Pension fund options for sole proprietors and the self-employed

Self-employed individuals enjoy more flexibility when it comes to social security; however, they must still fulfil specific obligations. The need to take independent responsibility for retirement provision also has its challenges and downsides. Without mandatory pension contributions, self-employed individuals must be extra vigilant to ensure they save adequately for retirement.

Mandatory 1st pillar (AHV/IV/EO)

Just like full-time employees, self-employed individuals must also contribute to the first pillar, and this forms the foundation of their social security coverage. The first pillar consists of old-age and survivors’ insurance (AHV), disability insurance (IV) and the income replacement scheme (EO).

A key difference is that, unlike employees, self-employed individuals pay both the employer and employee portions. Additionally, the self-employed don’t contribute to unemployment insurance nor participate in its benefits.

First pillar contributions are based on net income, with rates adjusted according to earnings.

Optional 2nd pillar (occupational pension)

Participation in the second pillar is voluntary for self-employed individuals earning above the required threshold. Opting in provides additional retirement benefits and risk coverage for disability and death, similar to the protection full-time employees receive.

Contributions to the second pillar are tax-deductible up to the maximum contribution limit, and this creates a financial incentive for self-employed professionals to build a more secure retirement fund. We will further explore the mechanics of optional 2nd pillar pension for the self-employed in the next section.

Pillar 3a and 3b (private retirement savings)

Pillar 3a and 3b play a crucial role in retirement planning for self-employed individuals. These are the optional private savings portion of Switzerland’s 3-pillar social security model.

Pillar 3a allows for tax-deductible contributions, making it an attractive savings tool for long-term financial security. The annual contribution limits vary depending on whether the individual also participates in a 2nd pillar scheme.

On the other hand, pillar 3b represents unrestricted savings and investment opportunities that are not tied to retirement. While pillar 3b contributions do not offer the same tax benefits, they provide greater flexibility in terms of investment choices and accessibility of funds. They also offer an additional option for those who wish to exceed the maximum contribution limit of pillar 3a.

We will explore the pillar 3a in more detail in a later section.

If you were previously part of a mandatory occupational pension scheme and are now transitioning to self-employment, you have the flexibility to choose between several options for managing your existing 2nd pillar funds.

These “vested benefits” are the retirement savings which have been accumulated in your occupational pension plan when you leave your job before retirement age. As such, they remain your rightful property, and you can decide between one of the following options:

1. Vested benefits account: You can choose to park your funds in this special type of bank account where they continue earning interest at a relatively low but stable rate until you can withdraw them at retirement. This conservative option ensures the capital remains secure.
2. Vested benefits policy: You can use the funds to take out a vested benefits policy, which is an insurance-based investment that offers a combination of interest and risk coverage (such as disability or death benefits). It provides more security, but usually lower returns compared to other investment accounts.
3. Vested benefits deposit: This is an investment-based option where funds are placed into dynamic, potentially higher-yield financial instruments like stocks, bonds, or mixed portfolios. This approach offers the potential for better returns but comes with higher risk.
4. Early withdrawal to invest in a business: Swiss law allows, under certain conditions, the early withdrawal of funds from the second pillar to start a self-employed business. This option is only available to individuals who genuinely become self-employed and are recognized as such by the AHV (e.g., sole proprietorship). An early withdrawal is not permitted if the individual intends to establish a corporation (e.g., GmbH or AG).

The withdrawn funds can be used as start-up capital but will lead to a reduction in retirement benefits and are taxed as a lump-sum payment, with the tax burden varying by canton. Therefore, this decision should be carefully considered, as failure in self-employment can have significant financial consequences.

What should you consider before withdrawing your 2nd pillar funds to start your own business?

If you leave your full-time job to become self-employed, you have the option to withdraw your vested 2nd pillar funds to start your own business. The advance withdrawal must be made within one year of becoming self-employed.

If you are partially self-employed (e.g., running a side business while still employed), you can only access your vested benefits once you fully leave your job and are no longer covered by an employer's occupational pension plan. The 12-month period for withdrawal starts from the point when you become exclusively self-employed. Documentation proving self-employment, such as AHV registration, is required.

