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Divorce because of the AHV pension?
In addition, married persons of AHV age receive only 150% of the single pension as a couple, despite having paid full AHV contributions. Cohabiting couples, on the other hand, receive two full individual pensions. This difference can amount to up to CHF 14,000 in one year.
Given this obvious disadvantage in old age, it is not surprising that more and more married couples are wondering whether or not it is appropriate and justified to divorce and to continue living as a cohabiting couple, in order to receive a better pension provision in old age. We would like to pursue this question in this article and try to find an answer from a purely financial and fiscal point of view. While searching for evidence, aspects of family or custody law, as well as family and social constellations are not considered and evaluated.
Taxation basics
With the decision to divorce, the previous economic unit "married couple" is dissolved and the division of the existing income and assets begins. With regard to the AHV, this means that there is an "AHV splitting". This means that the income earned during the marriage is divided equally between the two spouses, regardless of whether the two have both worked or earned the same amount of money. There are no exceptions to this rule.
The BVG and pension fund contributions are also distributed at 50% each. This is also intended to compensate for any contribution shortfalls resulting, for example, from childcare and "family work". A non-half splitting is only permitted in special cases.
Read more about buying into the pension fund after divorce
In addition to the AHV and the 2nd pillar, unless otherwise agreed under the separation of property or the marriage contract, a division of property is carried out, in which, among other things, the division of pillar 3a, life insurance and assets is carried out. Furthermore, in addition to regular maintenance payments, a spouse may also be awarded pension maintenance. This does not serve to cover current living costs, but is intended to help build up a spouse's future retirement provision if this cannot be achieved by the spouse's own efforts.
Once the division of income and assets has been completed, the former spouses will each receive a new individual AHV pension. This amounts to a maximum of CHF 2'370 (if there are no gaps in the contribution years and an average annual income of at least CHF 85'320) and a minimum of CHF 1'185. So if a couple divorces, they would receive a total maximum of CHF 4'760, instead of just CHF 3'555 totally. The difference is particularly significant if the legally divorced couple actually continues living together as a cohabiting couple. Through a so-called "sham divorce", the monthly pension is greatly increased, without any double expenditure for housing costs, car etc.
Comparison of the tax burden - an example
The following calculation for the tax year 2020 shows the extent to which married couples are disadvantaged compared to cohabiting couples. The data used in the example apply to a roman-catholic couple living in the municipality of Lucerne. Their annual income is calculated from the AHV maximum pension and a total of CHF 50'000 from the pension fund and the pillar 3a. Assets valued CHF 100'000 are owned together. It is further assumed that income and assest are divided equally among the spouses in case of a divorce.
Married couple (family taxation)
Income AHV per year:
CHF 42,660 (maximum pension)
Income from capital provision per year (BVG, pillar 3a):
CHF 50'000
Total income per year:
CHF 92'660
Total assets:
CHF 100'000
Income tax:
CHF 2,934.10
Wealth tax:
CHF 323.75
Tax on capital benefits:
CHF 1'432.15
Total tax burden:
CHF 4'690
Net income per year: (income less taxes)
CHF 92'660 - CHF 4'690
= CHF 87'970
Cohabiting couple (individual taxation)
Income AHV per year:
CHF 56,640 (maximum pension); CHF 28,320 each
Income from capital provision per year (BVG, pillar 3a):
CHF 50,000; CHF 25,000 each
Total income per year:
CHF 106,640; CHF 53,320 each
Total assets:
CHF 100,000; CHF 50,000 each
Income tax:
CHF 4'580.60; CHF 2'290.30 each
Wealth tax:
CHF 323.80; each CHF 161.90
Tax on capital benefits:
CHF 1152.20; CHF 576.10 each
Total tax burden:
CHF 6'056.60; CHF 3'028.30 each
Net income per year: (income less taxes)
CHF 106'640 - CHF 6'056.60
= CHF 100,583.40
Because the couple already receives a lower AHV pension and this lower AHV pension is also subject to progressive taxation under family taxation (applicable to income tax, the special tax on capital benefits and wealth tax), the couple will continue to be penalised twice over and will receive an annual net income of CHF 87'970. The cohabiting couple receives two full individual pensions in the same situation and is given preferential tax treatment, as their income is not taxed together and they therefore do not suffer under progressive taxation. It is to note that although the tax due on the income of the cohabiting couple is higher, this is a consequence of the higher income earned. Consequently, the net income available for the cohabiting couple is CHF 100'583.40. Even after taxation, it is obvious that married couples suffer from the "marriage penalty" because they receive about CHF 12'613.40 less than unmarried couples. It should be noted that the tax rate and the degree of progressive taxation vary from residence to residence. For example, the tax rate on capital benefits in Zurich is almost twice as high as in Zug or in Altdorf.
Is a sham divorce worthwhile?
In this sense, there is every reason to divorce before retirement. However, there are several reasons why this is not so often the case after all. Because although it is not the task of social security to check whether couples have actually separated, a "sham divorce" could be qualified as tax evasion, which would lead to the "newly-cohabiting couple" still being considered "married" for tax purposes and possibly a penalty. Although there is not yet a jurisdiction from the Federal Supreme Court on this issue, it is clear that "sham divorces" are well known in Federal Supreme Court the context of residence permits.
A further disadvantage of this "solution" is that the spouses lose all entitlement to a widow's/widower's pension in the event of divorce. This pension is calculated with an additional 20% of half of the couple's pension received so far. With this supplement, the remaining pension (except for maximum pension recipients) is higher than if a individual pension would be received.
The last point that speaks against divorce is the regulation of succession. During the marriage, partners will be subject to the following privileged rules in relation to other persons entitled to inherit. Thus, a spouse receives at least half of the total inheritance if the couple has descendants and at least three quarters if only heirs of the parental line are available. The entire inheritance passes to the spouse if none of the cases mentioned above apply to the situation. However, this privileged inheritance claim ceases to exist with the divorce. Also, if a will has been drawn up during the course of the marriage, it loses its effect with the divorce, unless it is explicitly mentioned in the will that it will continue to have legal effect after the divorce. If you want to continue to prefer your ex-partner as your heir after the divorce, it is necessary to draw up a new will and, depending on the canton, high inheritance taxes will be imposed. The only cantons which currently do not have inheritance taxes in Switzerland are the cantons of Obwalden and Schwyz. It is further also disputed whether such a will could also serve as evidence of a sham marriage.
Alternative possibilities for tax optimisation in old age
Even if one does not want to take this drastic step of divorce, there are other possibilities to optimize the financial situation after retirement. For example, staggered payments of the lump-sum benefits from the capital provision make a lot of sense, since the influence of the tax progression is reduced by the distribution over several tax years. A staggered payout can be achieved by, among other things, early withdrawals for home ownership, partial or early retirement, as well as a five-year early or belated payout of the pillar 3a. Another possibility is the transfer of domicile, but this is only worthwhile with correspondingly large payouts or if the idea of transferring is considered anyway, since the additional costs are relatively high.
Conclusion
The income difference in old age between married couples and cohabiting couples can be considerable. The reluctance of married couples to correct this difference through divorce certainly still displays the high importance and appreciation of marriage in our society and the disadvantages associated with divorce, e.g. in inheritance law. But the mere fact that couples are thinking about divorcing for financial reasons shows that financial pressure increases in old age, that social attitudes change and that the generally high number of divorces and the increasing number of cohabiting couples lowers the "moral" hurdle for such an undertaking. It remains to be seen how the social services and the courts will be able to cope with an increased number of such "sham divorces", which would in any case definitely cause additional costs for the social welfare institutions.
Read more about the tax consequences of a divorce or separation