Using pension assets to finance the purchase of a residential property for own use (not as a holiday home or second residence) or to repay a mortgage loan has become popular. Up to one-fifth of all the existing residential properties, and one third of all the new residential properties, sold in 2010 changed hands using pension plan monies. Home ownership is often regarded as a form of retirement savings and has been expressly encouraged by Parliament since 1995.

Withdrawing pension assets to reduce mortgage costs

The minimum amount that can be withdrawn from a pension plan is CHF 20,000 except for the purchase of an interest in a co-operative residential association or a comparable form of co-ownership. Pension plan members may even make several withdrawals, provided there is a lapse of at least five years between one withdrawal and another. A member may withdraw his entire vested pension benefits before the age of 50. After 50, withdrawals are restricted. Withdrawals may be made up to the age of 62 or, at the latest, up to three years before retirement. Withdrawals are subject to income tax at a reduced rate. So, by making a withdrawal, a member can increase his equity while reducing his mortgage debt and interest charges.

Legally speaking, however, the withdrawn capital still belongs to the pension fund, so if the property is sold, the capital will have to be repaid to the pension fund. Members can also repay their withdrawals to improve their retirement benefits. The tax paid on the amounts withdrawn will then be refunded. Voluntary purchases of pension plan benefits can only be made after any withdrawals have been repaid.

Withdrawals are an expensive way to increase equity

Apart from increasing your taxable income and reducing your tax-deductible interest, withdrawals also reduce your pension benefits. So when you go into retirement, you will be short of the principal amount withdrawn and the interest which would have accrued thereon. In a defined contribution plan, withdrawals might even reduce your death and disability benefits.

A pledge is less expensive and involves less risk

Pledging your retirement savings capital is far less risky because you can avoid any gaps in benefits. The pledged pension assets remain with the pension plan but serve as collateral for the bank. In exchange, the bank will give you a mortgage of equal amount. The bank's charges will be deducted from the loan. The interest accruing will be higher because the mortgage debt is higher. But if you take into account the additional tax deduction (because of the higher interest) and the higher annual savings rate which avoids benefit gaps, a pledge is altogether less costly.