Are you independent? Here's everything you need to know about your pension

The status of independent (individual reason and not shareholder of an SA or Sàrl) marks an important step giving you a feeling of freedom, pride and accomplishment. However, this status comes with great responsibilities. Beyond the concern to keep your business dynamic and profitable, while covering all possible risks, you alone are responsible for ensuring your own retirement.

How to establish an optimal retirement plan if you work independently?

Swiss law offers you several possibilities in the form of the 3 pillars. If the contribution AVS or old-age and survivors insurance or (1st pillar) is compulsory for everyone, it is hardly enough to live comfortably after retirement (you will only receive the maximum AVS pension of 2,450 CHF per month provided that you have received income of at least CHF 88,200 per year.) A self-employed person must therefore consider other options to supplement their AVS pension.

Impact Financial Engineering offers various pension solutions as well as a pension plan developed for those who have decided to become self-employed. Here is our sound advice on how to save for retirement when you are self-employed.  

In Switzerland, the self-employed person is not required to contribute to professional pension provision (LPP) – an option that is usually offered by the employer. He can, however, decide to contribute to the 2^e pillar optionally (with a Foundation dedicated to the commercial activity in question) or at 3^e pillar (with a bank or insurance company), or both (2^e pillar and 3^e pillar).  

The 2^e pillar, is it possible for the self-employed?

Yes. It is entirely possible to make a 2^e pillar when you are independent.

In 2^e pillar or LPP, you have the option of insuring yourself with your staff (if you have employees) or in a separate contract. You must insure your staff with a pension fund. You can then also join the chosen pension institution, but can also opt for affiliation alone in another plan. If you plan to become self-employed, you also have the right to request advance payment of your vested benefits to become self-employed.  

Consult one of our pension advisors to find out how you can prepare for retirement with an optional LPP.

The LPP provides the insured with an old-age pension which supplements the AVS pension when he reaches retirement age, which allows him to receive sufficient income after retirement. The annuity paid is determined mainly by the capital available upon retirement.

The capital is constituted from regular contributions paid over the years and accumulated interest which is credited annually to the capital by the pension fund. Contingency plans often offer disability benefits and survivor benefits in the event of the death of the insured. The extent of benefits depends on the plan chosen or the regulations of the pension fund chosen, which may vary from one fund to another. Affiliation to a pension fund allows you to optimize your taxation, because the premiums are tax deductible to a certain extent.

For their employees, employers are required to provide professional insurance and contribute at least half. Self-employed people, for their part, must contribute in full to their own contributions.    

Do I need 3^e pillar to supplement my retirement savings?

Certainly! The 3^e pillar constitutes another private pension solution offered by Swiss insurance companies and banks. This is a combined retirement savings solution, for insurance solutions with risk coverage (death and disability insurance). Premiums may therefore vary depending on the extent of risk coverage and the insurance company's offering. Premiums also differ due to the diversity of capital investment methods (investing in funds consisting of bonds and stocks) and available investment products, the returns and risks of which can vary considerably.

We distinguish between 3^e linked pillar (3A) and 3^e free pillar (3B).

Pillar 3A is linked to retirement age, i.e. savings cannot be withdrawn before 5 years of legal retirement age. Premiums here are fully deductible from taxable income.

Pillar 3B offers more flexibility than 3A. Payments are free with the possibility of withdrawing savings at any time. Some cantons also grant certain tax advantages to this more flexible solution.

2^e or 3^e pillar? Which one is best suited to my situation?

Some of our independent clients ask us if they contribute to a 3^e pillar is more interesting than contributing to a 2^e optional pillar for a secure and adequate retirement. Certainly, the contribution to the 1st pillar or the AVS is obligatory, but to usefully supplement the performance of the AVS, you can adopt several strategies.

If you decide to only subscribe to 2^e pillar, you will have to pay 100% of your contributions. This amount can be very significant, especially if your business is very young.

If you prefer to go through 3^e pillar you could enjoy more flexibility. At the level of l‘tax savings, pillar 3A is more interesting than pillar 3B. With Pillar 3A, you can fully deduct your payments from your taxable income and significantly reduce your taxes. Pillar 3B is sometimes less advantageous since tax deductions can differ from one canton to another.

A self-employed person can deduct up to 20% of their profit under the 3rd pillar A, but a maximum of CHF 35,280 per year.  Your pillar 3A capital bears interest, the proceeds of which are exempt from taxes. In addition, Pillar 3A savings are not subject to wealth tax and the tax is only levied at the time of payment, at a very attractive reduced rate.

At a later date, you have the option of using your savings to fill a gap in the pension fund (LPP), buy or renovate a main home or reduce debt.  As partial payment is not possible, we advise you to open multiple 3a accounts.

As for those who already generate significant income, we recommend subscribing to both a 2^e optional pillar and a 3^e pillar for prepare as best as possible for your retirement. From a tax point of view, both are advantageous because high incomes can deduct the extra-mandatory part of their 2 from taxes^e pillar.  

Please note that as soon as you are affiliated with a 2^e pillar on an optional basis, you cannot pay on your 3^e pillar that the same amount as if you were an employee, i.e. 7,056 CHF per year. In this case, your tax savings will be less since your tax advantages linked to 3^e pillar a will be the same as those of an employee, but at the same time you deduct contributions to the 2nd pillar.

In any case, you and your family are covered in the event of death or disability.

Preparing for retirement requires a holistic approach. You need to cover all the blind spots when it comes to your savings with minimum taxation so you can use your hard-earned funds and meet all your retirement needs.  

Contact our office in Geneva and get a consultation with our trusted pension advisors. Together we can determine your pension plan so that you achieve financial independence in retirement.