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Created on 21.06.2018

Retirement planning – your first step to becoming an investor

Retirement planning is important to ensure you don’t spend the autumn years of your life in poverty. A good piece of advice is that you cannot start putting money aside for retirement early enough. It helps if you understand what retirement provision actually is. And what investment has got to do with it.

Retirement provision is based on three pillars in Switzerland: state old-age and surviving dependants insurance pension, employee benefits – such as pension funds – and private retirement planning. While state and occupational pension provision is usually managed for you, you have to take care of private retirement planning yourself. Past experience shows that Swiss people generally require around 80% of their previous income during retirement. This amount cannot usually be covered by the first and second pillars alone.

The column shows what the 3-pillar concept of retirement planning in Switzerland consists of. A triangular roof labelled “3-pillar concept” rests on three pillars. The first pillar is captioned “1st pillar” and “State pension”. This pillar is divided up into three blocks. Both of the two top blocks are captioned “AHV / IV” (old-age and surviving depends insurance/disability insurance) and “Supplementary benefits”, and the bottom block is captioned “Secures a minimum level of income”. This means that benefit recipients from the first pillar will have the living essentials in old age, when they are no long able to work and after someone’s death.  The first pillar in the 3-pillar concept consists of old-age and surviving dependants insurance (AHV) and supplementary benefits, and it ensures a person has the living essentials in an emergency. The second pillar is captioned “2nd pillar” and “Employee benefits”. This pillar is divided up into three blocks. The top two blocks are captioned “Mandatory coverage: BVG / UVG” (Federal Law on Occupational Retirement/ Accidental Insurance Act) and “Over-obligatory scheme”, the bottom block is captioned “Secures usual standard of living”. The aim of the second pillar is to secure someone’s usual standard of living with employee benefits, accident insurance and over-obligatory employee benefits. The third pillar is captioned “3rd pillar” and “Private pension”. This pillar is divided up into three blocks. Both the top blocks are captioned “Fixed: Pillar 3a” and “Free: Pillar 3b”, and the bottom block is captioned “Supplementing/filling gaps in coverage”. The third pillar receives tax incentives from the Confederation, and its aim is to supplement income from pillar 1 and 2 in a person’s old age, and to fill any gaps in coverage.

Pillar 3a: fixed pension plan

It is well worth taking control of retirement provision yourself rather than relying on mandatory contributions to state pension insurance. Pillar 3a is a particularly attractive option. As an employee with a pension fund, the maximum amount that you can pay into the third pillar is around CHF 7,000 a year. This amount changes every few years so check the current situation each year. Self-employed people can make higher contributions. This amount can be deducted from taxable income at the end of the year so it’s worth making the most of it if you can. However, if you do not wish or are unable to pay in the maximum amount, pillar 3a is a good option as it also allows you to save on taxes and benefit from higher interest rates, even with smaller amounts of money. Note that pillar 3a is a fixed pension plan. This means that withdrawal is possible five years before reaching retirement age at the earliest and five years after that date at the latest. Early withdrawal is only possible in certain circumstances, such as financing the purchase of your own home.

Retirement planning also means investment

Almost all banks have a retirement savings account 3a for your third pillar money. This allows you to pay in the maximum amount in several instalments or all in one go – for example, by using a bonus or the 13th monthly salary instalment. You can also pay retirement capital into a life insurance policy or invest it into a retirement fund, thus taking your first step from saver to investor. Lots of different retirement funds are available – there are funds with varying proportions of shares depending on how much risk you wish to assume with your retirement money. Unlike retirement savings accounts or insurance policies, here you can benefit directly from positive developments on the financial markets – returns have sometimes exceeded 30% over the past ten years depending on the type of fund. This means that quite a lot of capital can be accrued over a long-term investment horizon.

Pillar 3b: flexible retirement planning

Then there’s pillar 3b. This does not allow you to benefit from tax privileges, but you can invest your capital flexibly. This includes, for example, securities, shares, residential property or savings accounts.

So there are various retirement provision options available. As part of your private retirement planning, you can invest money relatively easily and benefit from attractive returns. Start planning for retirement as early as possible to ensure you are financially independent in old age and can enjoy life to the full when you retire.

Example calculation:
Let’s assume you start paying into the fixed pension fund at the age of 20: you receive a sum of CHF 326,530 after 45 years if you contribute the maximum amount of CHF 6,768 each year (maximum amount for 2018). Thanks to the interest rate of 0.3%, which remains constant, CHF 21,970 of that is pure interest (including compound interest).

If you only start making contributions ten years later under the same conditions – in other words, at the age of 30 – you receive CHF 250,117 when you reach 65 (CHF 13,237 pure interest). If you start paying into pillar 3a at the age of 35, the amount would be CHF 212,761 (CHF 9,721 pure interest).

As you can see, it is never too early to start retirement planning. Even if you don’t always pay in the maximum amount from the start, it’s still worth investing in your future when you are young. And find out about retirement funds – they usually provide higher returns than retirement savings accounts, especially when investing long-term.

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