Optimal redemption amount

How much to buy back in your pension ?

My pension certificate tells me that I can devote a large sum to redemptions.

But how much should I buy again this year?

This decision obviously depends on several factors, such as the overall organization of one's assets, the availability to make redemptions or even the desire to make tax savings. It is therefore appropriate to go through a multi-dimensional analysis of your personal situation.

In our August Newsletter we developed the notion of “tax return” of a pension buyout, indicating that the later the latter was done, the better its tax return. In this letter, we will focus on the main component of this return, namely the tax savings realized at the time of redemption.

Let's take the example of a taxpayer domiciled in Nyon, single and with a taxable income of CHF 250,000.-. Its marginal tax rate will be 45.6%, or almost one in two francs saved in the event of a buyout. Assuming this taxpayer has a total redemption reserve of CHF 200,000.-

If he buys back for CHF 50,000, his tax savings will be CHF 22,086.-. If he buys back (in one go) for CHF 100,000.-his tax savings will be CHF 37,753.-, for 150,000 buyback savings of CHF 60,560.-and 200,000 buyback would represent a saving of CHF 73,957.-.

We can then calculate the difference between the taxes saved in the event of redemptions spread over several years, compared to a single redemption of an equivalent amount. As it stands, the difference between a single buyout of 200,000.- and the same buyout broken down over 4 years represents a difference in terms of cumulative tax savings of CHF 14,387.- (in favor of the buyout broken down over 4 years).

This difference comes from the progressiveness of the income tax rates that all the Cantons and the Confederation apply. It therefore depends on the tax domicile of the person concerned.

We illustrate below the evolution of marginal rates in the case of our single person, knowing that different rates apply in the case of married couples.

Geneva (city) Vaud (Nyon) Neuchâtel (city)

Friborg (Bulle) Valais (Sion) Jura (Delémont)

It appears that all French-speaking cantons have very strong progressiveness in their income tax rates, for brackets between CHF 0.- and CHF 200,000.-.

A good optimization strategy therefore consists of planning your redemptions over a sufficiently long period so that the residual taxable income remains in the highest possible tax brackets (see red zones).

Other important elements:

• It will be remembered that the salary used for the redemption calculation is that of the current year, to which the contribution rates of the LPP plan are applied since the age of entry into the fund provided for by the plan (generally 25 years). In the case of salaries with high variability we will use the right years to make large redemptions, because the amount of the redemption calculation and the tax impact will both be significant (although with the pitfall of certain tax administrations which ask to smooth the calculation of income over several years, for the deductibility of the redemption).
• The origin of the funds used to make the buyout is irrelevant. If you have a redemption reserve without your income allowing you to do so, it is possible to use other sources, such as your free savings, or even an increase in your mortgage debt (if the criteria are united).
• The date of effective retirement is not always an element that we control, it can depend on health issues, decisions of our employer or quite simply the desire to slow down. Many experts recommend, out of prudence, planning your last redemptions before the age of 55, because the risk of being offered or imposed early retirement begins at the age of 58 and, in the event of taking all or part of the second pillar capital assets, the tax authorities reclassify deductions for redemptions within 3 years preceding effective retirement.
• However, a change this year in the LPP provides that from the age of 58 and in the event of dismissal or early retirement, the insured can choose to remain in the fund of his “future ex-employer” in choosing his own contribution rates on the basis of his last salary. In such a context, it is of course necessary to ensure the financing of the lifestyle, but this strategy can make it possible to “save a few years” with all the advantages that result from it, in particular the maintenance of the tax deductibility of redemptions that are too recent, a rate more interesting future conversion, etc.

Redemption of pension years is often considered a royal road to saving taxes.

It is preferable to use this tool in a well-defined context and strategy, because the effectiveness of the solutions that can be implemented can vary significantly depending on the tactics put in place.

Impact Financial Engineering is of course at your disposal to advise you on the fair amount of the buyout to be made, as part of the implementation of the solutions best suited to your needs.