5 considerations when voluntarily contributing into a pension fund

Voluntary contributions to the pension fund are regarded as an attractive way to increase pension capital while saving taxes. However, there are also constraints and risks involved that you should clarify in advance.

Over the course of your career, you gradually save more and more into your pension fund. This increases your pension provision and is key to ensuring that you will have sufficient financial means for maintaining your standard of living when you retire. Both employers and employees make monthly savings contributions to increase pension assets. The capital market is seen as a third contributor; after all, it is the capital market that assesses your retirement savings and gives you a higher or lower return on them.

A voluntary contribution to the pension fund means raising the level of second-pillar finance with additional amounts that go beyond the mandatory contributions and allow you to close so-called gaps in contributions.

A gap in contributions can occur, for example, following a salary raise: the new, higher salary is not fully reflected in the pension fund because the lower income from the previous years is the main contributory factor. Luckily, this contribution gap can be made up, as long as your personal financial situation enables you to do so. These “voluntary contributions” are also exempt from income tax, meaning they are an efficient method of improving your pension benefits in a tax-optimized way.

But how much sense do voluntary contributions make, when all factors, ranging from taxes to yields and through to pension fund benefits, are taken into consideration? Specific cantonal regulations are also an important factor in this context.

Should I voluntarily contribute to my pension fund?

This five-point check will help you to decide whether contributing to your pension fund makes sense:

1. Impacts on pension fund benefits 

Does the paid-in amount have a positive impact on your pension fund benefits? The important thing here is that your savings objectives and risk considerations should not be undermined by the existing benefits solution.

What happens to the voluntary pension fund contributions if you die or need to claim insurance benefits as a result of, for example, invalidity? Does your pension fund take the additional amounts into consideration or does it exclusively pay benefits on the basis of the insured salary? 

2. Protection against remedial action

How is your level of pension fund coverage? If it is well below 100 percent, remedial action may be necessary in the future. The costs of this are paid mainly by insured persons who are in employment—for them, either the conversion rate, for example, or interest, or both, can be reduced.

3. Returns after tax

Voluntary contributions to the pension fund can represent a profitable investment. First and foremost are the tax benefits, but these differ significantly from canton to canton. In order to account for cantonal regulation, it is, for example, worth setting up an individual contribution plan in order to stagger contributions (see tip 5).

Either way, it is important to calculate after-tax investment returns beforehand, together with an expert, so that you can figure out the optimization potential in each case. In general, it can be assumed that the return potential in extra-mandatory pension solutions with an individual investment strategy is higher than in integrated pension funds with the same (defensive) investment container for all insured persons.

4. Statutory waiting period for withdrawal of capital

Anyone who makes voluntary contributions to the second pillar only gets unlimited access to the pension fund capital after three years, at the earliest. Otherwise, taxes which were saved would have to be repaid. This becomes relevant, for example, if you want to use pension fund capital for buying a house. There are exceptions to this rule (e.g. after divorce) and adherence to this three-year limit has to be reviewed individually.

5. Staggered pension fund contributions

This is particularly important for anyone with greater financial scope: It does not always make sense to contribute the maximum amount all at once. Depending on your canton (and age), it may make more sense to contribute in stages, so you can further optimize the tax benefits. In this case, an individual contribution plan is a tried-and-tested aid. In years where your income is particularly high, you may choose to deviate from your set plan and revise your plans for the years ahead.