Taking Control of Your Pension Planning
In these times of very low interest rates, combined with high equity and real estate values, making a voluntary purchase toward your pension benefits holds great appeal. Anyone choosing not to purchase benefits would have to achieve a return on investment of around 10 percent in order to have the same capital after ten years as with an additional payment into the pension fund.
Purchase Benefits or Invest in Securities?
The following sample calculation shows how attractive pension fund purchases can be, compared with conventional investment options.
|Purchases||Total purchases in the pension fund||CHF||400,000|
|Value of purchase amounts upon retirement||CHF||431,105|
|Tax savings on pension fund purchase||CHF||146,560|
|Value of tax savings upon retirement|
|(Investments in securities)||+||CHF||175,064|
|Tax charge upon withdrawal||-||CHF||56,387|
|Securities investments||Total investments in securities||CHF||400,000|
|Value of securities upon retirement||-||CHF||477,618|
|Conclusion||Benefit obtained from making purchases in the pension fund||CHF||72,164|
|Corresponds to a return of||18.04%|
Underlying assumptions: Swiss married couple, age 50, Protestant, domiciled in Thalwil
Income: CHF 350,000 (= taxable income), savings rate: CHF 50,000
Disposable assets: Securities portfolio of CHF 1,000,000, balanced investment strategy
Pension fund: Retirement assets of CHF 800,000, purchase gap of CHF 400,000, plans to retire at age 62
Additional payments are particularly attractive if they are made three to ten years before retirement. If they are paid in sooner than that, the tax-saving effect will be more diluted. One factor to consider is that lump-sum withdrawals are not permitted for a period of three years after any additional purchases (restriction under the law on pensions).
The conditions are as follows:
- People can only pay in if their pension fund has a pension gap or coverage shortfall (for instance due to a job change or stay abroad).
- Anyone withdrawing a portion of their pension fund capital for residential property has to first pay back this advance withdrawal before they are able to make voluntary payments again.
- It only makes sense to make additional payments to pension funds that are on a healthy footing (coverage ratio of 100 percent or more).
Voluntary pension payments are very simple to make. It is just as simple as paying into Pillar 3a. Anyone looking to combine pensions and securities investments can use Pillar 3a for additional return opportunities.
3a Sometimes Better than the 2nd Pillar
The criterion of risk diversification favors investing pension assets not only in the second pillar, but in the third pillar where possible on an annual basis. This means that as a whole, more funds can be put aside for retirement while taking advantage of tax relief. Because interest on the 3a pension accounts is only about 0.3 percent on average, 3a securities solutions with a large equity component are more appealing. The best pension funds achieved returns of over 30 percent over the last five years.