Retirement provision for women – special characteristics and challenges
Retirement provision becomes more difficult for women if gainful employment is interrupted for maternity reasons or reduced through part-time working. In such situations, gaps arise in their retirement savings. For this reason, women should engage with the topic of retirement provision in detail.
Women are more likely to have gaps in their retirement savings than men. The main reasons for this are career breaks and part-time working as a result of pregnancy and looking after small children. As a consequence, their pension fund contributions are reduced or even halted altogether. The issue of retirement saving can often be overlooked as women juggle childcare and work, with the result that many women only start to think about appropriate solutions when it is already too late. As an additional factor, the higher life expectancy of women poses additional challenges when it comes to retirement provision.
The lower the part-time working ratio and salary, the more serious the repercussions for old-age income. This is particularly true of Pillar 2 saving. Employers are only obliged to integrate their employees into their pension fund if the latter earn an annual salary of CHF 22,050 or more. This is what is known as the entry threshold. Employees earning less than this amount have no entitlement to an occupational pension, and therefore cannot save money for their retirement through this medium.
Another factor with major repercussions for the BVG (occupational salary) benefits of part-time employees is the so-called coordination deduction. This has the effect of disproportionately lowering the pension fund benefits of part-time employees.
Hypothetical example: Repercussions of the coordination deduction
If a full-time employee earns an annual salary of CHF 70,000, for example, this will equate to an insured BVG salary of CHF 44,275 (CHF 70,000 minus coordination deduction of CHF 25,725). But for those working only 50%, only CHF 9,275 is insured. So while the actual salary is reduced by a half in such a situation, the insured salary is reduced by more than three quarters.
Retirement provision solutions for part-time workers
Occupational retirement provision takes a particular hit if a person is working limited hours for various employers. In this case, the coordination deduction generally has to be applied repeatedly, or the annual salary will often not even reach the threshold for entry into the pension fund.
However, depending on the specific pension fund regulations, it may be possible – following consultation with the employers in question – for the individual salaries to be amalgamated if this would bring them above the entry threshold. This way the coordination deduction is only applied once, and the insured salary therefore works out higher. If this solution is not an option, part-time employees may join the BVG Substitute Occupational Benefit Foundation.
Women who work part time are also advised to make the most of private pension provision options with a view to maintaining their accustomed standard of living in old age. The earlier they start to save through Pillar 3a, the more they will benefit from a long investment horizon and the compound interest effect at a later stage. This form of retirement saving also has the effect of reducing the employee’s tax burden. Even small regular contributions are worthwhile.
An existing pension gap can also be reduced through the purchase of pension benefits. However, the amount that can be paid into a pension fund in this way is limited and depends on the current insured salary.
One of the benefits of being self-employed is that you can be more flexible in juggling the demands of work on the one hand and family/household on the other. But self-employment often entails a lower salary than you would earn as an employee. Moreover, if the business in question is organized as a partnership – be it an ordinary or collective partnership – there is no automatic affiliation to an occupational benefits scheme.
Retirement provision solutions for the self-employed
Self-employed persons working for an ordinary or collective partnership can insure themselves voluntarily under Pillar 2 – such as through the pension fund of their professional association, for example. If this is not possible, the BVG Substitute Occupational Benefit Foundation is another option. However, this is often the least attractive option, as only the minimum pension benefits can be insured, and in many cases, this will not cover the full salary. Another alternative is to set up a joint-stock company (“Aktiengesellschaft”) or a limited liability company (“GmbH”). With companies of this kind, it is generally mandatory for any salary of CHF 22,050 or more to be covered by a pension fund.
In addition, self-employed women should always take out insurance against the possibility of disability or death. This is particularly true if there are dependents who need to be protected. Furthermore, self-employed persons without significant financial reserves should always have daily benefits insurance in order to safeguard their income. If a self-employed person is unable to work for medical reasons, this insurance will pay a replacement salary for a certain period of time.
Motherhood is a frequent cause of women suffering a temporary loss of income. This too has dramatic repercussions for pension benefits. Because unlike in the case of part-time working, a woman cannot purchase additional benefits in either Pillar 2 or the tied Pillar 3 in the event of a career break. Those who are not employed and have no self-employment income remain obliged to make AHV contributions at least. The extent of this obligation will depend on various things, including the family situation. For example, if one spouse already makes AHV contributions, the non-employed spouse is typically also insured as a result. Otherwise, at least the AHV minimum amount of CHF 514 must be paid into Pillar 1.
Hypothetical example: repercussions of maternity breaks and part-time working for final pension
For example, if a 30-year-old teacher takes a six-year break to raise children and then works for eight years on a part-time basis of 60%, this will have serious repercussions for her pension. Her pension fund assets will be some CHF 95,000 lower than if she had continued in full-time employment throughout this period, while her Pillar 3a assets will be some CHF 80,000 lower. In other words, due to the career break and part-time working, the gross income of this teacher would work out 14% lower after retirement.
