Pledging to finance home ownership
Can I pledge my retirement provision with comPlan to finance buying my own home? How much of my retirement savings can I pledge? What must I do to arrange a pledge? What costs and taxes are payable? What you have to look out for if you pledge your retirement provision with comPlan in order to buy your own home.
So, you’re planning to buy your own home and your source of funding wants extra collateral? Instead of an advance payment from retirement assets, the law on the promotion of home ownership allows you to pledge them. If you do this, your retirement provision will remain unchanged, but you will benefit from more favourable conditions for financing. If you make a pledge, you can continue to purchase more benefits under the pension fund regulations. From that moment on, however, you will need the written consent of your pledgee for every payment of a pension or lump sum.
The ability to make a pledge is conditional on your living in the home you own yourself. Then, as a general rule, you can pledge your entitlement to your pension benefits in old age, in the event of death or disability or to your termination benefit. If you are no longer able to meet your mortgage interest or repayment obligations and the pledgee insists on realising the pledge, this is possible at any time when the vested benefits are pledged. If the retirement benefits are pledged, the pledge cannot be realised until after the occurrence of an event for which provision has been made (retirement, death or disability). Whatever else happens, though, the realisation of a pledge is something to be avoided.
The Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG) allows you to pledge your retirement savings in order to finance the purchase of residential property for your own use. Before reaching the age of 50, you can pledge all the capital for this purpose. After that, you can pledge no more than the savings you would have been entitled to at the age of 50, or half your present termination benefits. You can find the amounts that apply in your case on your statement of insurance.
Consider pledging the retirement savings only if you are sure that you can reliably pay your mortgage payments and repayments, even at higher interest rates.
We have an application form you can use to do that. If you’re married or living in a registered partnership, the consent of your spouse or registered partner is required in writing. This rule still applies if you’re separated.
The processing fee is CHF 300.
Unlike when you make an advance withdrawal of retirement savings, you do not have to pay taxes at the time you pledge them. If, though, you do not meet your mortgage interest or amortisation obligations, there is a risk that your pledgee will insist on realising the pledge. In such a situation, realising the pledge amounts to an enforced early withdrawal of your retirement savings. You then have to consider that, when the pledge is realised, just as in the case of an advance withdrawal of retirement savings, you will have to use your own funds not tied to the pension to pay the tax bill.
The realisation of a pledge is always an extremely unpleasant business and one that you should avoid at all costs.
The biggest advantage of a pledge when compared with an advance withdrawal of retirement savings is that your retirement benefits aren’t reduced and that no taxes are payable at the time the pledge is made (although they do become payable at once if the pledge is realised). The additional collateral means that the cost of repaying your mortgage – for example, a second mortgage – are usually reduced. The pledge also doesn’t stop you continuing to purchase more benefits under the pension fund regulations.
The two main drawbacks are that, when you make a pledge, you are taking on additional debt (more of your capital is borrowed) and that you become substantially dependent on your pledgee, whose written consent is needed every time you want to claim a pension or a lump sum. This will remain true when you retire – no matter whether you opt for a pension or a lump sum payment. You will also need the pledgee's consent in the event of a pension settlement in the event of divorce or if you want your vested benefits paid out in cash. You will become even more dependent on the pledgee if you stop paying off your mortgage principal and interest and the pledgee insists on realising the pledge. The realisation of a pledge corresponds to an enforced advance payment from your retirement capital, reduces your retirement savings and triggers larger tax bills, which must be paid from your own funds.
Carefully compare the relative advantages and disadvantages of an advance withdrawal or a pledge of your retirement savings.