Independent entrepreneurs are responsible for financing their own retirement. Here’s a recap of the key points to understand and expert advice.
Being your own boss has many advantages: the freedom to pursue entrepreneurship, flexible hours, and the opportunity to pursue your ambitions. However, self-employed individuals do not have the same benefits as employees when it comes to certain social benefits such as unemployment and accident insurance or retirement planning.
For instance, employees of a company are mandated by the Federal Law on Occupational Retirement, Survivors’, and Disability Pension Plans (LPP) to be covered under a 2nd pillar, provided their annual income from their employer exceeds CHF 22,050 (2024 ceiling). On the other hand, independent workers must voluntarily arrange for their retirement planning, except for mandatory contributions to the 1st pillar.
Avoiding unpleasant surprises
"The main concern of a self-employed individual when starting their own business is to develop their commercial activities. They can sometimes overlook the requirements regarding the 2nd pillar," says Eric Niederhauser, CEO of Retraites Populaires. Independents often become interested in their retirement planning about ten years before retirement. We strive to raise awareness of this issue so that they can take action as early as possible."
The decision to prioritize either a 2nd or 3rd pillar should be based on income levels and consistency. "At the beginning of their venture, incomes are often low and fluctuating. In such cases, we recommend opting for a 3rd pillar with flexible contributions, offered by an insurance company or a bank," explains Eric Niederhauser. "As an independent’s income grows, it becomes more advantageous to join a pension fund to benefit from death and disability coverage at more favorable costs. The 2nd pillar also allows for buying back contributions for years when the person could not contribute. This is advantageous from a tax perspective and improves retirement benefits."
Multiple options available
A self-employed person has three options regarding the 2nd pillar. They can join the pension institution of their professional association or the LPP Supplementary Institution Foundation. If the entrepreneur employs staff, they can also register in their employees’ pension fund.
Switzerland’s retirement planning 3rd pillar is divided into two subcategories: pillar 3a and pillar 3b. The main difference lies in their purpose and use. "Pillar 3a is specifically designed for retirement planning and offers attractive tax benefits," explains Charly Rupp, Director of Retirement Planning at VZ Vorsorge Bank. "An independent without a 2nd pillar can deduct contributions to pillar 3a from their taxable income each year, up to 20% of their income, to a maximum of CHF 35,280 per year (2024 ceiling)."
Contributions to pillar 3b don’t enjoy the same tax benefits but offer greater flexibility in fund usage. "Pillar 3b is more flexible than pillar 3a and can be used for various purposes besides retirement."
For independents aiming to secure their retirement, it’s crucial to address the matter as soon as possible. "The earlier you start contributing, the more substantial your capital will be due to interest accumulation, even if you’re making small contributions initially," emphasizes Édouard Barreau, financial advisor at Swiss Life Select.
Valuable advice
The experts interviewed recommend consulting financial specialists, brokers, or insurance advisors. "Such an approach allows for a comprehensive assessment of one’s situation, identifying any gaps, and implementing an appropriate solution," says Édouard Barreau. "I’ve encountered clients who earned a good income but neglected their retirement planning, leading to complicated situations upon reaching retirement age."
"Market solutions and offers should be compared based on costs, security, and interest rates," adds Eric Niederhauser, CEO of Retraites Populaires. "A key takeaway is not to subscribe to an offer without fully understanding its implications. Finally, it’s essential to regularly review your retirement planning, at least every five years, or during significant life changes such as childbirth, marriage, or divorce."
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The three-pillar system
Switzerland’s three-pillar system for retirement planning is designed to guarantee financial security for individuals throughout their lives, with a primary focus on retirement. The 1st pillar provides essential benefits and is funded by mandatory contributions from both workers and employers. The 2nd pillar complements the benefits of the 1st pillar and is compulsory for employees but voluntary for independent workers. Lastly, the 3rd pillar pertains to individual retirement planning, offering enhanced flexibility for saving or investing towards retirement.
Last modification 06.03.2024