Retirement provision solutions for loss of income situations
Pillar 1: A statement of the individual AHV account from the AHV compensation office provides information about existing contribution gaps. Any gap can be retrospectively closed within five years.
Pillar 2: Payments to the occupational benefits fund can be made retrospectively at any time and are deductible from the taxable salary for those who are employed. Bear in mind that a three-year blocking period applies for capital withdrawals after making such payments, so they should be made no later than three years prior to retirement.
Pillar 3: As things stand, payments into Pillar 3a cannot be made retrospectively. However, the Swiss parliament recently accepted the motion "Enable the purchase of Pillar 3a benefits," which is designed to allow precisely that. That said, it is not yet clear when this legislative change would take effect.
As a rule, the following applies: Even with a very low working ratio, it is possible to make at least a small contribution to retirement provision through payments into Pillar 3a. Employed persons who are not affiliated to a pension fund and self-employed persons can pay in up to 20% of net employment income.
In other words, with net employment income of CHF 15,000, a maximum of CHF 3,000 a year can be paid into Pillar 3a. If the individual salary is not sufficient for such payments to be made, a higher-earning partner may be able to help out. An inheritance legacy may also provide an opportunity to contribute to retirement savings.
Although a longer lifespan is generally something to be welcomed, it also poses significant challenges for retirement saving. As a compounding factor, women in Switzerland can currently retire at the age of 64. According to national statistics, the life expectancy of a 64-year-old woman is currently 87 – and rising. Even as things stand, many people live to a much older age.
If a person has 25 years of retirement ahead of them, this must be set against a period of just 40-45 years in which retirement contributions have been made. In other words, the pension contributions of some four decades of gainful employment will have to suffice to see a person through almost three decades of not working.
It is unrealistic to assume that sufficient funds can be accumulated for retirement through straightforward saving. To give a hypothetical example, A woman working for 40 years without any career interruptions would have to save 38% of her income as pension capital in order to secure the same standard of living in retirement. But almost no one can save this proportion of their income.
Pension planning and investing for the future
Women who want to be able to fall back on a sufficiently large financial cushion in their retirement should additionally be investing in private retirement savings, i.e. Pillar 3a – ideally at an early stage, on a regular basis, and in a disciplined way. After all, the benefits paid through the mandatory state pension pillars (Pillar 1/AHV and Pillar 2/occupational benefits) are unlikely to suffice to maintain a person’s accustomed standard of living in old age.
It makes sense to start saving through Pillar 3a at an early stage. This will allow the full benefits of compound interest to be enjoyed, which substantially increase the final savings amount. For example, a person who saves CHF 1,000 and generates a return on securities saving of 3% a year will have a retirement pot of CHF 2,427 after 30 years. Of this amount, CHF 527 – or almost 20% of asset growth – is achieved through the compound interest effect.
It also makes sense to tailor investments to your individual needs. Engaging with their finances allows women to have financial security and independence at every stage of life.
Taking the initiative in retirement provision is worthwhile
Women who are married are particularly likely to leave issues like this to their husbands. They are often insufficiently aware of the consequences that a family career break or part-time working will have for their own retirement savings, and therefore do not fully exploit the opportunities open to them. Credit Suisse studies show that many women do not exploit the potential offered by Pillar 3, even in situations where they possess the financial means to do so.
How do I identify a pension gap?
I want to plan my retirement, where do I start?
Every pension planning situation is different. For this reason, it is important to obtain advice from an experienced specialist. The experts at Credit Suisse analyze your individual situation and phase of life, and show you ways in which you can maintain your existing standard of living in your old age.
What impact do my retirement assets have on the taxes I pay?
When you withdraw pension assets from Pillar 2 or Pillar 3, a lump-sum payout tax is due. The level of this tax varies, depending on the amount of capital withdrawn and the canton in question. In certain circumstances, you can save a great deal through forward-looking planning. Read up on the key aspects in this article.
When withdrawing pension assets, always remember that the higher the sum paid out during any tax period, the higher the tax that will apply. However, the tax rate for lump-sum payouts is lower and calculated separately from other income. However, here too there are differences from canton to canton. Read more in this article.
I would like to be protected against the possibility of losing the capacity to make decisions, how can this be done?
Two instruments are available to you here – the "advance directive" and the "living will." An advance directive covers all questions relating to the care of dependents, management of assets, and legal representation. A living will addresses medical questions. Further instructions such as organ donation can also be set up. Both these instruments should be established while you still have full capacity to act. Read up on the key aspects in this article.
The Women in Finance video series
The Women in Finance video series is about showcasing the three pillars of the #ChangetheGame campaign: striving for equality, amplifying women’s voices, and supporting financial literacy. The episodes look at a number of questions: Why do we need to embrace change and ensure that the rules are equal for everyone in a world with a 50/50 gender split? What invisible obstacles do women entrepreneurs in Switzerland face? How do those obstacles present an opportunity for women to drive change? The series also challenges barriers and misconceptions that prevent women from closing the wealth gap and shows how to deal with them.