Who Can Afford to Retire in Switzerland?
Switzerland is an attractive destination for highly skilled foreign professionals and executives, offering excellent salaries, career opportunities, and an exceptional quality of life. However, when it comes to retirement, even well-paid professionals often find that staying in Switzerland is financially challenging. The combination of pension gaps, high living costs, and increasing tax burdens makes retiring in Switzerland a luxury that not everyone can afford.
The Pension Gap for Foreign Specialists and Executives
Many foreign specialists and executives work in Switzerland for only part of their careers, resulting in incomplete contribution periods in both the 1st pillar (AHV) and the 2nd pillar (occupational pension funds). While gaps in the 2nd pillar can often be compensated for with voluntary contributions, the 1st pillar presents a greater financial challenge. In some cases, individuals contribute substantial amounts to the system yet receive relatively little in return. As one of my clients put it:
“That’s the Swiss deal! We are welcome to work, but we have to leave again when we retire.”
A Growing Challenge for Swiss Citizens
The affordability of retirement is no longer just an issue for foreign professionals. An increasing number of Swiss citizens are also struggling to maintain their standard of living after they stop working. High housing costs, rising healthcare expenses, and significant tax burdens make Switzerland one of the most expensive places to retire. As a result, many retirees are now considering relocating abroad to stretch their pensions further.
The Tax Trap: Why More Retirees Are Leaving Switzerland
A growing number of Swiss retirees are moving abroad to reduce their tax burden. The Swiss government is considering increasing taxes on pension withdrawals, making emigration an even more attractive option. Retirees who relocate before withdrawing their pension funds can often benefit from significantly lower taxation rates. For example:
A retiree in Zurich withdrawing CHF 1 million from their pension fund might pay CHF 112,000 in taxes.
If they move abroad and withdraw their funds from an institution in Schwyz, they might pay only CHF 48,000.
Some countries offer additional tax benefits, allowing retirees to recover part or all of the Swiss withholding tax, depending on double taxation agreements.
However, careful planning is essential. Not all double taxation agreements grant Switzerland full tax sovereignty over pension withdrawals. For example, if a retiree chooses to relocate to Spain, withdrawing funds through Schwyz may not provide any tax advantage, if the retiree doesn't fall unter the 'Beckham Law' regime, because Spain has the taxation rights in this scenario—a situation most retirees would prefer to avoid.
The Business of Retirees
Many countries have recognized the economic benefits of attracting retirees and have introduced favorable tax regimes and incentives. However, when taken to extremes, these policies can create challenges for local populations—one major consequence being soaring real estate prices, making housing increasingly unaffordable for locals. As a result, some of the most popular retirement destinations have begun tightening their previously generous tax benefits for retirees.
These popular destinations have recently made some changes.
Thailand: A long-time favorite among Swiss retirees due to its relatively relaxed visa requirements, Thailand recently introduced significant changes. As of January 1, 2024, foreign-sourced income remitted to Thailand is now subject to taxation in the year it is earned. However, income earned before 2024 and transferred afterward remains exempt from Thai income tax.
Portugal: In 2020, Portugal revised its Non-Habitual Resident (NHR) tax regime, introducing a 10% flat tax on foreign pension income, reducing some of the previous tax advantages.
Spain: Spain’s "Beckham Law" allows certain retirees to benefit from a reduced tax rate on foreign income. However, due to rising property prices, the government is now considering introducing a real estate tax for non-residents.
These countries have only recently discovered the business of attracting retirees.
Italy: Since 2019, Italy has offered a 7% flat tax on foreign pension income for new residents relocating to specific southern regions—a move aimed at revitalizing less populated areas.
Greece: In 2020, Greece introduced a 7% flat tax on all foreign income for individuals establishing tax residency in the country, aiming to attract more retirees.
Conclusion
Retiring in Switzerland is becoming increasingly expensive, even for well-paid professionals and executives. At the same time, an increasing number of Swiss citizens are looking for ways to optimize their financial situation—often by relocating abroad to reduce taxes and lower their cost of living. With the Swiss government potentially increasing taxes on pension withdrawals, the trend of retirees leaving Switzerland for more tax-friendly destinations is likely to accelerate.
Careful planning is essential to avoid excessive tax burdens. Evaluating alternative locations, understanding tax implications, and structuring pension withdrawals strategically can make a significant difference in preserving retirement wealth.