Identifying, avoiding, and closing pension gaps early on
If a pension is not large enough to cover a person's normal expenses, this is known as a pension gap. What are the potential causes of such a gap and what options does the Swiss pension system provide for avoiding or closing them at an early stage?
What is a pension gap?
The Swiss pension system stipulates that the statutory payments to the AHV (first pillar) and the pension fund (second pillar) should enable retirees to maintain their accustomed standard of living. However, the resulting pension essentially only covers 60% of the last salary or less. In Switzerland, this is in most cases not enough to maintain the current standard of living after retirement. Doing this would require 80% to 90% of the person's last income. The difference between the pension assets paid out and actual living costs is known as a pension gap.
Sample calculation for a salary of CHF 100,000
Despite uninterrupted contributions to the AHV and pension fund, only approximately 60% of the salary is covered upon retirement by the first and second pillars. However, as a rule of thumb, roughly 80%–90% would be required to maintain the same standard of living.
Situation before retirement
Situation after retirement
|AHV benefits (first pillar)
|Pension fund benefits (social second pillar)*
Calculating the pension gap
|Benefits from the first and second pillars
|Pension gap per year
* Assumption for second-pillar pension payout: CHF 30,000 (the actual benefits are shown on the pension fund statement).
Identifying possible causes of pension gaps
The amount of retirement pension paid out, and thus the size of the pension gap, depends on a variety of factors in addition to the last income:
- Missing AHV contribution years: Every missing contribution year reduces the pension paid after retirement by 1/44 for women and men. Contribution years are lost, for instance, if the AHV minimum contribution is not paid during a year due to childcare, studies, a language stay, or an extended trip.
- Part-time work: The pension fund contributions in the second pillar are based on annual income. The contributions are accordingly lower for part-time work, leading to a lower retirement pension. The same is true of the AHV retirement pension. Since the average income for part-time work is most likely lower than for full-time work, the AHV retirement pension is also smaller.
- Early retirement: In the case of early retirement, both the company and the employee make contributions for a shorter amount of time. This reduces the annual pension; additionally, the interest and compound interest of the missing contributions also disappear.
- Divorce: In Switzerland, the pension contributions from AHV, the pension fund, and the third pillar are fundamentally split in half between spouses during the marriage.
- High income: Generally speaking, the higher annual income, the greater the pension gap since statutory benefits are limited.
- Conversion rate: A decreasing conversion rate lowers the retirement pension, as the assets accrued in the pension fund are multiplied by this rate to calculate the pension.
Knowing the impacts of pension gaps
AHV and pension fund benefits are based on the minimum needs of retirees. This means that even the full retirement pension does not allow for a great deal of leeway. Many employees are not aware of the extent to which pension gaps can affect their standard of living in old age. Even in Switzerland, there are recurring cases of people who suddenly can no longer cover their daily needs in old age.
A frequent example is real estate owners who can suddenly no longer afford to pay their bills and have to sell their homes. In the case of immigrants, they may even be forced to return to their home country due to pension gaps. Simply because the cost of living is usually lower there.
When is a good time to make sure I don’t have any pension gaps?
For gainfully employed persons, the obligation to pay AHV contributions starts from January 1 after reaching the age of 18. For non-employed persons – pupils and students – it starts from January 1 after reaching the age of 21.
This means that anyone who is not gainfully employed due to their studies must make the minimum AHV contribution. Students should therefore take a close look at the consequences of their pension planning – which you should generally do every time your circumstances change. Be it a career advancement, an extended stay abroad, starting a family, or a divorce. Otherwise, we recommend starting to look at this topic by no later than the age of 50.
Closing pension gaps with forward-looking retirement planning
1. Checking AHV contributions
Missing AHV contributions reduce your pension by 1/44 over the course of your life. If you would like to know whether you have contribution gaps, you can contact the respective compensation office to order an account statement from your individual account (IA). Existing gaps can only be paid back for a period of five years.
The AHV 21 reform offers an additional option: Currently, if you continue to work after you have reached the reference age, you do not pay any AHV contributions on a gross salary of up to CHF 1,400 per month. Salaries in excess of this allowance are subject to contributions but do not count toward the amount of pension you receive. Following the entry into force of the AHV 21 reform, it will be possible to voluntarily waive this allowance. However, this must be requested separately from each employer. In addition, you can apply to have the AHV contributions paid after age 65 taken into account in the pension calculation. This makes it possible both to close previous contribution gaps and to increase your individual AHV pension amount through the additional contributions.
2. Planning for voluntary pension provision
In practice, 80%–90% of a person's last income should be used as a guideline for their needs in retirement. The difference between this amount and the amount provided by the first and second pillar benefits (approx. 60%) must be provided for privately – this is done via the voluntary or private pension provision:
- Pillar 3a: First and foremost, we recommend payments to the third pillar – for instance Pillar 3a. Due to the compound interest, it is worth getting an early start on retirement provision. If financially feasible, it is advisable for gainfully employed persons with a pension fund to make the maximum annual contribution to Pillar 3a of currently CHF 6,883. Said contribution can be deducted from taxable income.
- Purchase of pension benefits: As with Pillar 3a, voluntary purchases of pension benefits can be deducted from taxable income. Purchases of pension benefits usually enable a flexible choice between a higher pension fund pension or a higher lump-sum payout upon retirement.
For both options, the accrued retirement assets are not subject to wealth or income tax during the term. In the event of withdrawal in the form of a lump sum, both options are once again subject to tax – but separately from other income, and at a lower, preferential rate.
- Pillar 3b: Alternatively, Pillar 3b is also an option for private pension provision. With this option, the money remains available but there are no tax benefits, save for a few exceptions.
3. Request an AHV pension forecast and study the pension fund statement
You can request a pension forecast to see what your expected pension will be. This is particularly worthwhile for women in the transitional generation (born between 1961 and 1969) in view of the legal changes that enter into force under the AHV 21 reform on January 1, 2024.
In addition, the pension fund statement should be studied in order to determine the pension income. It is also very important to take a close look at your own pension fund: Is it stable? What do the regulations of the fund say?
4. Draw up a budget
It is imperative to draw up a budget and list the expected costs. The question: "When do I spend more money – while working, or during leisure time?" acts as a guide in this context. This lets you fulfill a few of your wishes, maintain hobbies, and indulge yourself a little during retirement.