Even a cursory review of our three-pillar pension system shows that the benefits from the 1st (OASI) and 2nd pillar (pension fund) won’t allow you to maintain your standard of living after retirement, especially given current demographic trends, with rising life expectancies and falling birth rates. More weight is now being given to the third pillar: voluntary, private pension plans. People can choose from a seemingly infinite array of investment and savings options. One thing they all have in common, though: they are designed to plug funding holes left by the mandatory occupational benefit scheme.
Eric Gfüllner, pension expert at Helvetia, says there is no “right” time to start saving. Generally, however, the following applies: the sooner the better. “That way, you can maximise the power of compound interest and minimise your own investment,” Gfüllner advises. His advice is to start setting aside money as soon as you get your first paycheque. The actual amount is relatively unimportant in the beginning: “Even CHF 100 per month is a good start.”
Pillar 3a is an attractive and popular vehicle for building private pension plans. Not only do contributions earn interest, but they can also be deducted from taxable income. Pillar 3a accounts can only be opened by individuals with income subject to OASI. The deductible contribution limit for 2015 is CHF 6,768.
Recent entrants to the workforce can already start investing in the third pillar. Even trainees and students can pay into pillar 3a and reduce their tax bill. To qualify, they must have income subject to OASI and be insured in the 2nd pillar (occupational pension fund). If they are only insured through OASI but not through an occupational pension fund, they can still pay up to 20 percent of their income into a tied pension plan – up to CHF 33,840 in 2015. By the way, the same rule applies to anyone who is self-employed.
A word to the wise: pillar 3a is a tied pension scheme. Investors can’t withdraw paid-in capital whenever they please. Funds can only be withdrawn early if you want to finance residential property for your own use, start your own business, move away from Switzerland, pay back a current mortgage, receive a full disability pension or make extra voluntary contributions to your pension fund. Otherwise, the law specifies that the capital will be locked up until five years before retirement.
You can pay into a pillar 3a pension plan through a bank or an insurance company. If you choose the bank route, you can determine when and how much to pay into the 3a account. This flexibility is attractive to young adults who want to pay into the plan for a limited period, either because they plan to leave the country or want to use the money to buy residential property in a few years.
The insurance solution lends itself for people who want to put their savings in a secure investment over the long term. This option also includes insurance. For example, if you integrate the “waiver of premiums” supplement, the insurance company guarantees payment of periodic 3a premiums until the end of the contract if the insured becomes partially or fully disabled due to illness or accident.
According to Eric Gfüllner, it pays to spread pension savings over several accounts. Although it does require more attention, it provides much greater flexibility in planning. A pillar 3a account can only be paid out in one lump sum. “If you have several accounts, you are free to withdraw the money in stages. This will optimise your taxes by keeping you in a lower tax bracket.” For Gfüllner, it also makes sense to divide the savings up into bank and insurance models. The bank provides flexibility, while the insurance company can provide personalised solutions, says the pension expert.
“Teenagers and young adults always invest over longer terms, making them ideal candidates for products that use investment funds,” Gfüllner continues. These products give them exposure to investment markets. A portion of every payment goes into a fund that contains up to 50 percent stock. As a result, the pillar 3a investment fund has the potential to produce a higher final payout than a bank account or conventional life insurance. “The higher yield does, however, come at a greater risk,” Gfüllner warns.
Interest rates in the finance industry are at record lows. That underscores the importance of comparison shopping, the expert explained. If you invest money at the highest available interest rates, it will grow much faster over the years. Another possibility is a guarantee fund or a product with a base guarantee. “While guarantees are not absolutely necessary with longer terms, it’s hard to put a price on an investor’s gut feeling and sense of security,” explains Gfüllner.
For Gfüllner, one tip is especially valuable since it applies to all young savers equally: “I recommend getting good advice early on so that you can get the right solution for you.”
Eric Gfüllner is a key account manager in Private Pension Plans. He works at the head office of Helvetia Switzerland in Basel.