Pensions are falling: seven suggestions for your private pension provision
Low interest rates, increasing life expectancy, and falling conversion rates – future generations will have to expect lower pensions. Private pension provision is becoming more important. We have put together seven suggestions that will help you to live as worry-free as possible in your retirement.
Those who are already retired got lucky – at least as far as pensions are concerned. Today's retirees are benefitting both from the high returns of the past few decades, which allowed pension fund assets to grow, and from conversion rates that are too high by today's standards.
It is a different story for those who are currently employed: Low interest rates are stunting the growth of their retirement assets, and conversion rates are falling and will probably be even lower in a few years. Reforms are needed, and the controversial discussions as to what such reforms could look like are in full swing.
Pensions will fall
One of the latest studies from Credit Suisse shows that the future pension situation will deteriorate significantly unless countermeasures are taken. The study also examines the individual-level financial effects of the reform proposals currently under discussion by the involved associations and organizations. Even if several of these measures are actually implemented, pensions will fall and pension gaps will grow.
The current situation makes it clear that private retirement savings are more important than ever before. The importance of private pension provision is likely to continue to rise in the coming decades.
What you can do
We will show you seven possible measures you can take today to improve your own personal retirement situation.
Seven measures for private pension provision
1. Maximum contributions to Pillar 3a
Compared to all the other proposed reforms, this one is the most effective. It leads to an increase of up to 17 percentage points in retirement income – especially for lower incomes.
The maximum amount that an employed individual with a pension fund can contribute to Pillar 3a is currently CHF 6,826. Employed individuals without a pension fund may contribute 20% of their net income, up to a maximum of CHF 34,128.
Another big advantage of Pillar 3a contributions is their tax benefits. Depending on the particular municipality, the tax benefit dramatically increases the total return achieved through 3a saving.
Despite all these benefits, many employed individuals, especially women, do not make full use of the potential that Pillar 3a provides.
2. Higher returns on 3a savings thanks to securities
Returns on ordinary Pillar 3a pension accounts are modest today due to low interest rates. With securities solutions, you have the opportunity to increase your returns many times over. Opening a pension securities account is especially worthwhile if you have a long time horizon, i.e. for individuals in the early or middle phase of their career. This allows possible price drops to be offset.
A comparison between two employed individuals who both made the maximum contributions at the start of each year from January 1, 1987, through December 31, 2018, shows the following: While the first person contributed to a normal pension account, the second took advantage of the option to save with securities and so obtained CHF 84,463 more assets over the 31-year period.
3. Start making contributions to pillar 3a early – even small amounts
Making the maximum annual 3a contribution of CHF 6,826 can be unrealistic – especially for young people in the workforce. However, we do not recommend foregoing payments to the tax-privileged Pillar 3a just because of that. Even small contributions have positive effects – not just on your future pension, but also on today's taxes. In particular, young people with a long investment horizon can benefit from the securities solutions mentioned above.
Saving with securities pays off
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I would like to review and improve my Pillar 3a.
4. Contributions to Pillar 3b
The voluntary pension provision under Pillar 3b includes savings such as savings accounts, bonds, money market investments, equities, shares in investment funds, or residential property. The capital that has been saved can generally be accessed at any time. However, unlike the tied pension provision under Pillar 3a, the flexible private pension provision does not come with any tax benefits – with a few exceptions.
5. 2nd pillar: purchases of pension benefits
Anyone with coverage shortfalls in their pension fund – for example, because of time taken to raise a child or long periods of time spent abroad – is entitled to fill these gaps. Such "purchases" of pension benefits are – most of the time – more than the maximum allowed 3a contributions and are also deductible from taxable income. Unlike Pillar 3a, voluntary purchases of pension benefits are even possible retroactively and over several years. The maximum amount is calculated individually – the pension fund statement provides details.
Before purchasing any pension benefits, you should review various points, such as the financial situation of the pension fund and the regulations in the event of death. It is best to stagger your contributions over several years for tax reasons. However, keep in mind that after you purchase benefits, no lump-sum withdrawals are allowed during the next three years.
6. 2nd pillar: voluntarily make larger contributions
Some pension funds allow their insureds to voluntarily make larger savings contributions. In contrast to the purchase of pension benefits referred to in point 5, the voluntary savings amounts correspond to a certain percentage of the pensionable salary defined in the company pension plan. They are deducted directly from your salary by your employer and forwarded to the pension fund. Speak with your employer if this opportunity interests you.
7. Work longer – beyond retirement age
In addition to all of the other options mentioned above, there's one thing you shouldn't forget: You can work longer. The withdrawal of your AHV pension can be delayed a maximum of five years. Pension funds have different regulations, although they often have a maximum five-year deferral as well. However, it's hard to plan to extend your career. If your employer doesn't share your opinion, it can be difficult to find a new position. If you are unlucky, you can be confronted with a reduced conversion rate – simply during the phase of your extended career – and end up with the same pension you would have received if you had quit working at the standard retirement age. Therefore, when planning your retirement provision, working beyond retirement age should not replace the private pension provision.