Emigration and pension benefits: how to save on taxes

A quick visit to the Schwyz Cantonal Bank is one way to save taxes. Keystone/Ennio Leanza

If you retire and withdraw your pension benefits as a lump sum, a tax is due. If you live in Switzerland, this takes the form of a capital withdrawal tax; if you live abroad, it is a withholding tax. The latter can be claimed back by Swiss nationals abroad – but only under certain circumstances.

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According to Swiss federal statistics on pensions, in 2022 only 44% of new recipients opted to receive a lifelong monthly pension, while 37% withdrew their pension fund benefits as a lump sum and 19% chose a combination of the two.

In other words, less than half of all new pension recipients opted fully for lifelong pension payments. The majority wanted to receive at least part of their pension savings as a one-off payout.

What is more advantageous: withdrawing your capital in Switzerland or abroad?

Lump-sum payouts from both the second (occupational) pillar of the Swiss pension system and the third pillar (non-compulsory private pension plan) are subject to tax. The amount due is calculated according to a special rate and independently of other income. 

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At least this is how things stand today. A Swiss government expert commission now wants to make the capital withdrawal tax rate dependent on income as well, and not just on the retirement capital. It is not yet confirmed whether this will go ahead.  

But let’s take a look at the status quo. We’re speaking here of people who leave Switzerland and settle abroad. The question then arises: is it better to withdraw your pension fund capital while you are still registered as living in Switzerland? Or is it advantageous, from a tax point of view, first to take up residence abroad and only then to withdraw the capital? 

Optimising capital withdrawal tax 

Basically, the following applies. If you withdraw your pension fund capital while still resident and tax-domiciled in Switzerland, a capital withdrawal tax is due, which varies from canton to canton. However, if you withdraw your capital only after moving away from Switzerland and settling abroad, a withholding tax is deducted. This tax also varies from canton to canton, but it is usually lower than the capital withdrawal tax. 

Withholding tax is lowest in canton Schwyz. Tax optimisers may therefore move their pension fund assets to a foundation in Schwyz before transferring the money abroad. Liberty Pension is a well-known foundation there, for instance. The Schwyz Cantonal Bank also promotes its vested benefits foundation. 

Markus Stoll is a tax specialist at the Zurich financial consultancy provider VZ VermögensZentrum. He advises anyone thinking of emigrating first to check whether Switzerland or the foreign country has the right of taxation.  

If the foreign country has the right of taxation, the withholding tax may be reclaimed depending on the double taxation agreement. In this case, transferring the assets to a vested benefits foundation in canton Schwyz is not necessary. 

However, the foreign tax authorities must confirm that the claimant is registered as living in the country in question. And this is where things get tricky again. If the new country of residence has the right of taxation, it may tax the capital withdrawal as income. This is the case of Austria, for example. It may then be worthwhile to have the pension fund capital paid out in Switzerland. 

In practice, however, emigrants often do not declare the lump-sum payment in their new country of residence. This is expressly not recommended here. 

Is there a double taxation agreement? 

The United States is one of the countries with which a double taxation agreement expressly provides for the reclaiming of withholding tax. This means that anyone taking up residence in the United States can reclaim the withholding tax in the canton where the pension fund is domiciled. The same applies to most European countries. 

However, the existence of a double taxation agreement is no guarantee that the withholding tax can be reclaimed. Thus, Switzerland has signed double taxation agreements with countries such as Denmark, the United Kingdom, Iceland, Canada, Sweden and South Africa – and yet Swiss nationals who have emigrated there cannot reclaim the withholding tax deducted from their pension fund assets. 

This is because, in the agreements in question, the right of taxation has been assigned to Switzerland. Although again, caution is required: the foreign state may also tax the lump-sum withdrawal and simply offset the Swiss withholding tax. 

Exception for public pension schemes 

Switzerland also has the right to tax capital payments from public-sector pension funds. This means that, in such cases, the withholding tax cannot be claimed back, and transferring the assets to a pension fund in canton Schwyz could be worthwhile. 

But here too, be careful: VZ VermögensZentrum warns on its website that some foundations in low-tax cantons charge several hundred francs in fees if the assets are parked with them for only a short time. 

In our Guide to Moving Abroad you will find tips for emigrating from Switzerland and living abroad. 

For example, a former federal employee has pension fund assets worth CHF500,000 ($545,000). In canton Bern, the withholding tax on this sum amounts to CHF45,325; whereas in Schwyz, it is a comparatively modest CHF22,825. The tax saving before transaction costs is thus CHF22,500.  

What applies to the second (occupational) pillar of the Swiss retirement system does not necessarily also apply to pillar 3a, the private pension plan. Thus, if you emigrate to Thailand, the withholding tax on your pension fund assets will be refunded, but not on your pillar 3a assets. This is also the case for Argentina, Mexico and New Zealand. 

Edited by Balz Rigendinger. Adapted from German by Julia Bassam/ts