Lump-sum payout tax: There are considerable differences between the cantons when it comes to taxes on lump-sum payouts.

Lump-sum payout tax: Seven things you should know long before retirement

You can save taxes throughout your entire working life by paying into your employee benefits insurance and private pension. When you withdraw these amounts on retirement, they are subject to their own special tax: lump-sum payout tax. This varies depending on the canton and the amount of capital involved. An astute strategy can sometimes save a lot of money. The following seven points summarize the key information.

1.    Lump-sum payout tax – a brief definition

Lump-sum payout tax is due when accrued retirement capital from employee benefits insurance and your private pension (the second and third pillars in the Swiss system) is paid out. More precisely, in the case of lump-sum withdrawals of pension capital from your pension fund and vested benefits accounts, as well as the payment of Pillar 3a assets.

As with income and wealth tax, the tax is collected at federal, cantonal, and municipal level. The church receives a share as well.

2.    Tax progression – second and third pillars are added together

Like income tax, lump-sum payout tax is subject to progression in many cantons. All payouts from the second pillar and Pillar 3a are added together. In Zurich, the tax on a withdrawal of CHF 250,000 would be CHF 15,383. Withdrawing twice that amount would incur tax of CHF 38,126. Payments in the same year for spouses or persons in registered partnerships are also added together.

Calculation examples: as of 2023; religious denomination: Reformed; civil status: single; source: Credit Suisse

3.    Cantons – the differences in lump-sum payout tax are enormous

Whether you live in the Canton of Zurich or the Canton of Zug, for example, makes a remarkable difference in the amount of tax you have to pay on lump-sum withdrawals. In addition to the cantonal differences, there are variations between municipalities as well. However, these are not quite as pronounced for municipalities within the same canton.

A withdrawal of CHF 250,000 would incur tax of CHF 12,773 in Zug, rising to CHF 30,686 for a withdrawal of CHF 500,000. In other words, living in Schwyz means saving around CHF 7,233 in tax on a payout of CHF 500,000 of pension capital versus Zurich.

Calculation examples: as of 2023; religious denomination: Reformed; civil status: single; source: Credit Suisse

4.    Planning – the earlier, the better

Planning early is essential to optimize the taxes due on the payment of your retirement capital. Ideally, you should be thinking about the "how" as early as 10 to 15 years before retirement, because there are some things that can no longer be changed once you are approaching retirement. The following points explain in more detail why getting your plans in order at an early stage is very much to your advantage.

5.    Staggered withdrawal – taking capital out of your pension fund and Pillar 3a over several years

As clearly shown by our examples in points 4 and 5, there are significant tax benefits to spreading lump-sum payouts from employee benefits insurance and your private pension over several years. This breaks up the tax progression.

However, assets in a Pillar 3a account can only be withdrawn in one go. To keep tax progression as low as possible, it may therefore make sense to open several Pillar 3a accounts. You pay into these while you are employed. When you retire, you do not have to withdraw your assets from all Pillar 3a accounts at the same time. You can stagger the payment of the capital in the accounts over several years.

Some pension funds allow the lump-sum payout to be split up into two tranches by means of partial retirement if you have decided not to draw a pension. Part of the retirement assets are paid out when you partially retire and the remainder is paid out when you finally stop working. However, the applicable conditions depend on the pension fund regulations.

A number of legislative changes take effect on January 1, 2024, as part of the AHV 21 reform. For example, the reform allows insured to withdraw their retirement benefits as a lump sum in a maximum of three stages, with one stage comprising all withdrawals made within a year and across several pension funds. The reform also introduces the option of making partial lump-sum withdrawals in cantons in which only two stages were previously permitted. However, there is a duty to provide information: If vested benefits are transferred, the pension fund must report the maximum number of withdrawals as a lump sum to the new pension fund.

Lump-sum payout tax: Savings through staggered withdrawal

Tax saving thanks to staggered withdrawal

Instead of having the assets from pillars 2 and 3a paid out in the same year, it may be worth spreading the withdrawal over several years. The amount of tax saved in this example is CHF 33,151.

6.    Purchasing pension benefits – save on taxes before lump-sum payout tax becomes payable

If you deal with the issue early enough, you can think about whether purchasing pension benefits makes sense for you. To find out whether this option is available to you, check your pension fund statement. By purchasing benefits, you can save on taxes, as the tax on your lump-sum payout when you retire will be lower than the tax you save on your income during your employment. Please note: There are time limits applicable to this method; for example, purchases may not be paid out as a lump sum in the three years that follow. It is equally important to check the funding ratio of your pension fund before making a purchase.

7.    Changing your domicile – moving to a different municipality or canton

If you are considering relocating before you retire, whether for tax purposes or other reasons, you should plan this carefully in plenty of time before your retirement if you want to benefit from lower taxes in your new home. It is also important to move your place of residence not only for the payout but on a permanent basis. If you return to your old domicile shortly afterward, you will end up having a lengthy conversation with the tax office.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. This material does not contain tax advice of any kind. You should consult with a professional tax advisor as you deem necessary.