Taxation of Pension Lump-Sum Payout

Coming towards the end of the year, one way to lower your upcoming tax bill is to make voluntary purchases into your pension accounts. These are the pension pillars where you can make such purchases:

Pillar 2

This is the mandatory pension account setup by your employer. When you receive your salary every month, a percentage is deducted and paid automatically into this account. Your employer will also pay an equal amount into this account.

Making a voluntary purchase into this account will improve the pension benefits that you'd get during retirement, both if you're planning to opt for a monthly pension or a lump-sum payout. These purchases will also improve the death and disability benefits from this pillar.

There is a maximum amount for voluntary purchases into this pillar. But since the amount goes up with your salary and age, the maximum amount is usually quite high.

Pillar 1e

This pillar is very similar to pillar 2, but employers usually have conditions for employees to qualify for this additional pension program. The assets in this pillar must be paid out in lump-sum close to the retirement.

The advantage of this pillar compared to pillar 2 is the potential of higher returns since the assets can be invested in permitted mutual funds. Additionally, since the assets belong to you personally, they won't be diluted by any change in the pension conversion rate.

Pillar 3a

This is a voluntary pension account that you can have with various providers in Switzerland. Like pillar 1e, you can also choose to invest your assets in pillar 3a into permitted mutual funds to gain the potential of higher returns.

The assets in this pillar must also be paid out in lump-sum close to the retirement. But unlike the other two pillars, this pillar doesn't typically come with death or disability benefits.

The maximum amount that can be purchased into this pillar is defined every two years by the government, mostly to take into account the effect of inflation. The maximum amount in 2023 is CHF 7'056.


The amount you purchase voluntarily into these pillars up to the maximum amount can be deducted form your taxable income. This is attractive if you have spare cash, since it means that your tax bill will be reduced by roughly the following formula:

income tax savings = voluntary purchase * marginal tax rate

This sounds very enticing, but you shouldn't forget that if the assets in these pillars are paid out in lump-sum, there is a progressive tax to be paid on them, even though it is a separate tax bracket that is typically lower than your income tax bracket.

It is important to note that the payouts should be staggered over several years, starting 5 years before retirement, which is key in lowering the tax progression. Furthermore, Lump-sum payouts have also recently become more attractive in Zurich since the tax rates have been reduced significantly in 2022.

But as with everything, there is an opportunity cost with voluntary purchases into these pillars, since you can invest the amount yourself in a brokerage account where the capital gains are tax-free. And I can't seem to find any existing article comparing these options to figure out which is better.


Especially in the case of the pillars 1e and 3a, where I can make the investment decisions, at least in terms of which funds the assets are invested in. But I would still like to know if voluntary purchases in these pillars would result in better returns than investing outside of the pension system in a private brokerage account. Therefore, I've made simple calculations to compare both scenarios. We take the example of CHF 25k can be put into each of these options and assume that the marginal income tax rate is 30%.

Making a voluntary purchase into the pension pillars means that you don't need to pay income tax on this amount. Conversely, if you plan to put the money in a brokerage account, you'd need to pay the 30% income tax first, which lowers the actual amount invested at the start.

Pension Purchase Private Brokerage
Cash Available 25'000 25'000
Income Tax Rate 0% 30%
Cash After Income Tax 25'000 17'500

Furthermore, we assume that the amount stays in both places for 35 years until retirement and that the average annual returns are equal at 5%. The final amount in the accounts can then be calculated using these assumptions.

However, when the lump-sum payout is made from the pension pillars, a tax would be levied on the final amount. Furthermore, since the payout from the pension pillars will include the contributions from other years, the tax rate would be higher. Here we take a payout tax rate of 11.4% which would be levied if the total lump-sum payout in the year is CHF 1m.

In contrast, the amount in the private brokerage account will not incur any tax since capital gains are tax-free in Switzerland.

Pension Purchase Private Brokerage
Start Amount 25'000 16'750
Time 35 years 35 years
Assumed Returns 5% 5%
End Amount 137'900 96'500
Payout Tax Rate 11.4% 0%
Payout Amount 122'200 96'500

The table above shows that making pension purchases is still more beneficial in the long run. The benefit of the initial income tax savings is so great that investments in a private brokerage account couldn't catch up.

There is an argument to be made that you can achieve better returns investing the assets yourself in a brokerage account since you have access to broader investment vehicles. But the outperformance needs to be significant for that to be the case. At the end of the day, the best allocation will be the combination of both, which is why it's important to review such financial decisions regularly.

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The content of this post is my personal opinion and should not be constituted as financial advice. The arguments presented here are based on assumptions and past performance does not guarantee future returns. Please perform your own due diligence based on your personal situation.