Planning Retirement: The Eight Most Important Terms
Whether it's early pension withdrawal or pension deferral, early retirement or partial retirement, pension gap or coordination deduction: If you familiarize yourself with the most important terms for retirement, you'll be better prepared for it – even financially.
1. AHV/BVG Early Pension Withdrawal
Women normally retire at age 64, while men generally retire at age 65. Both men and women can withdraw from the AHV pension around one or two years early, but they have to continue contributing to the AHV. With an early withdrawal, the pension is reduced for life by 6.8% if you withdraw one year early and 13.6% for two years. You must apply for advance withdrawal in writing at the compensation office and at least three months before maturity.
In theory, you can receive pension fund retirement benefits (BVG) starting at age 58. However, each pension fund regulation states its earliest possible retirement age.
2. AHV/BVG Pension Deferral
You can defer the AHV retirement pension up to five years. This increases your pension for life. You must sign up for pension deferral by the time you reach the normal retirement age at the latest and its duration does not need to be specified in advance. The pension can be requested any time after one year beyond the normal retirement age on a monthly basis.
Deferring the BVG pension is possible. If you continue working, the conversion rate along with retirement assets and the retirement pension will also increase. However, a deferral depends on the pension fund's regulations: It may allow for retirement no later than five years after reaching the normal retirement age up until reaching the age of 70.
3. Pension Gap
The pension gap refers to the difference between the pension income as well as assets after retirement and what is needed to maintain one's standard of living. Pension gaps may go unnoticed – for example, if you took some years off while in school or after having children. People who choose to retire early usually also open a pension gap.
Purchasing pension benefits can minimize or close this gap. It is best to receive retirement advice before making a decision.
4. Early Retirement
Pension funds have long allowed for early retirement. This optional benefit is not required to be offered with BVG minimum benefits. The statutory minimum age for early retirement is 58 years of age. The only exceptions to this are when a company restructures or in occupations that can only be performed up to a certain age for safety reasons.
With early retirement, you have to reckon with a reduction of the retirement pension (see point 1). The earlier the pension is received, the shorter the contribution and compounding period are and the lower the conversion rate is. Furthermore, anyone who wants to retire early still has to make AHV and IV contributions up until reaching the normal retirement age.
5. Supplementary Benefits
Supplementary benefits for the first pillar (AHV) are need-based pensions. They ensure the livelihood of people who receive AHV/IV benefits but don't reach the minimum subsistence level with them. This is guaranteed in the constitution. Supplementary benefit amounts are determined by individual circumstances and continuously adapt to changing situations.
6. Coordination Deduction
The coordination deduction is the amount that will be deducted from the gross salary in order to calculate the pensionable salary (coordinated salary) in the second pillar. The deduction serves to coordinate the first and second pillars and ensure that part of the salary is not double-insured. Currently, the coordination deduction is CHF 25,095, which is seven-eighths of the maximum annual AHV retirement pension. For example, if you receive a yearly income of CHF 80,000, then you have a pensionable salary of CHF 54,905 with the pension fund.
7. Conversion Rate
This refers to the percentage at which capital is converted to a pension. How high the conversion rate is for mandatory employee benefits insurance is declared in the BVG. The minimum conversion rate is currently 6.8%. It looks different with the conversion rate of the extra-mandatory portion: Here, the pension funds may determine how high it is. Many pension funds already calculate with rates of under 6%, but in the future, the conversion rate could sink even lower, to under 5%. Individual pension funds have already announced this.
Early retirement also makes a negative impact on the conversion rate – both for mandatory as well as extra-mandatory assets. Pension funds generally reduce the rate by around 0.15 to 0.2% per year. That means that anyone who stops working two years earlier can only expect a conversion rate from 6.4 to 6.5% for the mandatory part.
8. Partial Retirement
In principle, gradually exiting the workforce is possible and is allowed by an increasing number of pension funds. The age limit in this respect – depending on the pension fund's regulations – is between 58 and 65 or 70 years of age.
If, for example, you reduce your full-time level of employment to 70% at the age of 60, you can receive 30% of the pension fund benefits and partially offset the loss in income.
Generally you are free to do choose whether you want to withdraw the retirement assets or receive them as pension. If you reduce your level of employment in more than three stages, you have to consider possible tax hurdles.