Retirement is still a long way away, retirement planning with the Swiss three-pillar system is under pressure and private retirement planning 3a sounds really complicated. So where and how exactly do you start? A lot of us find the prospect of retirement planning overwhelming. However, if we want a comfortable life when we’re older, we should start making provision for retirement as early as possible. We give you six good reasons that will encourage you to start planning for retirement now, in particular with pillar 3a:
Seven good reasons to start private retirement planning now
A care-free, independent life in our old age is something we all dream of. To achieve this goal, we need to start thinking about retirement planning early on. Seven good reasons that demonstrate why you should get started with private retirement planning 3a now.
The shortfall is there and needs to be dealt with.
It is no secret, but it cannot be stressed enough: life expectancy of Swiss men and women is increasing. Measures must be taken by politicians, for example, to ensure the pension we receive is enough by the time we retire. According to the legislator, the first and second pillar were originally designed to ensure that upon retiring, a person would receive 60% of their previous income as pension in order to continue enjoying the same standard of living. Practical experience, however, shows us this figure would need to be 70 to 80% of the person’s most recent gross salary. If the amount paid upon retirement is below this benchmark, this is known as a pension shortfall. Pension shortfall can be avoided if you spot it early on and do something about it. Find out more about retirement and how to prepare for it in our article “I’m drawing close to retirement – what do I need to know?”
With retirement comes an increase in costs
Continuing to enjoy the same normal standard of living as you did before – regular eating out, holidays, healthcare expenses, etc. – can be a bit of a challenge in old age in terms of the costs involved. What exacerbates this problem is that there is actually no such thing as “normal life” after retirement. For those people who previously worked full time, retirement means a big life change. This is because you essentially stop working from one day to the next, and you suddenly have a lot more time to spend on other things. It is then very likely that we will devote this new-found time to activities that involve additional costs. In addition to this, fixed costs (for instance health insurance premiums) tend to go up with age, whereas pension income goes down due to falling conversion rates in the second pillar. To find out why you should also think about investing when you are older, take a look at the article “Investing after retirement: what you need to bear in mind”.
The transition to retirement triggers mixed feelings in a lot of people. Some look forward to it, whereas for others, their new-found freedom may end up being just one big void. Familiar schedules, meaningful activities and promising plans suddenly become a thing of the past – which is something you want to prevent. Private retirement planning is becoming increasingly important, and we want to be the sort of pensioners who take up a new hobby when they’re older, who channel their energy into a new project or who rediscover the world. This is what makes starting private retirement planning early on all the more important. After all, it is only with private retirement planning that we can cover our pension shortfalls and continue enjoying the standard of living we’re accustomed to in old age.
You can rest assured this will all pay off.
Some undergo training and further their education on an ongoing basis, never miss an opportunity to advance their career and work diligently from dawn to dusk. Others invest a great deal of time and effort in working around the house and in family life, raising their children and ensuring they grow up to be happy, independent adults. But other people have a completely different attitude to life. However, there is one thing most of us have in common: we all concentrate on what is closest to our hearts. And that really should pay off in the end. We all reach a point where we have worked enough, we have raised our children to be independent or we decide for some other reason that now is finally the time to put the feet up and relax.
It would be a real shame if all that hard work was for nothing. With a 3a account, practically the only way you can build up your assets is through inpayments. But today it is well worth considering other investment types. Taking into account the investment horizon, you will be able to make investments that will make dreams of care-free retirement a reality using just a few tricks. For instance, in just a few steps, you can invest retirement capital from your retirement savings account 3a or your vested benefits account in retirement funds, and thus make more long-term, return-oriented retirement planning. Find out more about your options in our article “How to get more out of retirement planning”.
You can benefit right now
And here is the good news: retirement planning is not just about the future, but the present as well. For instance, you can enjoy tax benefits by making inpayments into pillar 3a. In other words, you can deduct annual contributions paid into your 3a fixed pension plan from your taxable income up to the legal limit. By doing so, you are not just saving up for retirement at a later date, but can already benefit from tax benefits today.
And don’t be put off by the term “fixed pension plan” either. The money you invest in pillar 3a is by no means unconditionally bound to the whole duration of the plan until you reach retirement age. Pillar 3a retirement assets can be paid out at the earliest five years before and at the latest five years after the statutory retirement age. Under certain circumstances, for instance when starting a self-employed activity, buying your own home or moving abroad, you can also access your pillar 3a funds earlier.
Sometimes a lot can come from (practically) nothing – how to be a smart retirement planner
Want the money for your private pension to go further so you can continue enjoying your usual standard of living? Retirement funds, and the risks they involve, give you the opportunity to make your retirement capital go further than if it were to remain in a low-interest retirement savings account. In other words, if you don’t just want to save your money in a retirement savings account, then by investing in retirement funds, you can benefit from higher average returns in the long term, and thus get more out of your retirement capital. Retirement funds do offer higher potential returns on average, but are also associated with greater risks due to fluctuations on financial markets. Across a longer period of time (investment horizon), a retirement fund has scope for recovering even in the event of downturns on the market.
Here is an example that also applies to the third pillar: if, over the course of 25 years, a person invests the current maximum amount of CHF 6,883 (as of 2022) in pillar 3a, then after 25 years, they will already have about CHF 239,000 (based on a hypothetical average return of 2.5%). After 35 years, this figure would be as high as CHF 384,000. That is no small amount! To understand exactly how the compound interest effect works, we recommend the article and video “The compound interest effect in simple terms”.
At last, a form of retirement provision you can manage independently
“By the time I retire, our pension system will be in difficulty anyway.” Many Swiss people think like this today, especially the younger generation. It is also not surprising that confidence in the current retirement planning system is waning.
Switzerland is confronted with an ageing population, and this is a key challenge for the country. What it means is that the number of people in retirement is increasing, and the number of working individuals who pay into the retirement planning system is decreasing. As it stands, there are still no solutions to this funding shortfall in sight.
Private pension (pillar 3a), unlike the first and second pillar, explicitly constitutes a form of retirement provision that serves as an individual supplement that anyone can manage on their own, and to which the Confederation and the cantons apply tax benefits. These are not contributions that are redistributed (as with the first pillar) or managed by private or public-sector institutions (as with the second pillar). Private pensions, which are boosted by personal contributions and tax benefits, enjoy the most trust among the population because of the challenges the first and second pillar involve.
And that’s a reassuring feeling.
You have now made the first step by reading this article. Here are a few more tips on how to specifically approach your private retirement planning today:
- assess your current situation and work out how much your expected pension will be. For example, you can get an estimate of your AHV pension on the The link will open in a new window Confederation website. You can obtain information about your second pillar directly from your pension fund
- Calculate how much tax you will save by paying into pillar 3a using our “Pillar 3a tax savings” calculator
- Do you already have a retirement savings account 3a but are considering investing in a retirement fund? You can find out more about the differences between a retirement savings account and a retirement fund in the article “How to get more out of your retirement planning”
It’s less important how you start your private retirement planning. What’s much more important is to actually start putting money aside. After all, the earlier you get started, the more you can look forward to a comfortable life – both now and in future.