Vested benefits account: Basics & Tips on Payout, Interest Rates and Investment Strategies

Reading Time: 10 minutes

In 1995, the Vested Benefits Act (FZG) regulated vesting in the event that the insured person leaves the pension fund before the insured event occurs. This means maximum flexibility of the second pillar of Swiss pension provision and avoids disadvantages in the event of career changes. To this end, the accrued pension assets are transferred in the event of a change of benefits provider. Important: In many cases, the vested benefit credit cannot be transferred directly to a new pension fund. If this is the case, a vested benefits account must be opened, for which the insured persons themselves are responsible. It may therefore be worthwhile to find out what is available in the vested benefits area at an early stage.

In the following, we offer background information and important tips on vested benefits accounts in Switzerland.

The most important at a glance

• If the pension capital from the second pillar (occupational pension plan) cannot be transferred directly to another benefit provider in the event of a change in occupation, it must be parked temporarily in vested benefits accounts. These are offered by so-called vested benefits institutions.
• Insured persons are free to choose the provider for a vested benefits solution. They then instruct their previous pension fund to transfer the assets there.
• Since saved pension assets must in principle remain in the pension cycle, the assets are temporarily parked in a vested benefits account in the absence of a pension fund.
• Since there is thus no interest in real terms on vested benefits accounts, greater attention must be paid to any fees.
• Securities are an alternative. This type of investment is mainly suitable for long-term investments.

In which cases do I need a vested benefits account?

There are various situations in which the saved pension assets cannot be transferred directly to a new pension fund in the event of a career change.

This applies in the following cases, for example,

• new self-employment without follow-up insurance
• Unemployment
• Parental leave
• Divorce (transfer claim to former spouse)
• Income falls below BVG minimum wage
• Emigration or career break
• Change of employer if not all of the vested benefit credit can be transferred to the new benefits provider

The path to a new vested benefit account solution

In any case, decide for yourself which vested benefits foundation offers you the most lucrative opportunities for your retirement assets! If you leave a company, you are responsible for opening a vested benefits account yourself in the cases mentioned as examples above. If you do not react, your pension capital will be held by the “Stiftung Auffangeinrichtung”, the national pension fund, after a certain period of time.

To open a vested benefits account, simply contact the provider of your choice directly. In the meantime, online offers facilitate the setup. To get the best possible overview, it is a good idea to seek advice in advance.

What to do with a new employer and a different pension fund?

Your professional situation has changed again and you are taking up a job that is subject to compulsory insurance again? The pension assets must now flow back into the new pension fund and your vested benefits account is closed.

Vested benefits accounts in comparison

A comparison of interest rates (second pillar, vested benefits accounts) of the largest Swiss banks and financial institutions shows at first glance: They are currently below the BVG minimum interest rate for foundations (1.0 percent for 2017-2022). Unlike pension funds, vested benefits institutions are not bound by this minimum interest rate.

Provider	Rate of interest
BVG Contingency Fund	0.4 %
Bank CLER (ex Coop)	0.4 %
Banque Cantonale Vaudoise	0.3 %
Basler Kantonalbank BKB	0.6 %
Berner Kantonalbank BeKB	0.75 %
Credit Suisse	0.4 %
Luzerner Kantonalbank	0.4 %
Migros Bank	0.4 %
PostFinance (Post)	0.01 %
Raiffeisen	0.8 %
St. Galler KB	0.5 %
UBS	0.4 %
ZKB	0.4 %
Valiant	0.5 %
ABS – Alternative Bank Schweiz	0.00 %

Source: FinanzMonitor

Comparison portals such as FinanzMonitor or comparis enable an up-to-date comparison of the conditions.

For a comparison of yields, the pure comparison of interest rates is not sufficient

Negative interest on savings in vested benefits accounts is not permitted in principle. However, if interest rates tend towards zero, as is currently the case, pension assets still lose value in real terms when fees are taken into account. You should note, for example, that the above-mentioned providers charge fees of between CHF 0 and around CHF 36.

Opening an account is usually free of charge. However, vested benefits institutions often charge a fee for early withdrawals for homeownership. Likewise, fees are not uncommon if the account is closed within one year.

Some banks offer fee reductions if a mortgage is taken out with them.

