event of early retirement

Early retirees often have to pay several thousand francs a year in OASI contributions until they reach the ordinary OASI retirement age. If you work for at least nine months in the year in which you take early retirement and your work-time percentage is at least 50 percent, you’ll be deemed to have fulfilled your OASI contribution obligation for the year in question, and no additional contributions will be due. 

Plan your retirement yourself: these are the most common mistakes 

When you retire, you can have your pension fund assets paid out as a lump sum or withdraw them as a pension. A mix of both is also possible. The biggest advantage of a pension is that it is paid out for as long as you live. However, your pension will lose value over the years because very few pension funds compensate for inflation. Given an annual inflation rate of 2 percent, the purchasing power of CHF 3,000 will shrink to around CHF 2,450 in 10 years’ time.

If you draw your pension assets as a lump sum, you’ll remain financially more flexible and generally save on taxes. Pensions must be taxed as income every year. Capital is only taxed once – at a lower tax rate. As a result, a lump-sum withdrawal is often more attractive. Under no circumstances, however, should you opt for a lump-sum withdrawal for tax reasons alone.

In most cases, OASI and occupational pensions are no longer sufficient for people to maintain their accustomed standard of living, even after regular retirement. Early retirement further exacerbates the problem. Many prospective pensioners are now forced to withdraw at least part of their assets in the form of a lump sum so that they have enough income in retirement.

Whether you opt for a pension or a lump sum, your decision is final and will affect your quality of life after retirement. So prepare yourself well. Weigh up the opportunities and risks of each withdrawal method carefully and draw up a financial plan. It will show you how withdrawing a pension or a lump sum will affect you in the long term. This will greatly help you make the right decision.

The cost of early retirement at 64 instead of 65 is roughly equivalent to one year’s salary. One year’s income is lost, adjusted for the lower income tax and the OASI contributions for those not in gainful employment, which must be paid until regular OASI retirement age. In addition, OASI and occupational pensions are lower on a lifelong basis following early withdrawal.
If the single man in our example takes early retirement at the age of 64, it will cost him around CHF 92,600 (see table). If he retires at the age of 62, the total cost will be CHF 274,800 and, at the age of 60, the cost will be CHF 447,800.

More and more pension funds are offering their insured members the option of compensating for reduced benefits on early retirement by making voluntary buy-ins. Insured persons who have already made all the pension fund buy-ins necessary to obtain full ordinary benefits can then make additional buy-ins. 

Buy in to your pension fund: What you need to bear in mind 

The additional retirement benefits mustn’t exceed the benefits on regular retirement by more than 5 percent. Insured persons might exceed this limit if they work longer than planned. By deferring their retirement, they not only continue to pay into the pension fund, but they also benefit from a higher-than-expected pension conversion rate.

Ask your pension fund what will happen to the excess capital paid in before you make a buy-in. As a rule, it expires in favour of the pension fund. Read our tips about the OASI, occupational and pillar 3 pensions on a regular basis:

If you want to gradually reduce your working hours, you can also opt to draw merely part of your OASI pension and/or occupational pension early. You can draw your pension between the ages of 63 and 70 in up to three phases. Many pension funds allow partial retirement from as early as 58 or 60.
 

When companies cut jobs, they often opt to first send their oldest staff members into early retirement. Affected employees should carefully examine all options for their pension fund assets so that the loss of income in retirement isn’t excessive. Depending on the situation, they can either remain insured with their previous pension fund, draw their pension early or transfer their retirement assets to a vested benefits account. 

Some employers cushion the financial impact of involuntary early retirement with a severance payment. It may make sense from a tax perspective to pay the severance payment into your pension fund.