Federal Council proposal to increase taxation on lump-sum withdrawals from the 2nd and 3rd pillars

Principle

In general, contributions made to pension institutions are deductible from taxable income. In return, the pension payments received later are fully subject to income tax. During the savings phase, capital gains are not taxed, allowing for their full reinvestment. This creates a favorable tax regime, which is a political choice designed to encourage increased savings for retirement.

Context

Withdrawals from the 2nd and 3rd pillars are currently taxed at one-fifth of the normal federal direct tax rate. This reduced rate takes into account the fact that capital withdrawals are made over a limited period, while pension payments span a lifetime, benefiting from a lower tax progression.

Proposal

The Federal Council is considering aligning the taxation of capital withdrawals from the 2nd and 3rd pillars. This would lead to an increase in the tax burden on capital withdrawals. The aim is to eliminate the favorable tax treatment of capital withdrawals compared to pensions at the federal level. Additionally, the proposal seeks to discourage high-income households from exploiting the 2nd and 3rd pillars for tax optimization purposes.

Consequences

The removal of this federal tax relief could lead to a decrease in capital withdrawals. On the other hand, it would make it less attractive for taxpayers to use retirement savings tools. However, pension payments subject to tax would be higher in the future, partially deferring the receipt of additional tax revenue. It is also possible that the elimination of this tax advantage would reduce contributions to the 2nd or 3rd pillars, resulting in higher income tax revenues as a consequence.

Upcoming developments

This proposal is currently under review, and many details still need to be clarified. The Federal Council plans to submit this proposal for consultation in January 2025. It will be interesting to see whether this proposal could also apply to capital withdrawals from pillar 3a, which, as a reminder, can only be withdrawn in this form today. Additionally, it will be important to observe how the Federal Council integrates this proposal with recent reforms aimed at offering more flexibility and benefits around retirement. These include the recent AHV reform (which introduced the possibility of phased retirement with up to three capital withdrawals) and the upcoming reform regarding the possibility of making additional contributions to the 3rd pillar (read our article about it "New development in pension savings: retroactive contributions to Pillar 3a now possible").