Career transition

Career transition and pension assets

The exceptional health crisis we are going through is creating an unfavorable economic context. Therefore, some employers are forced to part ways with some of their employees.

The dismissed worker must then take numerous steps and in particular be concerned about the future of his professional pension assets. Here we offer some food for thought:

• Opening one or more account(s) /deposit(s) or vested benefits policy(s) and sharing of retirement assets?

It is possible to open two accounts /deposits / vested benefits policies with different foundations for each exit pension envelope. This approach can be interesting depending on the projects and the time horizon available to the dismissed employee. He can, for example, request to transfer pension assets meeting the minimum LPP to a traditional vested benefits account (cash) and the additional obligation to a deposit accompanied by a riskier management strategy, but offering better returns on the long term.

• Banking or insurance solution?

The vested benefits policies offered by insurance companies offer insurance services which may be interesting in certain very specific cases. In the event of death, for example, survivors will receive a death benefit, often higher than having paid it. It is possible to back up a benefit in the event of disability but risk premiums are generally expensive. In addition, these products generally only offer very low yields.

Banks offer the possibility of investing accumulated savings and achieving a significantly higher return. However, it is recommended to plan for a sufficiently long placement horizon due to fluctuations in performance, something that is not always easy to predict if the person concerned is looking for a new job.

• Free passage in cash or invested?

Vested benefits accounts today offer an interest rate close to zero, or even negative. If the worker intends to reposition himself quickly in the job market, this solution is recommended. Conversely, if the person concerned has a longer time horizon, for example in the case of gaining professional independence, the choice of a suitable investment strategy may prove more judicious and makes it possible to free yourself from the low interest rate environment.

• What about during the transition phase?

Old-age assets remain deposited freely. In the event of resumption of salaried employment, the worker is required to have his assets transferred to his new pension plan.

If he intends to move from employee status to self-employed, he can opt for payment of his assets within 12 months following recognition of self-employed status by the AVS. However, we do not recommend this approach, as it can lead to an erosion of pension capital if the self-employed activity does not produce the expected results. In addition, capital removed from the vested benefits envelope no longer benefits from its tax privileges (no taxes on wealth or capital income).

• What about people of early retirement age?

Vested benefits assets can be withdrawn no earlier than 5 years before the legal retirement age and are in principle paid in the form of capital, although some establishments offer the payment of an annuity, but with conversion rates generally very weak.  

In our December 2020 newsletter, we mentioned the possibility from January 1, 2021 of maintaining pension provision for dismissed workers over 58 years old (55 years old if the pension regulations propose it). They can in fact remain insured with their pension fund and thus choose the time of retirement under the conditions laid down by the fund's regulations (in particular with a conversion rate that is a priori more advantageous).

The choice of legal structure in the event of gaining professional independence (SA, Sàrl, independent status) during a career transition will be discussed in a future newsletter.

Buyout in third pillar A:

The pension reform will lead in the medium term to an increase in contributions and a reduction in pensions in the 2nd pillar. As this development is no longer in line with the constitutional principle according to which the insured must be able to appropriately maintain their standard of living in retirement, the role of the 3rd pillar will be strengthened and the Federal Council is responsible for implementing implement a new regulation to encourage this form of foresight.

The annual contribution that can be paid in pillar 3a has always been capped:

• At CHF 6,883 per year for active workers affiliated to a pension fund
• At 20% of the annual profit but a maximum of CHF 34,416 per year for active people not affiliated with the second pillar.

It will soon be possible for people with income subject to AVS who have not made payments into pillar 3a in the past, or who have only made partial payments, to make contributions to posteriori, fully deductible from taxable income.

This new possibility of redemption will be limited both in terms of frequency and amount of payments:

• The redemption will only be accepted for people with income subject to AVS.
• Redemptions will probably only be possible from the age of 25 (this point must still be clarified by the Federal Council).
• Redemptions will only be permitted for years during which the maximum contribution to pillar 3a has not been paid (for those not affiliated to the second pillar as well as for affiliates).
• Such payments will only be allowed every five years.
• The sum of total redemptions is limited to CHF 34,416.
• Any early withdrawals for the acquisition of housing made under pillar 3a will be deducted from the maximum redemption amount.
• The effective date has not yet been set.

This project, opening up possibilities for redemptions in the third pillar, brings this pension pocket closer to the characteristics which prevail in the second pillar, although with strong limitations on the amounts which can be committed to it.