Early retirement: the triple LPP penalty no one anticipates.
Leaving at 62 rather than 65 costs much more than it seems. Triple LPP penalty: fewer contributions, less compounding, reduced conversion rate. The math, plainly.
Leaving at 62 rather than 65 is three extra years of freedom. And, in the 2nd pillar, a triple penalty that quietly stacks: fewer contributions, less compounding, and — depending on the fund — a lower conversion rate. The pension loss can exceed CHF 8,000 per year, i.e., more than CHF 160,000 over 20 retirement years. Good news: it can be calculated. And offset.
Penalty 1 — Missing contribution years
Every working year feeds your 2nd pillar. When you leave early, you lose both the employer contributions and your personal contributions, calculated on the "retirement credit" share of your coordinated salary.
For an annual salary of CHF 110,000 and a 18% credit (55–65 bracket per LPP art. 16), the annual theoretical capital loss is about CHF 18,000. Over 3 years: ~CHF 55,000 of capital that will never be built.
Penalty 2 — Compounding that evaporates
This missing capital is not just absent at 62 — it would have continued earning interest for 15 to 25 retirement years. At the LPP 2024 minimum rate of 1.25% (extra-mandatory reality is often higher), CHF 55,000 compounded over 20 years at 2% yields ~CHF 82,000.
Penalty 3 — Reduced conversion rate
The conversion rate (CR) is the percentage that turns your LPP capital into an annual life annuity. At the legal level (LPP art. 14, mandatory part) it is 6.8% at 65. But this rate drops in case of early retirement, to offset the fact that the pension will be paid longer.
Each fund sets its scale. Indicatively, many apply:
| Departure age | Typical conversion rate | Effect vs 65 |
|---|---|---|
| 58 | ~4.8% | −1.8 points |
| 60 | ~5.2% | −1.4 points |
| 62 | ~5.6% | −1.0 point |
| 63 | ~5.8% | −0.8 point |
| 65 | ~6.6% | reference |
The full calculation: 62 vs 65
Salary CHF 110,000. Current LPP assets: CHF 580,000. He targets a departure at 62. His fund applies a 5.0% CR at 62 and 5.6% at 65.
- Projected capital at 65 (status quo)
- CHF 720,000
- Projected capital at 62 (early departure)
- CHF 640,000
- CR at 65 (fund)
- 5.6%
- CR at 62 (fund)
- 5.0%
- Annual pension at 65
- CHF 40,320 720,000 × 5.6%
- Annual pension at 62
- CHF 32,000 640,000 × 5.0%
- Annual difference
- −CHF 8,320 for life
- Total loss over 20 retirement years
- −CHF 166,400
And other income at 62?
Early retirement also creates "gaps" to fill between departure and AVS age (65 from 2028 for men AND women under AVS 21):
- Early AVS: possible from 63 (62 for women born before 1969), with a reduction of 6.8% per year of advance, for life (LAVS art. 40).
- No AVS at all if you leave at 60-61: income only from your LPP in the meantime.
- Mandatory "non-active" AVS contributions between departure and AVS age (minimum CHF 514/year, maximum CHF 25,700/year in 2024 depending on income/wealth).
Compensation strategies
1. LPP buy-backs staggered over 5–10 years
If your pension certificate shows a gap (see our certificate guide), you can close it with buy-backs. Every CHF bought back increases your final capital and future pension. Tax bonus: 100% deductible from taxable income in the year of payment (DBFTA art. 33 para. 1 let. d).
2. Continue working part-time
Many funds allow partial retirement: you take 30–50% of the pension at 62 and continue contributing on the remaining 50–70%. The CR penalty only applies to the part brought forward. Check your fund rules — often the most profitable optimization.
3. Combine annuity and capital
Rather than taking everything as annuity, many withdraw part as capital (mortgage repaid, taxation optimized) and keep an annuity for base income. See our annuity vs lump sum guide.
4. Check there are no forgotten accounts
Before any calculation, you need to know all your LPP assets. A 40-year career with 5–6 employers often creates several unidentified vested benefits accounts. Discovering CHF 30,000 forgotten at 58 is ~CHF 1,700 of additional annual pension for life.
When to start planning?
The most profitable corrections happen between 50 and 60. After 60, margins narrow (3-year buy-back rule, capital already mostly built, little time for compounding).
If you are over 50 and considering early retirement, follow our pre-retirement checklist. Six concrete actions, complete method.
Common mistakes
- Relying only on the visible LPP amount without verifying potential vested benefits accounts. A single certificate does not tell the whole story.
- Forgetting that the early CR is negotiated by the fund, not by law. The scale may be harsher than average. Ask in writing.
- Underestimating inflation over the retirement duration (20–25 years). A fixed nominal pension loses ~30% of purchasing power over 20 years at 1.5% inflation.
- Believing AVS takes over at 62. Early AVS is only possible from 63 (men) with a permanent reduction.
- 01Three cumulative penalties: fewer contributions, less compounding, reduced conversion rate.
- 02On a typical case (departure at 62 vs 65), the loss can exceed CHF 160,000 over 20 retirement years.
- 03Solutions: staggered buy-backs before 59, partial retirement, annuity/capital mix, and identifying all forgotten accounts.
- 04Planning must start between 50 and 60 — after, correction margins are narrow.
To understand what your certificate says about your current situation, see our line-by-line decoding. For the annuity vs lump sum choice at retirement, our detailed comparison. To identify opportune buy-backs, our buy-back guide.