Understanding Your UK & Swiss State Pensions as an Expat
Written by David Rosbotham DipPFS | Financial Planner | Feb 24
When it comes to retirement planning, understanding the intricacies of pension systems is paramount. While the United Kingdom and Switzerland have multiple finance agreements, their approaches to state pensions differ significantly. In Switzerland, the state pension system is comprised of three pillars, with the first pillar often considered a key cornerstone of retirement provision. However, while the Swiss 1st pillar is renowned for its reliability and robustness, there are nuances that expatriates and newcomers to the system should consider.
In this comparative analysis, we delve into the intricacies of the UK and Swiss state pension systems, examining their structures, benefits, and considerations for retirees. By understanding the strengths and limitations of each system, individuals can make informed decisions to safeguard their financial well-being in retirement.
What is the Swiss 1st Pillar Pension?
The first pillar pension in Switzerland, known as AHV/AVS is primarily funded through a pay-as-you-go system. This means that the benefits received by retirees are financed by the contributions made by current workers.
Employed individuals, as well as their employers, contribute a percentage of their income to the AHV/AVS fund. Self-employed individuals also make contributions based on their earnings. These contributions are mandatory for all individuals residing and working in Switzerland, with certain exceptions and exemptions based on income thresholds and specific circumstances.
The contributions collected from workers are pooled together in the AHV/AVS fund, which is managed and administered by the Swiss government. These funds are then used to pay out pensions to retirees, survivors, and individuals with disabilities who are eligible for AHV/AVS benefits.
Remember, this is not to be confused with a second pillar or third pillar. The second pillar pension in Switzerland typically refers to occupational pension schemes, which are employer-sponsored pension plans funded by both employers and employees, providing supplementary retirement benefits on top of the first pillar AHV/AVS system.
In contrast, the third pillar pension encompasses individual voluntary retirement savings arrangements, such as personal pension plans or private savings accounts, where individuals can contribute voluntarily to build additional retirement income and often take advantage of tax benefits.
How much is the Swiss 1st pillar pension?
On average, the first pillar of the Swiss pension system, AHV/AVS, provides retirees with a modest income intended to cover basic living expenses. As of 2022, the maximum annual AHV/AVS pension for a single person is around CHF 28,440, while for a married couple it's approximately CHF 42,660. These figures are based on full contributions and eligibility requirements, including having contributed to the system for at least 44 years for men and 43 years for women.
What will my 1st Pillar pension be?
The actual amount an individual receives from the first pillar can vary widely based on factors such as the number of years of contributions, income level during their working years, and marital status. For many retirees, the AHV/AVS pension serves as a foundation upon which other sources of retirement income, such as occupational pensions or personal savings, are built. It's important to note that while the first pillar provides a crucial safety net, it may not be sufficient to maintain the desired standard of living in retirement, particularly in Switzerland with its relatively high cost of living. Therefore, supplementary retirement planning is often necessary to ensure financial security during one's later years.
Can expats receive the full amount of 1st Pillar Pension?
As an expatriate, your eligibility for the full amount of the first pillar pension (AHV/AVS) in Switzerland may be impacted if you haven't spent a significant portion of your working life contributing to the Swiss system, especially considering factors like the duration of your employment or residency status in Switzerland.
How does the First Pillar Pension differ from the UK State pension?
A significant distinction of the Swiss 1st pillar is its absence of inflation indexing, unlike the UK system. While the UK state pension receives periodic adjustments to reflect changes in the cost of living, AHV/AVS payouts in Switzerland remain fixed, potentially decreasing in purchasing power over time. This absence of inflation protection emphasises the necessity for supplementary retirement planning for individuals depending on the Swiss 1st pillar as a primary income source during retirement.
Will my UK State Pension increase if I retire outside of the UK?
In the UK, pensioners benefit from something known as the “triple lock”. As a result of this, State Pension payments increase by the greater of two-and-a-half percent, price inflation or average wage growth. This means that State Pension will maintain its real value over time. For example, from April, the maximum UK State Pension will increase to £221.20 a week (up from £203.85). That is an 8.5% increase
However, for some expats who retire outside the UK, State Pension payments can be permanently frozen at either the date the individual retired or the date that they arrived in their new country of residence.
What happens to UK state pension if I move abroad?
Understanding the impact of location on your UK State Pension is crucial. In some countries, State Pension payments are subject to freezing, meaning they do not increase in line with inflation once you begin receiving them.
