Why It's a Good Idea to Invest Five Minutes Every Four Years in Your Old Age and Survivors' Insurance
Federal Old Age and Survivors' Insurance (AHV) is a somewhat neglected topic compared to the second and third pillars: Although it accompanies us throughout our lives, some insured people have unnecessary contribution gaps through insufficient knowledge. The result is that their pensions are appreciably lower. In most cases, spending five minutes on the subject every four years would be sufficient to avoid this.
We do yoga, drink green smoothies, wear a Fitbit: Self-optimization is the name of the game. Yoga poses such as "cobra" or "bridge" are much better known that the three pillars on which the Swiss pension system is based. But there is an important parallel between yoga and retirement provision: Correctly executed and maintained, both lead to greater mobility in old age.
Lack of Knowledge about AHV Leads to Lower Pensions
According to Ueli Kieser, professor of social security law at the University of St. Gallen, insufficient knowledge of AHV is often the reason for contribution gaps in people's individual pension calculation. Many people don't notice the gaps until it's too late, he says, and, in most cases, the gaps can no longer be closed: "Because the AHV is compulsory for people in gainful employment and contributions are automatically deducted from your salary, there is no urgency to tackle the issue. But it would be neither very costly nor time-consuming to do so," says the expert.
The Three-Pillar Principle – the Swiss Pension System
AHV is part of the first of the three pillars on which the Swiss pension system is based. The three-pillar principle is designed to maintain people's accustomed standard of living in old age, in the event of disability, and for surviving dependants in the event of death.
The first pillar comprises Federal Old Age and Survivors' Insurance (AHV) together with Federal Disability Insurance (IV) and any supplementary benefits (EL). This is the compulsory state pension. It secures a basic standard of living upon retirement, and in the event of disability and of death.
The second pillar comprises the employee benefits insurance (BVG) and accident insurance (UVG). The second pillar is mandatory for employees with a gross annual income of more than CHF 21,330. It is intended to safeguard your normal standard of living, and, in conjunction with the first pillar, aims to cover 60% of your final salary.
The third pillar is voluntary and is used by individuals to close any pension gaps. It can also be used to close any gaps in the first pillar on one's own initiative. Self-employed people have more opportunities in the third pillar to make up for their lack of employee benefits insurance. Saving with Pillar 3a enjoys tax advantages.
The Most Important Questions and Answers on AHV
Who Is Subject to AHV Contributions?
- Everyone of working age resident in Switzerland.
- All persons gainfully employed in Switzerland, including cross-border commuters.
- People taking early retirement are also obliged to pay contributions until they reach normal retirement age.
- Married people who are not gainfully employed are insured via their spouse, provided that the latter pays double the minimum contribution into the AHV.
|Gainfully employed persons||Not gainfully employed persons|
|Start of obligation to pay contributions||From January 1 after
reaching the age of 17
|From January 1 after reaching the age of 20|
|End of obligation to pay contributions||Upon giving up gainful employment,
but at the earliest upon reaching normal AHV retirement age (women 64 years, men 65 years)
|Upon reaching normal AHV retirement age (women 64 years, men 65 years)|
How Much Do AHV Contributions Cost?
8.4% of gross salary, half of which is paid by the employer;
Persons not in gainful employment
At least CHF 482, max. CHF 24,100, depending on one's assets
7.8% of annual income; for incomes under CHF 56,900, reduced contribution rates apply
How Is the AHV Retirement Pension Calculated?
Four factors determine the level of your pension income:
- Number of contribution years
- The level of average gainful employment income
- Any parenting credits or credits for time spent caring for relatives
- Married couples receive a maximum of 150% of the maximum pension.
If the contribution period has been completed in full (women: 43 years, men: 44 years), the following pensions can at present be expected:
Minimum retirement pension per month
Maximum retirement pension per month
Maximum combined retirement pension for a married couple, per month
In order to receive the maximum pension of CHF 2,370, an average income of at least CHF 85,320 must have been earned for 44 contribution years (women: 43 years).
What Is the Impact of Early Pension Withdrawal?
A pension can be withdrawn a maximum of two years early. The consequences of an advance withdrawal:
One year early
lifelong reduction of 6.8%
Two years early
lifelong reduction of 13.6%
Recipients of an early retirement pension must continue to pay contributions. However, these contributions no longer affect the amount of their retirement pension.
What Is the Impact of Pension Deferral?
- Deferring AHV withdrawal results in a higher pension. The retirement pension increases with every month for which the AHV retirement pension is deferred.
- Deferral of less than one year is not possible. After that, the pension can be drawn at any time on the first day of a month.
- Drawing a pension can be deferred for a maximum of five years.
- Contribution gaps cannot be closed by means of a pension deferral.
What Are Contribution Gaps?
Contribution gaps arise if the full contribution period is not reached (women: 43 years, men: 44 years). They often occur unnoticed, and can be closed retrospectively up to a maximum of five years.
The Most Common Reasons for Contribution Gaps Are:
- Stays abroad
- Retirement of the husband or the wife
- The employer does not pass the contributions on to the compensation office.
What Options Are There for Closing AHV Contribution Gaps?
- Payments for contribution gaps can only be made retrospectively for five years.
- Persons who paid contributions into the AHV between the ages of 17 and 20 can be credited for these so-called "youth years" if they have contribution gaps.
- Special rules apply to contribution gaps that arose before 1979. Depending on the situation, an additional one to three years can be credited.
- Persons whose salary is subject to AHV contributions during the year in which they reach normal retirement age will be credited for these months of contributions.
Stop Contribution Gaps Arising in the First Place:
Invest Five Minutes Every Four Years
An account statement can be ordered at any AHV compensation office. This provides information about all contributions that have been paid and shows any gaps. Social security expert Ueli Kieser recommends ordering such a statement every four years. It's important to request a compilation of all accounts held with the AHV. This allows any gaps to be closed in good time.
Two Examples of How Contribution Gaps Can Arise
Contribution Gap Owing to Education and Residence Abroad
Jonas Meier is a chemist. His career started at the age of 16 as a chemistry lab technician. He spent four years working at the Technical University in Berlin. The account statement he orders from the compensation office shows that both the contribution years in Berlin and the three years he spent studying after his apprenticeship are missing.
What Does That Mean for Jonas Meier?
- The so-called youth years between the ages of 17 and 20 will cover the gap from his studies.
- Jonas Meier will receive a German pension for his employment in Germany. This will possibly be lower than a Swiss pension.
- His years spent abroad will lead to a contribution gap and hence a lower AHV retirement pension.
- As Jonas Meier is aware of the problem, he can make up for this loss independently via the voluntary third pillar.
- If some of these contribution gaps have arisen in the last five years, he could make payments retrospectively.
Contribution Gap through Divorce
Ines Huber got married when she was 30 and gave up her job in a bookstore to become a housewife. The marriage ended in divorce after 20 years. Ines Huber received alimony for her living costs; the couple had no children. When she was 56, she started working in a bookstore again. When she registers for her pension, she discovers that she has a contribution gap of six years. The gap arose between the time of her divorce and starting her last job.
What Does That Mean for Ines Huber?
- A back payment is no longer possible because the contribution gap arose more than five years ago.
- If she was already working between the ages of 17 and 20, these three youth years will be credited to her to cover the gap.
- Because Ines Huber receives a salary that is subject to AHV contributions during the year in which she reaches normal retirement age, the contribution months up to the month of her birthday will be credited to her.
- But Ines Huber will have a gap of at least two years, which will reduce her pension.