Has anyone here made a large payment into their pension scheme? By large I mean approaching or exceeding your employment income for the year. I was wondering whether there could be any issues with doing this?
I’ve done lesser amounts only, is there additional tax benefit from paying in high amounts? Wasn’t sure it actually works as you can reduce taxes only for a certain percentage so I went for smaller amounts over a couple of years
The highest payment I did in one year was about 50K. No issue with that.
Best to check with the pension fund if they see any risk (i.e., max buy-in amount left etc). I don't think there is a limit as to how much you can reduce your tax bracket but doesn't make sense to exaggerate.
There is an advantage in splitting it over a few years to maximize the tax benefit.
there are no specific downfalls, except if you contribute more than your taxes advantage (it reduces your taxable amount). You need also to ask your insurance for an official statement how much you can contrinbute (maximum) and the way to do it (reference, …).
A good article on the topic… https://www.credit-suisse.com/ch/en/…le-201712.html
As long as the tax authorities are not surprised about where this money comes from, then no issue. But you should not do a buyback of more than your next taxable income as otherwise you will not be able to deduct the full amount.
Also, I had read an article that its better to spread across years vs doing 1 big buy back but I can no longer find it.
yes, typically the tax rate goes up the more income you have so, say, doing 2 years of 50k contribution will typically get more tax benefit than a single 100k of contribution as you take two lots of top slice income versus one.
If one pays additional contribution into 2nd pillar with a plan to withdraw later (for a property) and not pay it back, then at least in 2nd pillars run by Axa the the withdrawal is pro rata from both obligatory contributions and the additional ones.
E.g. if there is 100k saved in the obligatory part and 100k in the voluntary one, then a withdrawal of 100k will reduced both of them by 50k.
I put about one year's salary equivalent into my pension when I first arrived here. My taxable income was so low, I got assistance with my health insurance premiums.
In hindsight it would have been better to have split it, but this was before EF was here to advise.
That is quite exceptional. Normally, there is a limit of 20% of the insured salary as max. yearly inpayment into the pension fund in the first 5 years after moving into Switzerland (exception: people who have already been members of a Swiss pension fund before).
You can do this without issues. Indeed I did do this in two different years. The tax authorities accepted my declarations in toto. As a result I paid minimal taxes in those years.
I did three things in advance that I believe were helpful :
1. I worked with my pension plan administrator to calculate the maximum that I could invest/buy back in those years.
2. I made careful simulations to estimate the amount of tax I would save depending on how much I invest within the maximum. It turned out that I was better off spreading my buy backs over several years to maximize the marginal tax savings in each year.
3. In the first of those years I wrote to the Geneva tax authorities in advance explaining my intent and asking them if I could benefit from the potentially large tax savings by investing large sums relative to my income in my pension plan. They replied in the affirmative, and I eventually included a copy of the correspondence in my tax return. Not sure if this step was necessary but it did give me tremendous peace of mind before embarking on the investment.
In general it makes sense to fill up your pension in one or two lump sums to get the immediate tax break. But remember if you take out your pension as a lump sum when you retire you'll pay tax on what you take out (and if you take the annuity you'll pay income tax on it). So it's not a totally 'tax free' decision. Maybe investing the lump sum somewhere 'safe' would have bigger benefits depending on your timelines.
(It's all easy in hindsight but, I bet, putting 100k into a index related fund in 2003 would have paid off more in the last 20 years than putting it into a pension)
i'd put it into the 1e fund which is around 40% in stocks so not a total loss. i wanted to do this during covid times, but i didn't have all the admin in place and the recovery was so fast there was no time to really get it done.
if there's a big drop this year, i'll plan to invest into the pension. i'll plan to take out a lump sum to pay off mortgage in a few years so it will not be sitting there for too long.
where i am the lump sum taxation is relatively small and i would stage out the lump sum to keep the taxation down to the lower thresholds (in basel land, you can take out 400k at a time relatively cheaply).
Whether 2nd pillar or investing in stocks seems more profitable it really depend on your residence and income. In Neuchatel or VD you can easily gain nearly 40% of what you put into 2nd pillar. That makes a long time until return from stocks would catch up with 2nd pillar, and that assuming you won't invest the 40% gained immediately.