With the implementation of the OASI Reform 21 on January 1, 2024, the gradual retirement process has been explicitly regulated in the pension law. Previously, partial retirements were only possible in practice, without any legal entitlement. A new regulation allows pension benefits to be withdrawn in lump-sum form in a maximum of three steps. The previous tax practice in the Canton of Zurich only allowed two lump-sum withdrawals as part of a partial retirement. The Zurich Tax Administration now also allows three lump-sum withdrawals for tax purposes, thereby aligning its practice with the legal provisions.
Canton of Zurich practice on lump-sum withdrawals during partial retirements
On October 2, 2024, the Zurich Tax Administration published a practice note outlining the conditions for tax recognition of partial withdrawals of pension assets in the event of partial retirements:
Maximum of three lump-sum withdrawals: Retirement assets can be paid out in a maximum of three steps. This applies even if the salary earned with the employer is insured with multiple pension funds. One step corresponds to all lump-sum withdrawals within a calendar year.
After the third step, retirement benefits must be paid out in the form of a pension. If a pension annuity is not possible, the lump-sum withdrawals are added together to determine the rate.
First partial withdrawal: The first partial withdrawal must generally amount to 20% of the total retirement benefit, unless the pension fund regulations provide for a lower amount.
Reduction of employment level: The employment level must be permanently reduced.
Adjustment of insured salary: The insured salary must be reduced in line with the decline in employment level.
Time interval between partial retirement steps: There must be at least one year between the steps of partial retirement. If the time period is shorter, the circumstances will be examined in detail.
If there is no evidence of non-fiscal reasons for falling short of this period, the tax administration is likely to aggregate the withdrawals for tax purposes.
Relation to salary reduction: The proportion of the retirement benefit withdrawn before the official retirement age may not exceed the proportion of the salary reduction.
Tax advantages of staggered lump-sum withdrawals during retirement
A staggered withdrawal of retirement benefits in lump-sum form can bring tax advantages, as the progressive tax rates are mitigated through staggered capital withdrawals. Spreading retirement benefits over several years generally reduces the overall tax burden.
Conclusion
With the OASI Reform 21, the legal framework for lump-sum withdrawals has been established. It is encouraging that the Canton of Zurich now recognizes these rules for tax purposes in its latest practice note, which contributes to legal certainty.
However, it should be noted that the practice in the Canton of Zurich is not necessarily transferable to other Swiss cantons. It is therefore recommended to consider the specific cantonal regulations before pursuing a partial retirement. The options under pension law may be more extensive than those recognised by the tax authorities.