Vested benefit policies are also affected by low-interest rates

Policies contain insurance benefits and this means a reduction in the return. With a practically non-existent interest rate, the profitability of policies is thus questioned in a similar way as with vested benefits accounts, which are pure savings investments. If insurance cover for disability or death makes sense for you, the alternatives are currently more profitable. And these consist of buying a Pillar 3a or pillar 3b risk insurance policy and investing the pension fund assets in more lucrative investments.

Securities for higher return

If you expect to invest your vested benefit assets for longer than about three years, experience shows that securities promise a higher return. Banks and vested benefits foundations offer securities funds with different weightings of shares and bonds.

Note for the securities solution:

• If you re-enter employment, the securities must be sold and transferred to the new pension fund. If the prices have fallen below the purchase price during the investment, only a reduced vested benefit credit can be transferred. The expected investment period should therefore be a few years.
• Decide on an investment strategy that suits your risk awareness.
• Keyword performance: Compare the performance of different funds over a longer period of time. This way you can see how the fund has performed even in weak years.

How a profit-oriented strategy pays off

The compound interest effect plays a major role in pension planning. After all, we are talking about long terms. With a pure vested benefits account, however, those who get back the amount paid in can currently consider themselves lucky. Adjusted for inflation, it will currently always be accompanied by a real loss. With high-performance funds, on the other hand, an average annual return of five percent can be expected over the last ten years.

The following sample calculations illustrate this:

• Vested benefits account for an interest rate of 0.01 percent per annum and pension assets of CHF 10’000
• Credit balance in one year: CHF 10’001
• Credit balance after five years: CHF 10’005
• Credit balance after ten years: CHF 10’010

alternatively:

• Vested benefits custody account with an assumed performance of 4 percent per annum and an initial credit balance of CHF 10’000
• Credit balance after one year: CHF 10’400
• Credit balance after five years: CHF 12’166
• Credit balance after ten years: CHF 14’802

The capital for old-age provision would double in the second example in about 18 years. In comparison, the interest of 18 francs achieved in the first example would mean a high real loss of purchasing power.

Vested benefits account payout: When is this possible?

On what date can I apply for payment of my vested benefits and what about taxation?

The statutory provisions are authoritative for the payment of vested benefits. Accordingly, payment can be requested at the earliest five years before the AHV retirement age and up to five years thereafter. The earliest date is therefore 59 for women and 60 for men.

Vested benefits are generally paid out as a one-off payment. Pensions are paid from the second pillar exclusively by pension funds. If you are still employed subject to compulsory insurance, you should enquire with your pension fund whether any existing vested benefit credit can be brought in there to increase your pension entitlement.

Payment before ordinary retirement only in defined exceptional situations

The exceptions in which an early payout can be requested are very narrowly defined:

• Leaving Switzerland for good: The compulsory part of the retirement assets can only be paid out when emigrating to an EU/EFTA country if there is no longer any compulsory insurance. Otherwise, account holders can only receive the non-compulsory part.
• Disability: If a full disability pension is drawn from the Federal Disability Insurance, payment of the vested benefits account can also be requested.
• As a cross-border commuter, the permanent cessation of gainful employment in Switzerland: No gainful employment may be pursued in Switzerland and there may be no residence in Switzerland. In this case, the vested benefits can be paid out if the cross-border commuter permit is canceled.
• Purchase of residential property: Within the WEF (homeownership promotion), all or part of the pension assets can be withdrawn from the vested benefits account. A withdrawal is possible at intervals of five years up to five years before reaching the AHV retirement age. Possible uses include the purchase and construction of the owner-occupied residential property and the repayment of mortgage loans. The money can also be used for renovation or participation in housing cooperatives. Shares in a tenant public limited company can also be acquired.
• Death: If the holder of a vested benefits account dies, the assets go to the legal beneficiaries. The legal regulation applies, according to which the first beneficiary is the spouse. This is followed by minor children and children up to the age of 25, provided they are still in education. Subsequently, persons are taken into account who have lived with the account holder for at least five years prior to the account holder’s death. In addition, these persons must have been substantially supported by the account holder. Finally, children of full age and other legal heirs are considered.

