KMU Magazin No. 10, October 2021 Treatment of pension assets under divorce law
Divorce is not only a major life event, but can also lead to complex legal issues. For example, what happens to the assets saved during the marriage and what effect does the divorce have on retirement provisions? This article provides information on the possible consequences and stumbling blocks.
In the event of divorce, spouses often argue not only about assets saved during the marriage or child care, but also about division of the financial contributions to the second and third pillar pension funds. It is all the more important to divide these funds if the spouses were not equally employed and were therefore unable to provide for old age to the same extent. This article is intended to provide information on the consequences of divorce in connection with pension assets and to point out individual dangers that could lead to unpleasant surprises.
The three-pillar system
The pension system in Switzerland is based on three pillars: state provision (first pillar), occupational provision (second pillar) and private provision (third pillar). This article deals only with the 2nd and 3rd pillars.
The second pillar consists of the statutory pension funds. In principle, all employees over the age of 18 with a minimum annual income of CHF 21,510 are insured. From the age of 25, the insurance not only covers the risks of death and disability, but also saves assets for the retirement pension. The pension fund is financed by contributions from employees and the employer. The third pillar, known as private pension provision, is voluntary for each person and can be individually structured through various savings and insurance solutions. If a married couple agrees on a classic division of roles i.e. one spouse looks after the children, the other is gainfully employed - only the gainfully employed spouse saves retirement assets for himself or herself. In the event of a divorce, however, the other spouse would be left without retirement benefits from the second and third pillars. The law counteracts this inequality.
The 2nd pillar
The law provides that the entitlements to occupational benefits acquired during the marriage up to the time of the initiation of the divorce proceedings are offset in the event of divorce (Art. 122 of the Swiss Civil Code). The vested termination benefits together with their vested benefit assets and advance withdrawals for residential property are divided in half (Art. 123 para. 1 of the Swiss Civil Code), with offsetting of mutual entitlements. The purpose of this division in half is to relieve the burden on the spouse who was unable to accumulate any or only a small amount of second pillar assets during the marriage.
The 3rd pillar
In the event of divorce, the third pillar assets of the pension are divided in accordance with the rules of matrimonial property law. If the spouses have not changed or amended the legal matrimonial property scheme by means of a marriage contract, each spouse is entitled to half of the other spouse's matrimonial property upon dissolution of the marriage.
In particular, the salary saved during the marriage is regarded as acquired income. If one of the spouses pays the contributions to the private pension plan out of his or her salary - which is presumed to be the case - the other spouse is entitled to a pension. The assets accumulated in this way in the 3rd pillar belong to the acquired property and the other spouse is entitled to half of them. The 3rd pillar pension assets saved during the marriage must also be divided in this case.
A person can draw early withdrawals from both the 2nd and 3rd pillars for the acquisition of an owner-occupied residential property. The tax consequences are not discussed below. If a person withdraws contributions from the 2nd pillar to finance a home of his or her own, the money continues to be tied up in the occupational pension scheme and must be paid back to the pension fund in the event of the sale of the residential property. The pension fund contributions invested in the home therefore continue to count as 2nd pillar pension assets to be divided under divorce law. In the event of a divorce, the early withdrawal must therefore be added to the other vested benefits and termination benefits to be divided.
A person can also make advance withdrawals from the 3rd pillar to finance a home. In contrast to the 2nd pillar, these funds are no longer repayable in the event of a sale. Nevertheless, they must still be taken into account and, if necessary, divided within the framework of the property law dispute. If such funds are used in the owner-occupied residential property, the division of the pension assets on the occasion of a divorce can lead to problems. This is particularly the case if one spouse has not accumulated any pension assets himself/herself and is entitled to half of the BVG funds or the acquired assets including the pension assets from the 3rd pillar of the other spouse. In this case, the spouse who is obliged to pay out may no longer have sufficient "free" contributions and/or other liquid assets to "pay out" the other spouse. This liquidity squeeze may mean that the owner-occupied residential property has to be sold.
If the residential property is not to be sold, but is to be allocated to one spouse as part of the divorce, the following solutions are possible:
- Pillar 2 contributions cannot in principle be reallocated. However, on the occasion of the divorce, the spouses may agree on a division other than half and secure the entitlement to the prepaid housing finance by other means, e.g. by means of appropriate pension maintenance or by means of a one-time capital settlement from uncommitted funds. However, the court must approve this agreement and ensure that adequate old-age and disability provision remains guaranteed for both spouses.
- A settlement of claims to pension assets can be paid out by funds from a spouse's own estate and personal property. Personal property is in particular assets which already belonged to the spouse before the marriage or which he or she received during the marriage by inheritance or free of charge. For evidentiary reasons, it makes sense to manage personal property separately from the other assets from the outset, so that as far as possible it is not mixed with the acquired property. It should be noted at this point that income from personal property is part of the acquired property by law; if you also want to have this income as personal property, this must be agreed in a marriage contract.
- The spouses also have the option of individual marital agreements. Income from Own property, for example, can be declared to be matrimonial property. It is also possible to agree on a matrimonial property scheme of separation of property or community of property instead of a participation in the matrimonial property scheme. With such instruments, free, non-divisible assets can be created, which can then be used to settle claims to pension assets of the other spouse.
- In the case of a Homeownership Promotion (WEF) advance withdrawal of pension assets, the question of the obligation to divide must also be asked, who is allocated the marital home as a result of the divorce. If the spouse who has made an advance withdrawal takes over the matrimonial home, the options already described, such as the one-off lump-sum settlement, may provide a solution. If the spouse who has not made an advance withdrawal but is entitled to an equalisation payment takes over the marital home, the invested funds can be redistributed to the spouse taking over. In this case, the spouse taking over is "credited" with the funds drawn in advance and invested as compensation for the division of the pension assets. In this way, the spouse who is obliged to equalise can discharge his or her debt without having to provide further financial resources.
However, it is always important to ensure that both spouses have sufficient retirement provisions. Individual adaptations of the statutory provisions in marriage contracts can also help to find sustainable solutions for both spouses.
Any consequences of divorce must also be taken into account, even if the discussion of this topic at the beginning of a marriage is probably not very popular.
Finally, in the event of divorce, there are several possible solutions to settle the claims of the individual spouses. However, in order for this to happen, both spouses must be in agreement.
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