It does have an implicit upper limit in that at the top end of the income distribution, asset-based compensation starts to dominate comp from employment.
Neither dividends nor rents have (AHV/AVS/OASI) contributions levied upon, so if you want to “dodge” (AHV/AVS/OASI) you’ll have to 1) start a business (LLC/Ltd) 2) pay yourself a “reasonable salary” with OASI levied upon it 3) do a profit after all that and 4) pay dividends out of said profit.
Additional benefit is if you own >10% of that business, the dividends will be taxed at preferred rates…
I always wonder if you are not double taxed in this case (once with corporate income tax and then once more on personal income tax as dividends count as income) and if this really is cheaper than paying the social contributions?
Is there any other topic that can explain a bit more on how AHV worked ? Or can we deviate on this one to understand how useful it can be ?
For foreigner like me, it is not easy to understand the penalty of joining work force in Switzerland at 28 y.o.
I have done a simulation online when working 44 y will generate me 2450 .- by month.
If I still remain married it will be caped at 1750.- by month each as there is a 3500.- by month limit for a couple.
I suggested to divorce close to retirement but she is strongly against it
Let’s say I have worked since 28 y.o. With a minimum salary of 90kchf and I want to retire at 50 y.o. With only 22 y of AHV accumulation instead of 44. I won’t be able to walk at 72 y.o….
What will be the penalty on AHV ?
Is it on top of the 2nd pillar estimation ?
If you retire with 50, you’ll have to keep contributing to AHV based on your wealth (Beiträge der Nichterwerbstätigen). And these years also count, of course. I.e. you can still get 37 contribution years (assuming the regular retirement age stays at 65), in which case you’ll get 84% of the full pension (37/44).
Keep in mind that if one of you dies, the other has to pay inheritance taxes if you are not married. In addition if one dies, the rent of the other will be increased by around 20% if you are married, that’s not the case if you are unmarried.
You’d need to calculate carefully if a divorce before retirement is beneficial.
You are, but it can still be cheaper. I calculated/simulated that quite extensively some time ago, but a very rough calculation is: I pay 11.8% corporate income tax on all profit. Marginal tax rate on income >230k is 7.3% (canton) + 13.2% (federal taxes), so 20.5% in total. If you pay yourself a salary, you pay this 20.5% on your net income, so 12.8% AHV & ALV + (1 - 6.4%) * 20.5% ~= 32%.
Dividends are only taxed at 0.5 * 7.3% + 0.7 * 13.2% = 12.89%. So the total taxes are 11.8% + (1 - 11.8%) * 13.2% ~= 23.4%
In practice, this is much more complicated to calculate correctly, because you also have to consider the pension fund (allowing tax free withdrawals up to 25% of your income, although you have to increase your income for it, which in turn increases AHV & portion of money that is taxed to normal conditions), the effects on the wealth tax, etc…
And the results might differ in other cantons, especially when they have higher corporate income taxes and higher rates for the privileged taxation of dividends.
As @jay said you will have to contribute based on your wealth, which is roughly 2k per year per million net worth. Benefit is that you would have 37 years of contribution and get ca. 2k per month max. But that maximum would require an average of 88k contribution per year, which you won’t have. Ignoring the wealth based contributions you’d only have 53k on average, which is again reducing your pension to ca. 1.65k per month.
I think that the 5 year limit for buybacks applies only if you were allowed to contribute in the first place, which is not the case if you’re a foreigner arriving in Switzerland as a 25 year old for example
While I appreciate that there are many forms of ‘Mustachianism’, it seems an odd comparison for this forum. Are you planning to work the full 44 years @ 200k - 300k income on average?
If you look at it from a FIRE perspective, the current system might even, to a degree, have some advantages. If we assume a scenario where your contributions are based on:
50k average salary in your low twenties, if even that (studying).
75k - 100k average salary towards late twenties.
finally beginning to make some real money in your thirties, say 100k - 175k by the end.
a few years in your forties at 200k, achieving FIRE and retiring.
the rest are minimal contributions until 65.
You just about get to the max. 1st pillar pension and benefit from those years you overpaid, compensating the later FIRE years. It probably makes more sense if you lived in CH from 20&up, instead of migrating later and already having a degree from abroad.
In my simulation, assuming that I go for a more frugal FIRE, I will be short of the maximum 1st pillar pension. Or more precisely ‘we’, since it will be averaged between us for the years we are married.
True, I did mean “limited way” in various limits (I was just too lazy to research & quote all the exceptions).
As one counter-example - I arrived in Switzerland at 25 and could’ve*1 paid the missing years (I think it would’ve been CHF 400 p.a., the minimalbeitrag since I had been a student with no income), but yes, it was because I was/am a Papierli-Schweizer.
*1 I didn’t, I was broke and didn’t think of AHV at 25.
I would recommend paying it to my younger self now though, I suppose.
Tbh my examples were more for the sake of explaining that OASI contributions have no upper limit than anything.
My real commentary/personal takeaway is that because Swiss social costs don’t have an upper limit (like in most other countries) they become a fairly significant additional tax drag after CHF88k income. I wasn’t aware of this before and it contributes to my recent belief that Switzerland is not so good for taxes after all (unless you are lump sum billionaire paying 112k taxes in valais ofc but thats a discussion for another thread .)
In some cases the OASI implementation can be beneficial though you’re right.
When you say asset-based comp starts to dominate comp from employment what do you mean by this? Do you mean that the citizen at later stages in life has saved up and invested a lot, or that the richest are asset owners already, or that people are able to structure their comp at any time in an asset-based way?
For the LLC/Ltd point is it as easy to do as you make it seem? e.g. could I go to my employer tomorrow and tell them to start paying me into an LLC instead? I assume there are some struggles in terms of the employer agreeing, rights changing to that of a contractor, termination periods, payment of bonuses, etc.?
As a side note - to me it seems a bit perverse that governments structure tax drag in this way. If I work hard and get a great bonus the government will apply a huge marginal tax drag (Geneva) + uncapped OASI costs. However, if my portfolio/properties passively pay me money I have no OASI drag. And of course I can inherit billions for no tax drag at all.
Seems like the system heavily disincentives entrepreneurship while incentivising wealth hoarding. I suppose this is part of why the FIRE movement has grown so big as of late…
The income that would match the contribution if there was no minimum. E.g. this year the minimum contribution is CHF 514 and this is recorded as CHF 4’851. For self-employed people it’s double due to a progressive part in the contribution rates. See the following table for earlier years (from my IK-Auszug):
I expect it to be similar. E.g. if you’re contributing CHF 1’060 based on wealth, the income will be recorded as CHF 10’000 (based on a 10.6% rate). However, I’m not in that situation (yet), so I can’t confirm this.
What I don’t get about AHV: I was stupid enough not to contribute voluntarily to AHV while living abroad and will get sanctioned by a lower AHV pension. No way to repay what I missed, not even with a “penalty fee”. To me, this is rather arbitrary and somewhat annoying.
Anybody know of a possible solution (other than jokes / snarky comments at my expense )?
You are not “sanctioned”, you’re not entilted to the maximum amount if you haven’t paid your premiums for the required time. Maybe you have claims towards the social security you paid while abroad, instead?
Build up or buy-in to pillar 2, take advantage of pillar 3a, and/or save or invest for yourself. And check claims towards the social security you paid while abroad
Thanks! I’ve worked for the UN, so I guess no national social security system claims. Of course, I got my UN pension contributions back (deducted from salary), but that’s nothing compared to the AHV payout I’ll loose (plan’s to live until 100 at least )