Optimize taxes through distributed payout of pension assets

All assets from the second pillar as well as from pillar 3a are taxed once with the payout. However, a reduced tax rate is applied to this part of the income. The income during the term, on the other hand, remains tax-free.

Because of the tax progression, it is best to spread the payouts of pension fund assets, vested benefits, and Pillar 3a assets over several years. Good to know: Up to two vested benefits accounts are permitted. In this respect, splitting vested benefits credit balances into two accounts can also make sense. At the same time, the insolvency risk is minimized by splitting them between two vested benefits foundations. If you are looking for the greatest possible security, you should therefore split pension assets of over CHF 100’000 (up to CHF 100‘000 privileged treatment) between two vested benefits foundations or invest part of them in value credits.

The tax rates are progressive in most cantons but vary. For example, a withdrawal of a capital sum of 250’000 francs results in tax amounts of between 10’217 and 23’103 francs for a married man aged 65, depending on the canton.

Possible forms of investment are regulated by law

Vested benefits accounts are often offered by banks as well as by some non-bank vested benefits foundations. In addition to the classic accounts, the law also provides for insurance policies that offer coverage in the event of death or disability. However, this insurance cover must be paid for with a premium that is charged to the return.

The persistently low level of interest rates is unlikely to offer any prospects for savings investments in the medium term. It is true that there have been phases of so-called sideways movements recently. Nevertheless, a rapid rise in interest rates is not to be expected due to the high levels of government debt.

Therefore, another form of investment is gaining in importance: the vested benefits custody account. The providers of such custody accounts offer the option of investing in funds. In doing so, they ensure that your pension assets are invested in accordance with the legal provisions. These regulate in particular the proportion of risky investments.

The following maximum amounts apply:

• Real estate pledges: 50 percent
• Equity component: 50 percent
• Investment in real estate: 30 percent
• Investment in foreign currencies (without hedging): 30 percent
• other alternative investments: 15 percent

Investment horizon as a basis for decision-making

In the long run, investing in the stock market has always proven to be a profitable investment. This is at least true if attention is paid to broad diversification. Nevertheless, it is important to consider in each individual case how long the assets in the custody account are likely to remain invested. After all, there are always price slumps on the stock market that have to be weathered. Are your funds likely to remain invested until retirement or will you soon be putting them back into a pension fund? In general, an investment horizon of at least three to five years has proven to be advisable for investments in funds.

Save taxes with a later withdrawal

If you withdraw your vested benefit assets rather late, you can save further taxes in addition to the staggering payout. Both the assets of the occupational benefit scheme and those from pillar 3a (self-provision) are not taxed during the period in which you do not dispose of them. This means that you do not pay any wealth tax and also do not have to pay tax on interest and dividends.

Therefore, please note: Most foundations allow the deferral of withdrawal until age 70 (for men) or until age 69 (for women).

No interest rates in sight – lucrative alternatives

Did you know that individual asset management of your vested benefit assets is possible? The advantages of this form, which is not known to many investors, are low fees, tax optimization, and individual management of your pension assets.

ETF and individual securities possible with individual asset management

Here, the investment is made individually, taking into account the statutory investment guidelines for pension assets. Even individual securities are conceivable from a credit balance of CHF 500’000 with some providers. Below that, investments are made in investment funds and partly in ETFs (Exchange Traded Funds). This means maximum flexibility for you.

Digital and personal: institutional tranches

For institutional tranches, no retrocessions (reimbursements from product providers to asset managers, comparable to commissions) are paid. This reduces the fees for the client.

In this way, innovative new providers enable efficient asset management for a broad audience. With some digital wealth advisors, this includes the investment of pension assets.

Frequently asked questions (FAQ)

What happens to the vested benefits account in the event of death?

In the event of the death of the account holder, the pension assets are paid out to the legal beneficiaries.

Is it possible to open several vested benefits accounts?

Up to two vested benefits accounts can be opened. The two accounts must be held with different foundations. Only one account can be opened with a single provider.

Is a negative interest rate possible?

A negative interest rate is not permitted for pure savings solutions. However, there is no requirement regarding the minimum interest rate, as is the case with pension funds.

Continue reading in our journal:

• Switzerland’s 3-pillar principle
• Background on Private Equity
• Digital asset management