Understanding what a pension gap is and how to avoid it is crucial so you can look forward to retirement with as much peace of mind as possible.
What is a pension gap?
A pension gap occurs when the retirement pension is insufficient to cover the usual expenses. In Switzerland, the combined AHV and BVG pension usually covers only 60% of the final salary, which is generally inadequate to maintain the living standard before retirement. So, it is essential to be aware of the possible causes of these gaps and the possibilities offered by the Swiss pension system to avoid them or fill them in time.
Pension gaps in the 3-pillar system
The Swiss pension system is based on the AVS (first pillar), the pension fund (second pillar) and pillar 3a. AVS and pension fund contributions cover around 60% of the final salary. However, this percentage is even harder to achieve at an annual income of approximately 85,000 francs.
Identify the possible causes of pension gaps.
The amount of your second-pillar retirement pension depends not only on your average income but also on other factors such as the quality of your pension fund, part-time work, a career break, early retirement, divorce, high income, and a lower conversion rate.
How can we compensate for these gaps?
As far as the 1st pillar is concerned, you have 5 years to make up for a missed contribution. Young people's years (contributions made between the ages of 17 and 20) can also be used to make up for a missing year by requesting that this income be considered.
On the other hand, you can buy back years for the second pillar. The amount to be bought back is shown on your BVG certificate, which you receive at the beginning of each year. This process improves your retirement benefits and reduces your tax burden, as the amounts paid are directly deductible from your taxable income.
The final point to complete these first two pillars is to take out a pillar 3A or 3B.
Why compensate them?
The consequences of not having adequate pension provisions can be serious. Within the second pillar, they can also affect your benefits in the event of an accident, illness, or death.
AHV and pension fund benefits are based on the minimum requirement for retirement, which means that a complete old-age pension offers very few options. Working people often need to be made aware of the impact of pension gaps on living conditions when they reach retirement age. As a result, there are often people in Switzerland who are suddenly unable to meet their day-to-day needs when they retire.