What should I consider if I want to use retirement money?
You have already read the Introduction to Equity and know that you must provide at least 20 percent of the price of the property from your own funds. In addition to the other options described, you would like to use money from your Pillar 2 and/or 3 accounts. Here, you will find an overview of the points that you should take into consideration in that case.
First, you should review your personal retirement balances. You will find this information on your retirement fund statement under the point “vested benefit”; some funds refer to this as “termination benefit.” Now you have two options to use this capital - with an early withdrawal or a pledging of available funds.
Early withdrawal of retirement funds: pros and cons
Fundamentally, you have the option to withdraw funds from your retirement fund and thus increase your equity in financing your home. The following restrictions must be taken into consideration:
- The money can only be used for a property that you want to live in yourself over the long term
- A withdrawal of retirement balances is possible only once every 5 years
- The minimum amount that can be withdrawn from the pension fund is 20,000 Swiss francs.
At first glance, the advantage of a withdrawal is obvious: you have more equity available; as a consequence, the amount of the mortgage loan is reduced. Thus you can lower the interest burden.
But this approach also has disadvantages. The most apparent one is certainly the fact that an early withdrawal of retirement funds results in reduced performance. Your retirement benefit is reduced. Depending on the retirement fund, payment can also be reduced in case of disability or death. In addition, early withdrawal of retirement funds has tax consequences. Lastly, a lower mortgage amount means you have less debt to deduct on your tax returns.
Other rules apply after age 50
If you are age 50 or older, your retirement funds are subject to a withdrawal limit: Your retirement fund can pay out to you either a maximum of 50 percent of the current vested benefit or 100 percent of your vested benefit in the year you reach the age of 50. The deciding factor is which of the two amounts is higher - this is the amount you can withdraw. However, if there are less than three years until your earliest possible retirement date, you cannot make any more withdrawals.
The other option: pledging your retirement fund assets
Pledging of your vested benefits is generally preferable. The pledged capital serves as additional security for the bank and does not reduce the mortgage debt, but may affect the lending guidelines (higher mortgage load possible) or the applicable terms.
On the other hand, since the additional available funds are also borrowed money, on closer inspection, the pledging of retirement fund assets represents an increase in outside capital. However, most banks accept this up to a ratio of 90%, because the security provided by it is very high. But it is often required that the corresponding portion of the mortgage debt be relatively quickly amortized, by the latest at retirement.
Pledging is attractive from the standpoint of the pension fund benefits in old age, on the one hand; namely, these will not be affected; the entire accrued retirement savings continues to earn interest. In terms of taxes, interest burden, and investment strategy, many aspects play an interactive role. We therefore recommend that our financial planning service develop together with you an ideal financing structure that is customized personally for you.
Tapping into Pillar 3
You can also use funds from the tied-up Pillar 3a retirement savings to finance your home, if the home will be used by you yourself. A withdrawal is subject to similar conditions as Pillar 2. Early withdrawals of capital are taxable; but instead the money can also serve as collateral to obtain a loan from a bank.
In contrast to a withdrawal of pension-fund assets, an early withdrawal from Pillar 3 is not subject to a minimum. Therefore, you can also withdraw amounts lower than 20,000 Swiss francs.
Every variant offers advantages and disadvantages; weighing these without expert advice can be time-consuming and confusing. With an experienced advisor at your side you will find the best and quickest way to your personalized financing solution.