Proposed Tax Hike for Swiss Retirement Savings: An Analysis

The Federal Council wants to raise the capital withdrawal tax in 2027. It expects the tax hike to bring in an additional 160 million francs in annual revenues. The change affects withdrawals from the pillar 3a on the one hand, and lump-sum withdrawals from occupational pension funds and vested benefits on the other. That taxation of pensions from occupational pension funds is not affected. Occupational pensions will continue to be subject to income tax as they have been.

What exactly does the Federal Council want to change?

The proposal entails a minor but important change to the taxation system. The two most important changes to the capital withdrawal tax are:

• The capital withdrawal tax will have its own tax schedule.
• Married couples and registered partners will be taxed individually. *

* The change would only apply to the capital withdrawal tax. Income taxes and wealth taxes for spouses will continue to be taxed jointly.

The proposed capital withdrawal tax schedule uses very strong tax progression. Withdrawals of up to 22,000 francs in one tax year (this is normally a calendar year) would be tax free because taxes are not billed to taxpayers if the amount due is below 25 francs. The amount that falls below 20,000 francs is taxed at the rate of 0.1 percent. The portion of total annual withdrawals that falls between 20,000 and 50,000 francs is taxed at the rate of 0.25 percent. The part that falls between 50,000 and 100,000 francs is taxed at the rate of 1 percent. The next tiers are 3 percent, 5 percent, 7.5 percent, and 11.5 percent.

Table 1: The capital withdrawal tax schedule proposed by the Federal Council

Each tax rate only applies to the portion of the total withdrawal that falls within the corresponding tier. Example: If you were to withdraw 80,000 francs in one tax year, 20,000 francs would be taxed at the rate of 0.1 percent, while 30,000 francs (the part between 20,000 and 50,000) would be taxed at 0.25 percent, and the remaining 30,000 francs (the portion above 50,000) would be taxed at 1 percent. The total federal capital withdrawal tax, in this example, would be 395 francs.

Analysis: How would the proposed change affect singles?

The information provided in this section applies to people who were never married or in a registered partnership, widows, widowers, and people who are separated or divorced.

For singles, combined withdrawals from the pillar 3a and retirement benefits that are lower than 22,000 francs are not affected by the capital withdrawal tax hike. For all withdrawals that exceed that threshold, the proposed new tax regime would result in higher taxes. The size of the price hike depends on the amount withdrawn over the course of a tax year. In the best case, the tax would only be 10.7 percent higher than it is today. In the worst case, the tax could be nearly twice as high as it is today.

Table 2 shows the capital withdrawal taxes for different amounts. In addition to the actual amount of tax, the table also shows the size of the price increase as a percentage.

Table 2: Capital withdrawal taxes for singles

Many retirement savers will not withdraw more than 200,000 francs of retirement savings in one year. The following interactive diagram helps you find the tax burden for any amount up to 200,000 francs. It is interesting to note that the tax increase is relatively small for even amounts like 50,000, 100,000, and 200,000 francs. But withdrawing as little as several thousand francs more or less can drastically increase the effect of the tax hike. The change is smallest for annual withdrawals of 100,000 francs, with the tax going up by 10.7 percent for that amount.

The tax is higher for larger amounts. The diagram below lets you find the capital withdrawal taxes for withdrawals totaling between one million and 10 million francs in one tax year. The proposed change would result in taxes going up by 67.5 percent for annual withdrawals totaling half-a-million francs, and by 85.2 percent for annual withdrawals totaling one million francs.

Analysis: How would the proposed change affect couples?

The tax increases for married couples and registered partners can be larger than those for singles.

The difference in the tax burden is particularly dependent on whether or not both partners withdraw retirement savings in the same tax year, and how much they withdraw.

• The difference between the current and proposed taxes are smallest when both partners withdraw identical amounts. In the best case, a couple could end up paying up to 49.9 percent less capital withdrawal tax under the proposed new tax regime than they would with the current system. In the worst case, a couple could pay 74.8 percent more. When you look at the unweighted average difference between the old and the new system for withdrawals totaling up to 200,000 francs, couples would benefit from a tax decrease of 26.5 percent.
• The biggest tax increase applies to couples when only one partner withdraws retirement savings. If one partner makes withdrawals totaling 42,200 francs, the tax would be three times higher, climbing from 25 francs under the current system to 75.50 francs under the new system. In the best case, the taxes would be 51.2 percent higher. The unweighted average tax increase for withdrawals of up to 200,000 francs is 97.3 percent.

Tendentially, the more similar the amounts withdrawn by each partner are, the bigger the tax decrease for the couple would be under the new system.

It is interesting to note that in many cases where both partners withdraw identical amounts of money from their retirement savings in the same tax year, the proposed new tax regime results in a smaller tax burden than the current system. That is true for withdrawals totaling between around 65,400 francs and 496,799 francs.

Table 3: Capital withdrawal taxes for married couples

The lower tax figure shows the lowest possible tax that would apply if both partners withdrew identical amounts from their retirement savings. The higher tax figure shows the highest possible tax that could apply if just one of the partners makes withdrawals.

The graph below shows tax figures for withdrawals by a married couple totaling up to one million francs.