Advance Withdrawal of Pension Fund Assets to Purchase Residential Property
People wanting to finance residential property with funds from their pension fund can withdraw their pension fund assets early. This means that more equity capital is available, the mortgage is smaller, and less interest has to be paid. This makes sense especially if you only have a small budget. On the other hand, in some circumstances it can lead to gaps in your pension provision that you will then need to close.
The advance withdrawal of pension fund assets to purchase your own home increases your equity capital. Because more money is available for the purchase, less is needed from the bank. The mortgage is smaller and less mortgage interest has to be paid. The minimum amount that can be withdrawn early is CHF 20,000. Up to the age of 50, there is no upper limit – it is possible to use all of your pension fund assets for purchasing residential property. After age 50, you can withdraw either the value of the assets at age 50 or half of the current vested benefits – whichever is higher. This can be done up to three years before normal retirement, unless the pension fund has a more favorable regulation. This also applies to the pledging of pension fund assets.
If the Property is Sold, the Money Must Be Paid Back
In the event of an advance withdrawal, the pension fund enters a "restriction of the right of disposal" in the land records. This means that, if the owner-occupied property is sold, the money that was withdrawn in advance must be paid back to the pension fund in full. If more money becomes available later, the money can be paid back voluntarily in tranches of at least CHF 20,000. Only the final payment may be less, in order to close the balance.
An advance withdrawal leads to a pension gap. For this reason, the amount of the advance withdrawal should be paid back by retirement age, or a private pension solution should be found to compensate for the gap. Otherwise the pension fund will pay out lower benefits on retirement. The same applies under certain circumstances in the event of disability, or for the surviving dependants in the event of death. Anyone withdrawing money early from their pension fund should therefore check with a specialist whether any gaps will arise in pension provision and how these could best be closed.
Tax Must Be Paid on an Advance Withdrawal from the Pension Fund
The money withdrawn from the pension fund must be taxed at a reduced rate. These taxes cannot be settled using the sum withdrawn. If the money is paid back to the pension fund at a later date, the tax will also be refunded, without interest, however. After an advance withdrawal is made, tax-privileged, voluntary purchases of pension benefits can only be made again once the money withdrawn in advance has been repaid in full.
The Advantages and Disadvantages of an Advance Withdrawal at a Glance
- You pay less interest because your mortgage is lower.
- In certain circumstances, you can prevent tax progression when you withdraw your pension fund assets on retirement, because the amount has been reduced by the sum withdrawn in advance.
- You have to pay tax on the advance withdrawal (reduced rate).
- You can deduct less mortgage interest from your taxable income.
- You will receive fewer benefits in your retirement, and also, depending on the rules of your pension fund, in the event of disability or death.
- You cannot make any tax-privileged, voluntary purchases of pension benefits until the advance withdrawal is repaid.