The higher property prices rise in Switzerland, the fewer people can afford home ownership. Especially younger people or young families cannot. On the one hand, because they have too little equity, and on the other, because the housing costs put too much strain on their budget. They have to contribute 20 percent of the property value as equity, because banks lend up to 80 percent of owner-occupied housing - and housing costs (interest, amortisation and ancillary costs) may not exceed 35 percent of gross household income. To increase the equity, they could sell or pledge securities, talk to their parents about an advance withdrawal or a donation, or ask the family for a loan.
Attention: Banks calculate housing costs for affordability using an imputed interest rate of 4.5 or 5 percent, not the current low mortgage rates in Switzerland.
Prepay or pledge pension assets
More and more homeowners are financing their house or flat with money from the 2nd or 3rd pillar. This has been possible for owner-occupied residential property since 1995. The 2nd pillar is the compulsory occupational pension plan, the 3rd pillar is the voluntary private pension plan (vested benefits accounts and vested benefits policies). Pension assets may be withdrawn in advance or pledged within the framework of the statutory promotion of home construction and home ownership:
The amount you can withdraw from the 2nd pillar is shown on your pension fund certificate. However, making an early withdrawal has disadvantages. On the one hand, your retirement capital and thus your payout and/or your pension decrease, and on the other hand, most pension funds reduce their benefits in the event of death or disability. No benefits are reduced in the case of pillar 3a accounts.
If you pledge your 2nd or 3rd pillar, your retirement capital and insurance cover remain intact and serve as pledged collateral for the mortgages. This allows you to mortgage the house or flat at a higher rate than 80 percent.
Good to know
If you use money from your pension fund as equity, at least 10 percent of the property value must be hard equity. For example, saved assets or credit balances from pillar 3a.
Withdraw money from the 2nd pillar: What is allowed?
Build or buy owner-occupied residential property (main residence).
Finance value-enhancing or value-maintaining conversions or renovations.
Repay (amortise) a mortgage debt.
Buy share certificates in housing cooperatives or similar participations.
Withdrawing money from the 2nd pillar: What is prohibited?
Pay the ordinary maintenance of the residential property.
Pay the mortgage interest.
Finance a holiday home.
Finance real estate abroad if it is not identical to the permanent residence.
Advance money from the 2nd pillar: What you should know
You can withdraw money from your occupational benefit scheme up to 3 years before you are entitled to retirement benefits to finance owner-occupied residential property. These funds may only be used for one residential property at a time. You can make an advance withdrawal of at least CHF 20,000 every 5 years; the maximum amount is shown on your pension fund benefit statement. If you are married, your partner must agree and give written consent to the advance withdrawal. Every pension fund is different. Therefore, read the pension fund regulations carefully before making an advance withdrawal or talk to your pension fund advisor.
Good to know
Up to the age of 50, you may make an advance withdrawal of the entire vested benefits of the pension fund for owner-occupied residential property.
Withdraw money from the 2nd pillar: The tax consequences
Pension assets that you withdraw in advance for owner-occupied residential property are taxable and are taxed at the reduced pension rate. An advance withdrawal of CHF 100,000, for example, costs CHF 3,500 to 5,500 in taxes, depending on the canton. You have to pay this amount with other funds; you may not use any pre-withdrawn pension assets for this purpose. If you later pay the advance withdrawal back into your pension fund, you can file an application and reclaim the tax paid.
Advance money from the 2nd pillar: Other consequences
As soon as you withdraw funds from your occupational benefit scheme, a so-called pension gap occurs: If you do not repay the money by the time you retire, you will receive less pension. This can lead to you having to limit yourself financially as a pensioner despite the 1st pillar (AHV), 2nd pillar (BVG) and 3rd pillar. Depending on the pension fund, disability or death benefits may also be reduced, which often depend on the amount of retirement assets in the pension fund.
Good to know
If you do not want to touch your pension fund and have a life insurance policy, you can pledge the policy (usually for 90 percent of its surrender value) and add it to your equity.
Pledge: Your advantages and disadvantages
These are your three biggest advantages when you pledge:
Your pension protection remains intact.
You need less equity.
You optimise your tax burden.
These are your two biggest disadvantages when you pledge:
You pay more interest on debt.
For some actions you need the consent of the pledgee (bank).
These are your three biggest advantages when you prepay:
You increase your equity.
You pay less interest on debt.
You reduce your mortgage debt.
These are your four biggest disadvantages when you prepay:
Your pension benefits will be reduced.
You can deduct less debt interest from your taxable income.
You must pay tax on the advance pension capital immediately.
You must repay the early withdrawal before you buy back into the pension fund.
Conclusion: Prepay or pledge
With an early withdrawal, you increase your equity and reduce your mortgage debt, but also your pension benefits and, in many cases, disability or death benefits. If you pledge the pension capital as collateral, this has no effect on your retirement benefits - lump sum or pension - and your insurance cover. In addition, you pay less tax on your income thanks to the higher interest on the debt. There is therefore a lot to be said for pledging the pension capital instead of drawing it forward. However, the answer to the question "prepay or pledge?" depends on your age and your financial situation:
The younger you are, the longer you have to repay the pension capital and compound interest without losing your pension. However, an early withdrawal is only recommended if you expect your financial situation to improve in the future. Up to the age of 50, you can make an advance withdrawal of 100 per cent of your pension assets from the pension fund for owner-occupied residential property.
The older you are, the less time you have to close the pension gaps. Many underestimate the remaining time until retirement and have to tighten their belts because they could not or only partially repay the early withdrawal. That's why from 50 onwards you can only withdraw the amount you would have been allowed to withdraw at 50 (vested benefits) - or half of the current balance, whichever is higher.
You should only use money from the pension fund for financing if there is no other way. If you have sufficient equity even without pension capital, you should only claim the pension capital if the housing cost savings should exceed the pension reductions.
Do you want to buy a house or apartment but don't have 20 percent equity? You can also finance owner-occupied residential property with money from the 2nd or 3rd pillar. Our asset and pension advisors will explain to you how this works and how it affects your pension provision, taxes and financial planning.