While this option provides valuable initial capital for your business venture without needing to take on debt, it’s important to consider the risks, as these funds are meant for retirement security. There is always the very real danger that your business fails, and you may then leave yourself vulnerable by having eroded your retirement savings.

Furthermore, the withdrawn funds cannot be reinvested into a pension scheme later, so ensure sufficient retirement planning if withdrawing your existing pension funds.

Choosing between voluntary 2nd pillar contributions and pillar 3a savings depends on several factors, including the relative tax benefits, insurance coverage, flexibility, and how accessible the savings are for other uses.

Tax considerations

Both the voluntary 2nd pillar and pillar 3a offer excellent opportunities for tax-deductible retirement savings for the self-employed. However, the fact that you can typically contribute up to a maximum of 25% of your AHV salary to the 2nd pillar along with simultaneously contributing up to the small limit (CHF 7258) to pillar 3a, generally means the occupational pension fund offers superior tax-saving opportunities compared to pillar 3a (which has a limit of only 20% of salary up to a maximum of CHF 36,288 when you are not part of an occupational pension fund).

This difference is not so pronounced at lower incomes, but the 2nd pillar becomes especially attractive for high-income earners as it does not have a fixed cap like that of the pillar 3a.

Insurance protection

Occupational pensions come with built-in insurance coverage for disability and death. While this offers added protection, the options to customize coverage based on personal circumstances are limited. For example, contributions towards a survivor's pension are mandatory, even if you have no dependents. This in turn dilutes your benefits, as you may be paying for coverage you don’t want or need.

On the other hand, pillar 3a focuses primarily on retirement savings and offers limited insurance protection. Some plans include optional coverage for disability or family protection, but additional risk insurance may be required, and these extra policies are not tax-deductible.

In other words, if you value risk protection, 2nd pillar may be the best choice as it provides in-built, tax-deductible cover. However, if you are primarily interested in tax-deductible retirement savings and prefer to manage your insurance cover independently, pillar 3a is the better choice.

Contribution flexibility and purchase options

Occupational pension plans, even when joined voluntarily, generally require regular contributions (e.g., fixed percentages of income) and follow more rigid structures defined by the pension fund. The process for adjusting contributions is often more complex and less flexible compared to pillar 3a.

That said, the 2nd pillar allows for additional and retroactive contributions to fill gaps from previous years. This feature is particularly advantageous for self-employed individuals who may have experienced irregular income or inconsistent pension contributions earlier in their careers.

Pillar 3a offers significant flexibility in how much and when you contribute within the annual limits. You can increase, decrease, or skip contributions depending on your financial situation, making it ideal for self-employed individuals with fluctuating incomes.

Furthermore, starting from 2026, individuals will be allowed to make retroactive payments to cover gaps in pillar 3a contributions from 2025 onwards. This was previously not allowed and was a significant disadvantage compared to the 2nd pillar. While the change enhances the flexibility of pillar 3a even further, the conditions and restrictions in retroactive purchases are typically more stringent than for the 2nd pillar.

Access to savings and use of funds

The pension fund (second pillar) is primarily intended for retirement provision and can be withdrawn no earlier than five years before the statutory AHV retirement age. However, an early withdrawal is possible under specific conditions, including:

• Purchasing owner-occupied property
• Starting a self-employed business
• Permanent emigration to a non-EU/EFTA country

Pillar 3a is also subject to legal withdrawal conditions. Early withdrawals are permitted for:

• Purchasing owner-occupied property
• Starting a self-employed business
• Permanent emigration from Switzerland

In both cases, early withdrawals are subject to lump-sum taxation, which varies by canton. A withdrawal also reduces retirement savings and should be carefully considered.

The verdict: which is best for the self-employed?

To summarize the previous points:

Choose pillar 3a if you want flexible contributions and greater control over your retirement savings. It is particularly suitable for individuals with fluctuating incomes or those who want to tailor their investment strategy. Additionally, it allows for tax-advantaged savings with some flexibility in investment choices.

Alternatively, you can opt for voluntary contributions to the second pillar if you are a high earner looking to maximize tax savings while benefiting from built-in insurance coverage for disability and death. It is also an attractive option if you want to build a more stable retirement plan and secure a financially protected life in old age.

For many self-employed individuals, a combination of both pillars offers the best balance of tax benefits, protection, and flexibility.