How does Switzerland's three-pillar pension system work?

Switzerland's pension system rests on three pillars, each serving a distinct function. The first pillar (AHV/AVS) is the mandatory state pension funded by payroll contributions from all residents and employers. It provides a basic retirement income and covers survivors and disability. The maximum combined AHV pension for a couple is capped at 150% of the individual maximum to ensure redistributive fairness.

The second pillar (BVG/LPP) is mandatory occupational pension insurance for employees earning above the BVG entry threshold (CHF 22,050 in 2024). Employer and employee contributions are pooled in pension funds and invested. The accumulated capital converts to a pension at retirement based on the conversion rate set by law. Employees can also make voluntary buy-in contributions to close gaps, which are fully tax-deductible.

The third pillar is voluntary individual savings. Pillar 3a (tied pension savings) offers a tax deduction on contributions and tax-free growth. Pillar 3b is free savings with no special tax treatment. Together, the three pillars aim to replace 60% to 80% of pre-retirement income for the average earner. Higher earners typically need significant third-pillar savings to maintain their standard of living.

This is general information only, not professional tax advice. Consult a qualified tax professional for your specific situation.