The good news is that all countries within the European Economic Area (EEA), including Switzerland, the USA, Turkey, Isle of Man, Barbados, Serbia, Montenegro, and the Philippines, among others, allow State Pension payments to increase annually. However, countries like South Africa, Canada, New Zealand, India, and Australia, among others, may freeze State Pension payments.
Therefore, when planning your retirement drawdown strategy, it's essential to consider where you plan to retire, as the inflation-proofing of your UK State Pension is linked to the UK economy, not your country of residence.
The UK State Pension vs the Swiss 1st Pillar Pension?
To illustrate the impact of this scenario, let's keep it straightforward.
Consider an individual is receiving both a UK State Pension and a Swiss First Pillar Pension, each amounting to £1,000 per month from age 65.
To calculate the pension amounts at ages 75, 80, and 85, we'll assume the UK State Pension increases by 3% annually due to inflation, while the Swiss 1st Pillar remains static.
Starting with an initial pension amount of £1,000 per month, the projected amounts at ages 75, 80, and 85 would be:
• Age 75: £1,344.09 from the UK State Pension and £1,000 from the Swiss 1st Pillar.
• Age 80: £1,483.62 from the UK State Pension and £1,000 from the Swiss 1st Pillar.
• Age 85: £1,636.98 from the UK State Pension and £1,000 from the Swiss 1st Pillar.
Important Aspects for Expats to Consider about state pensions
Inflation - If you live in a country on the “frozen list” – the purchasing power of your pension will decrease throughout your retirement.
Imagine you retired 15 years ago with a pension of £1,000 per month. At that time, £1,000 could buy you a certain basket of goods and services, covering your basic needs and perhaps some luxuries.
However, over the years, due to inflation, the cost of living gradually rises. This means that the same basket of goods and services that £1,000 could buy you 15 years ago now costs more.
Let's say due to inflation, the purchasing power of your £1,000 pension per month has decreased by 50% over 15 years. This means that what £1,000 could buy you 15 years ago now requires £1,500.
Hence why we often say inflation is the silent killer of pension funds!
Currency - If the British pound depreciates against the Australian dollar and you reside in Australia while receiving a pension in GBP, each pound converted into Australian dollars will yield fewer Australian dollars, thereby reducing your purchasing power within Australia.
For instance, if your pension payment amounts to £1000 per month and initially yields $2000 AUD upon conversion, but later, due to the pound weakening, the same £1000 yields only $1800 AUD, you effectively receive fewer Australian dollars for the same amount of pounds.
Considerations to bear in mind include:
Cost of Living: Should the cost of living in Australia remain stable or increase while the pound weakens, it could significantly diminish your purchasing power within the country.
Exchange Fees: If you incur fees when converting your GBP pension into AUD, the impact of the weaker pound may be further compounded.
Overall, a weaker pound typically translates to reduced purchasing power for your GBP income, potentially adversely affecting your financial circumstances, especially if you heavily rely on your pension for living expenses in Australia. This holds true for any international pension and underscores the importance of considering currency fluctuations, particularly if you're employed in a country where you don't intend to retire.
Conclusion
Navigating the intricacies of retirement planning requires a nuanced understanding of pension systems, particularly when comparing countries like the United Kingdom and Switzerland. While both nations offer state pensions aimed at providing a basic level of income security in retirement, their approaches and provisions differ significantly.
In Switzerland, the AHV/AVS serves as the first pillar of the pension system, offering a reliable foundation for those who have contributed for extended periods. However, expatriates and individuals with shorter tenure in the Swiss system may find their benefits comparatively limited, compounded by the lack of inflation indexing.
Conversely, the UK State Pension, bolstered by mechanisms like the triple lock, provides annual increases to keep pace with inflation, offering a degree of protection against the eroding effects of rising living costs. Yet, expatriates residing in certain countries may find their UK State Pension frozen, highlighting the complex interplay between pension provisions and international residency.
Moreover, considerations such as currency fluctuations can further impact the purchasing power of pension incomes when retiring abroad, underscoring the need for thorough planning and diversification.
In crafting a robust retirement strategy, individuals must weigh the strengths and limitations of each pension system, alongside broader factors such as inflation, currency dynamics, and cost of living variations. By adopting a comprehensive approach and staying informed, retirees can better safeguard their financial well-being and enjoy a more secure and fulfilling retirement, regardless of their chosen destination.
Check your UK state pension forecast
To find out how much you have contributed to your UK State Pension in years of National Insurance Contributions you can request a statement via a BR19 form or click here. 
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