Under current law, life annuities are excessively taxed in Switzerland. In case of a running life annuity, 40% of the annuity is treated as income and 60% as a tax-free repayment of capital. As a result, part of the capital repayment is thus taxed as income.
With the motion “Stop the tax penalty in pillar 3b”, a change in law was initiated and approved by the Swiss Parliament in 2022. The Federal Council decided to put the new legal provision into effect as of 1 January 2025.
What changes in the taxation of life annuities?
Based on the new legal provisions, a distinction is made between Swiss and foreign life annuities. The taxable income portion of Swiss life annuities is determined based on the maximum technical interest rate which applies at the time the contract is concluded, as determined by the Swiss Financial Market Supervisory Authority FINMA. In order to calculate the taxable income portion, it is assumed that the life annuity has a term of 22 years. In case of a life annuity insurance, 70% of any profit share paid to the beneficiary is considered taxable income.
Consequently, the insurance companies have to indicate the guaranteed life annuity, any profit share and the taxable portion in the annual certificate issued to the policy holders. The income portion of running life annuities is subject to Swiss withholding tax and must be reported annually by the insurance companies to the Swiss Federal Tax Administration (SFTA). The SFTA forwards the notifications to the cantonal tax authorities for control purposes.
In the case of non-Swiss life annuities, the average return of federal bonds with a ten-year term in the tax year and the nine preceding years, increased by 0.5%, is used to calculate the taxable portion of the annuity. This markup is added to avoid preferential tax treatment of non-Swiss annuities. A term of 22 years is also assumed for non-Swiss annuities.
Life annuities become more attractive from a tax perspective
With this change in law, life annuities will become more attractive for policy holders. However, even with the new method, there is no exact split into capital repayment and income component based on the specific case. Like the life annuity itself, its taxation is of an aleatory nature and becomes more attractive, the longer the beneficiary lives.
In the absence of a transitional provision, the new provisions also apply to existing life annuity insurances and contracts, including such that have already started running.
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