What happens to pension funds withdrawn for house purchase after early retirement?

Real Estate
1

Let’s say you withdraw pension fund and use the funds to pay for part of the house.

Normally, you now ‘owe’ money to the pension fund which you should pay back before making any more voluntary contributions.

What happens if you retire early and have your pension transferred to a vested benefits account?

Is the ‘debt’ wiped clean? Do you have to pay it to the old pension fund (and then you have to withdraw again) or does the ‘debt’ get transferred to your VB and you can repay to the VB?

Anyone gone through this in practice?

2

You withdrew your own money, you don’t own a debt to your pension fund. What you have is an obligation to use that money, should it become available to you again, to buy into a pension fund to uphold your retirement coverage.

Whenever pension fund money is transferred there is quite a bit of additional info that is shared between the institutions in the background (more than what you see on your statements). Your vested benefit account provider would therefore get this information. You then have no relation with your former pension fund any longer.

And yes, you can and must pay back the money into your vested benefit account (for which this is an exception that they accept that, because you couldn’t do an ordinary buy-in at a vested benefit account).

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3

Could you please elaborate? It’s the first time I hear something like that.
Only scenario I could think of is if you rejoin a regular pension fund later on, and want to do buy-ins.

4

Could you help me understand if this is valid only until the age of 58? Post that everything is clean. Right?

5

Not sure what to add, so here the full summary:

  • You can pledge your pension fund (PF) or vested benefit accounts (VBA) to buy self-inhabited real estate (property). This has nearly no further consequences, but of course you then have a high mortgage and interests to pay.
  • You can also withdraw your PF/VBA money to buy your property. In that case you pay taxes (at reduced rate) on the withdrawn amount.
  • If you later sell that property (or permanently move out), you are obligated to return the amount back into your PF/VBA. You will also get your paid taxes back.
  • One exemption from repayment is if you sell your house to your children. Another exemption is if you plan to buy another property within two years, in which case you can leave the money for those two years on a VBA (in case you still have a PF).
  • Obligation to repay is waived if you fully withdraw your PF/VBA (e.g. because you become self-employed) and at the age you could draw a regular annual pension anyway (typically at 62, but can be as early as 58 depending on the pension fund).

Sources: Here and here.

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6

If you want to make voluntary payments into your PF, then the amounts are first set-off against the amounts withdrawn and don’t attract further tax benefits (until you ‘paid back’ the withdrawn amounts) - though you do get tax back on these repayments.

I’m not sure how this repayment works if you transfer to VB account in the interim. Presumably, you should repay the VB account assuming that this accounting is somehow transferred over from the PF.

I was just wary whether these corner cases are properly accounted for or whether they could fall through legislative gaps.

7

These cases are accounted for in the law and regulations. But it can still fall through the cracks if you meddle with your PF/VBA solutions, say you ignore regulations and don’t transfer all of your money when switching employer and end up with multiple VBAs. Worst case is you end up with multiple VBAs, of which none will accept you to repay the money from selling your property. In that case you might end up getting fully taxed retroactively for withdrawing pension funds without a permitted reason.

8

You can end up with multiple VBAs anyway even following all regulations.

9

The usage of pillar 2 benefits to finance a property in Switzerland is noted in the land registry. So the information is attached to the property itself, rather than to a specific pension fund or vested benefits institution.

Of course, there is a chance of information falling through the cracks, but that would only result in future complications, so it’s in your best interest to ensure that possible new pension funds or vested benefits foundations have this information.

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10

Thanks for the clarification. I got confused between OP’s question and your answer. My follow-up was on the “you have to pay back” part. OP didn’t mention selling the house. That’s another scenario where you’d need to pay back, that’s understood. Not sure how strictly it’d be enforced, though.

Still not sure I’m missing something😉 While (only) in a vested benefit situation, you could withdraw further for WEF, but not do any buy-in (or pay-backs, before that), anyway, right?

If you do get another job with pension fund insurance, and want to do more buy-ins, you’d need to pay back all WEF withdrawals (from former pension fund and vested benefit), first.

11

Yes you can. I am not saying multiple VBAs in itself is an issue, I am saying meddling and circumventing certain regulations can lead to multiple VBAs in a way that could be problematic.

Strictly. You may ultimately not be literally forced to payback the money, but then you will be fully taxed at normal tax rates for the amount.

You can do additional WEF withdrawals from a VBA, yes (though it is supposed to be only once every five years). You also must repay a WEF withdrawal to your VBA if you sell the property, as I mentioned. You cannot do any other normal buy-ins into a VBA (even if you repay the WEF withdrawal first).

Correct. But note that generally, once you do a WEF withdrawal it makes little to no financial sense to repay that WEF withdrawal again with the aim to then to subsequently do normal buy-ins. If you want to uphold the possibility of buy-ins for later in life, you should simply pledge your funds, and only withdraw once you either have exhausted the buy-in potential or given up on the idea.

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12

I guess any amounts you repay back, you still a refund of the withdrawal taxes and shelter from wealth taxes, so there are still some marginal benefits of repaying.

13

Thanks for this great summary.

14

More, you’d still get a tax benefit (not just paying back, but adding more afterwards). Let’s say 1/2 your tax rate, if the amounts (pack-back plus new buy-in) are the same.
If you did withdrawals, and later want to lower your debt, it’s better than just amortizing directly.

I don’t plan to do so myself, as I don’t have any withdrawal or pledge, but wouldn’t say it makes no sense.

15

I think it makes sense to separate the 2 cases:

  1. Where you repay already withdrawn funds, which gets only refund of capital taxes; versus
  2. Additional voluntary payments (in excess of any net withdrawn funds) which get the usual tax deduction.

In the above, I talk about the first case. Of course, if you withdraw, you have to repay the full amount of in case #1 before you can make any further contributions under case #2.