Home ownership – thanks to pension fund capital

If the available equity is not sufficient, an advance withdrawal or pledge of Pillar 2 savings can be an interesting alternative. The promotion of home ownership can open doors for you – provided the consequences are manageable.

Can I use my pension fund to buy my own home? And under what conditions? Most people in Switzerland who dream of owning their own home ask themselves these questions. As a rule, the answer is yes. However, such a decision does have an impact on your pension situation. For this reason, you should check carefully which solution is best for you. Allow us to help you.

Conditions for the use of pension assets

The decisive criterion for the advance withdrawal of pension assets for residential property is personal use. In Switzerland, pension capital may therefore be used for the following purposes: 

• Purchasing or constructing owner-occupied property
• Investing in your own home
• Repaying a mortgage
• Purchasing shares in a housing cooperative or similar investment

On the other hand, there are no funds from occupational benefits insurance for these purposes: 

• Financing the usual maintenance costs of residential property 
• Paying mortgage interest
• Purchasing and constructing vacation apartments 
• Investments in rental properties

Promotion of home ownership: Advance withdrawal or pledge?

The Federal Act on Occupational Retirement, Survivors’ and Invalidity Pension Provision (OPA) allows money from occupational benefits insurance to be used in two different ways to purchase owner-occupied residential property:

1. Advance withdrawal of pension assets
2. Pledging of pension assets and/or pension benefits

Whether you make an advance withdrawal or a pledge – both have advantages and disadvantages. The decisive factors are your personal situation and your need for security.

More equity through advance withdrawal

You can use the money you withdraw in advance from the pension fund as your own capital when buying a your own home. This lowers the mortgage interest burden. However, this also means less debt interest is tax-deductible. Above all, however, the advance withdrawal of pension assets also entails certain risks: A divorce, illness, or job loss could force you to sell your home below its value. As you have to repay the money you have withdrawn from your pension fund in full, this could put you in financial trouble. In addition, an advance withdrawal may lead to a reduction in retirement and risk benefits. This means that there is a risk of a pension gap – unless you save the lost capital and repay the advance withdrawal at a later date. You should take out risk insurance to compensate for the lower pension fund benefits on death and disability. 

Minimum and maximum amount of advance withdrawal

The lowest possible amount for an advance withdrawal is CHF 20,000. The maximum amount varies according to age:

• If you are still under 50, you can withdraw all your pension assets that have accrued until then, i.e. your current vested benefits. 
• From age 50, the maximum pledge corresponds to the vested benefits at age 50 or half of the current vested benefits, whichever is higher.

Restriction

According to the law, three years before ordinary retirement is the last possible date for an advance withdrawal. However, at AXA, an advance withdrawal from Pillar 2 is possible under the pension plan even up to retirement age. 

Taxation of advance withdrawal

Advance withdrawals are reported to the Swiss Federal Tax Administration automatically within 30 days. In general, the tax on the advance withdrawals is assessed separately from other income. Further information on taxation can be obtained from the tax office of your place of residence.

Additional borrowed capital thanks to pledges

When pledged, your pension capital remains in the pension fund. For your bank, however, the pledge provides additional security. In general, the bank even regards the pledged pension capital as your own capital. The argument: This money is yours. If you fail to meet your financial obligations, the bank can access the pledged capital. The consequences for you are then the same as for an advance withdrawal. With this in mind, the bank is prepared to finance more than the usual 80% of the property value. In other words, you will receive higher debt financing that is secured with your pension fund assets. It’s important to know that like the second mortgage, you must repay this additional financing within 15 years.

How does a pledge affect your financial situation? Since you have borrowed a lot, you now pay a significant amount of interest. However, the mortgage debt has a positive impact on your taxes, and the pledge itself is not subject to tax – unlike an advance withdrawal. The biggest advantage, however, is that your pension capital remains unaffected: The insured benefits on retirement, disability, or death remain unchanged. All in all, the pledge, which may seem expensive at first glance, may even be cheaper than an advance withdrawal.

Types of pledge 

There are two different types of pledges. The credit institution achieves optimum security when both types are combined:

1. You pledge your currently saved retirement assets, i.e. your vested benefits. If you still owe on your loan, a so-called realization of the pledge occurs. The credit institution receives your retirement assets, which effectively amounts to an advance withdrawal. 
2. You pledge your entitlement to future pensions. Suppose you are unable to repay the loan as agreed: As soon as a benefit case arises (retirement, disability, or death), you must forgo your pension until your debt is repaid. 

Maximum pledge amount

Here, too, the maximum amount allowed depends on your age: 

• If you are under 50, you can pledge no more than your current vested benefits. 
• From age 50, the maximum pledge corresponds to the vested benefits at age 50 or half of the current vested benefits, whichever is higher.

It may be agreed in the contract that the pledge amount may be adjusted continuously in line with changes in vested benefits.

Restriction

If you have pledged your retirement assets, your freedom is restricted: You need the pledge holder’s written consent if you wish to have the vested benefits paid out or, in the event of a benefit case, the pension benefits paid out. This also applies if a portion of the vested benefits is to be transferred to another occupational benefits institution following a divorce.