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Created on 21.06.2018 | Updated on 28.01.2021

Retirement provision: 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:

  • The first pillar is the state old-age and surviving dependants insurance pension
  • The second pillar is employee benefits – such as pension funds
  • The third pillar is private retirement planning

While state and occupational pension provision is usually managed for you, private retirement planning is voluntary. That means you have to actively manage your 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: take control of your retirement provision and save on tax with a fixed pension plan

It is well worth taking control of retirement provision yourself rather than relying solely on mandatory contributions from 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 CHF 6,826 a year (as at 2020). This amount changes every few years, so check the current situation each year. Self-employed people can make higher contributions. The amount you pay in can be deducted from taxable income at the end of the year, so it’s worth contributing the maximum amount if you can.

However, even if you do not wish to pay in the maximum amount or are not in a position to do so, it is worth paying into pillar 3a, as even small contributions add up over the years. The tax-saving effect is therefore an important factor, independent of the current interest rate on the retirement savings account 3a. 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

Most banks offer a retirement savings account for 3a private retirement planning. This allows you to pay in the maximum amount in several payments or all in one go – for example, by paying in a bonus or the 13th month’s salary.

You can also pay retirement capital into a life insurance policy or invest it in 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 capital. Unlike retirement savings accounts or insurance policies, here you can benefit directly from positive developments on the financial markets and so have the opportunity to achieve a higher return on average. This means that quite a lot of capital can be accrued over a long-term investment horizon. Find out more about the differences between a retirement savings account and a retirement fund in our article “How to get more from your retirement planning”.

Pillar 3b: invest your capital with fewer restrictions with 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 347,530 after 45 years if you contribute the maximum amount of CHF 6,883 each year (valid as of 2021). Thanks to the interest rate of 0.15%, which remains constant, CHF 11,830 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 265,788 when you reach 65 (CHF 7,067 pure interest). If you start paying into pillar 3a at the age of 35, the amount would be CHF 226,959 (CHF 5,203 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 don’t forget to find out about retirement funds which offer the prospect of a higher return in the long run.

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