Taxes on pension payments: no problem for the Swiss Abroad

No money worries in old age: for many, emigration is the path to happiness. Keystone

The Swiss government is drafting a savings plan which would eliminate a popular tax relief. If approved, this could make emigration even more appealing to retirees.

The government has presented an austerity package which includes many federal spending measures aimed at eliminating the budget’s structural deficit. One of the 60 proposals is aimed at increasing tax revenue – and it’s tough: the tax breaks given for second and third pillar pensions are to be abolished.

Currently, those who voluntarily contribute to second pillar pension funds or third pillar private pension schemes can deduct the amount from their annual taxable income.

When one then withdraws one’s savings at retirement age, it is taxed at a relatively low rate. This makes saving for a pension more attractive and makes it possible for many people to withdraw their pension later.

However, the tax rate for lump-sum pension withdrawals is now to be drastically increased in this new proposal, and it has triggered notable reactions in Switzerland. Even fiscal conservatives, normally strong supporters of austerity, are criticising the proposal.

Opponents fear that taxing lump-sum withdrawals would particularly disincentivise the middle class from funding their own retirement. Fiscal conservatives label the proposal as an “attack on the middle class” and criticise that “it would change the rules of the game”.

This tweet from Centre Party parliamentarian Elisabeth Schneider-Schneiter (the photo shows Finance Minister Karin Keller-Sutter) says: “Such a change of system jeopardises legal certainty. Those who pay in must be able to rely on the agreed rules of the game being adhered to. Something like this has no chance in @chparliament.”

Ein solcher Systemwechsel stellt die Rechtssicherheit in Frage. Wer einzahlt, muss sich darauf verlassen können, dass die vereinbarten Spielregeln eingehalten werden. #SchikaneExternal link #KapitalbezugExternal link
So etwas hat im ⁦@chparlamentExternal link⁩ keine Chance. https://t.co/Cyybmjz8VfExternal link

— Elisabeth Schneider-Schneiter (@Elisabeth_S_S) October 30, 2024External link

The proposal is still in its early stages and has yet to pass through parliament. The formal consultation process is set to begin in January. A referendum against it would also be conceivable at a later date. However, the plan is already being widely discussed and raises many questions.

If it is ever implemented, emigration would be a possible workaround, as the Handelszeitung newspaper pointed out. This is because withdrawing one’s pension would only be taxed if the person resided in Switzerland at the time.

‘Loopholes for the Swiss Abroad’

“Finance Minister Karin Keller-Sutter’s plan aims to close tax loopholes. However, she is overlooking other loopholes that still exist, such as those for the Swiss Abroad,” writes the Handelszeitung.

Pensioners who live abroad only pay withholding tax on their pension withdrawals. “In some cantons, this is strikingly lower than the capital withdrawal tax,” says the newspaper, which concludes that “the plans make it more attractive to move abroad when retiring”.

For now, these potential changes remain theoretical. However, pension experts told the Handelszeitung that tax benefits alone were unlikely to drive emigration. Just moving abroad temporarily to lower one’s tax burden is unfeasible, as Swiss taxes would be due again on their return.

“So there probably won’t be a big wave of emigration,” it says. Still, one thing is clear: “the Swiss Abroad are the ones who are laughing.”

In fact, Swiss nationals abroad already benefit from tax advantages, as withholding tax can be reduced and even reclaimed in some countries, which not many people are aware of.

Even withholding taxes can be avoided

In canton Schwyz, withholding tax can be reduced if the pension funds are withdrawn. Schwyz offers the lowest tax rate, with some retirees paying as little as half the amount in taxes required in other cantons. And getting one’s pension paid out in Schwyz is possible for all Swiss Abroad, even if they did not live in the canton. All they have to do is transfer their pension assets to a pension fund based in canton Schwyz.

What is potentially even more profitable for pensioners abroad is reclaiming the tax. This is because there are quite a few double taxation agreements that expressly provide for the reclaiming of withholding tax. These agreements, such as those in most European countries and the US, allow pensioners to reclaim the withholding tax directly from the canton that collected it.

We have analysed all of the existing agreements and have included them in this world map. This was the status as of 2017, but such agreements don’t change much.

Click on the country you are interested in.

Thailand, for example, is a special case. For those who emigrate there, the withholding tax on second pillar pension fund assets is refunded, but not on the third pillar private pension scheme assets.

However, only people who worked for a private employer can reclaim the withholding tax. This option is not available for pension funds in public-sector employment. In any case, taking the scenic detour through Schwyz is still worthwhile.

Edited by Samuel Jaberg. Translated from German by David Kaufher/ts