Many people dream of retiring earlier and having more time for themselves, their family or their hobbies. But early retirement also comes at a price: if you stop working before the ordinary retirement age, you can expect a pension reduction. In this blog article, you'll learn how much that reduction can be and what factors you should consider when making your decision.
How does early retirement work in Switzerland?
In Switzerland, the pension system consists of three pillars: the old-age and surviving dependants insurance (AHV) (1st pillar), the pension fund (2nd pillar) and the private pension (3rd pillar). The normal retirement age is 64 for women and 65 for men.
Early retirement is possible up to two years before the regular retirement age, i.e. from 62 years for women and from 63 years for men. However, you must expect a reduction in your pension, which varies depending on the pillar.
Important: The reference age for women and men will be standardized at 65 years from 2028. This means that you will only be able to apply for early retirement from the age of 63.
How much is the pension reduction for early retirement?
The pension reduction depends on how many years earlier you want to retire and how much credit you have in the different pillars. Here are some examples:
Old-age and surviving dependants insurance (AHV) pension
The AHV pension is reduced by 6.8 percent per year drawn early. So, if you retire two years early, you will receive 13.6 percent less AHV pension than if you had taken ordinary retirement. The maximum AHV pension for an individual is 29,680 francs per year (as of 2023). With a two-year early withdrawal, this is reduced to 25,402 francs per year.
Pension fund pension
The pension fund pension depends on the conversion rate used to convert your assets into a lifelong pension. The statutory conversion rate is 6.8 percent. For non-compulsory retirement assets, pension funds can set a lower conversion rate, often between 5 and 5.5 percent. If you retire early, the conversion rate is additionally reduced because the pension is paid out for longer.
Let's assume you have a balance of 500,000 francs in your pension fund, of which 200,000 francs are in the mandatory and 300,000 francs in the extra-mandatory area. With an ordinary retirement, you would receive a pension of 31,400 francs per year (200,000 x 6.8% + 300,000 x 5%). With a two-year early retirement, this would decrease to about 26'600 francs per year.
Early retirement can give you more time and freedom in retirement, but it comes at a price. You will have to make do with a smaller pension, which may not cover your usual standard of living. You need to plan your retirement well and invest your assets wisely to avoid a pension gap.