Pension provision: Debunking myths

Myths and misconceptions about pension provision: An overview

A lot of us tend to put off building up a retirement provision and planning for potential misfortunes – often in the belief that such measures aren't necessary when we're young. This is a myth, however; as is the assumption that marriage provides comprehensive protection – and these are by no means the only misconceptions. This article reveals the eight most common myths and explains why it pays to plan prudently and in good time.

Myth 1: Building up a retirement provision will only be worthwhile when I'm older

Young people in particular often labor under the misapprehension that pension provision is an issue for older generations. After all, there's still such a long way to go until retirement. But as we know, the early bird catches the worm – and this also applies to retirement provision.

If you start saving in good time and invest wisely, you could have a lot of money in your account by the age of 65 without having to get involved in risky investments. A long investment horizon and the compound interest effect are essential here. The latter causes earnings to grow exponentially over the years, which further increases the yield. And with a long investment horizon, you can generally take greater risks in order to benefit from greater potential returns. Last but not least, you can save on taxes each year by making regular payments into the third pillar. If you are late to start building up your pension provision, you'll miss out on all these opportunities, which could amount to upwards of CHF 100,000.

Myth 2: I probably won't get to see my pension capital anyway

There is a persistent misconception that pension benefits will no longer be available in the future, which is understandable given that the AHV is no longer on a stable financial footing. However, it is important to note that the first pillar is legally enshrined in the Federal Constitution. This means that pensions can't simply be cut, even if the AHV runs into financial difficulties in the future. The federal government and the Parliament must define a political process to govern the financing and benefits, with the people having their say by means of a referendum. In contrast to the first pillar, the second pillar is based on the individual pension fund. Your future pension is therefore dependent on the conversion rate according to the relevant regulations. Most funds give the option of having the entire capital paid out in a lump sum in old age. If the pension fund goes bankrupt, the BVG Security Fund will guarantee most of the benefits. Despite this security, however, it is still important to make sure you have a third-pillar pension provision, as the income from the first and second pillars is generally not sufficient.

Myth 3: I'd rather save my money outside of the third pillar

The third pillar may not amount to much in the short term, but in the long term you can build up a sizeable reserve. It is not currently possible to pay into the third pillar retroactively, so those who don't contribute lose out on the annual tax deduction – although there are political discussions ongoing regarding an amendment to allow back payments for missed years. Depending on your place of residence, income, and contributions, these tax benefits and the long-term return expectations can amount to more than CHF 100,000 over the years. Various financial institutions offer the attractive opportunity to invest the money in 3a funds with an equity holding of up to 100%, thus maximizing the potential returns.

Myth 4: If I were divorced, I would pay lower taxes and have a higher pension

Considering divorce as a means to pay less tax and receive more money from the AHV? Although this may seem like a good idea at first glance, a closer inspection reveals a different picture: The combined AHV pension for spouses is currently limited to a maximum of 150% of a single person's pension. This means that the AHV pension is often less important for those who are financially better off, as in addition to the state pension they generally also receive income from a pension fund as well as from savings and assets from the third pillar. In the event of divorce, however, the preferential treatment of spouses under pension and inheritance law no longer applies, and the surviving partner is excluded from statutory devolution of an estate. If there are children, the compulsory portions must also be taken into account. If the freely disposable share is left to the unmarried partner in a will, high inheritance taxes are payable in most cantons. It should also be remembered that marriage offers advantages in old age – if a person dies, the surviving spouse is entitled to a survivors' pension under the AHV. A survivor's pension for spouses is also payable from the pension fund. Divorcing purely due to financial considerations is therefore not recommended.

Myth 5: My expenses will reduce dramatically during retirement

Your financial expenses will change in a variety of ways once you retire. In most cases, though, the idea that they will reduce dramatically is a misconception because although you will no longer need to account for commuting costs, buying food while at work, and building up your pension provision, your expenses for leisure, travel, and hobbies will increase. This is especially true in the first few years of retirement, as many people want to fulfill their long-held wishes. It is therefore wrong to expect a sharp reduction in expenses.

Although taxes generally fall in old age in step with income, the drop is not as big as expected. Various deductions such as payments into the third pillar also no longer apply.

It would be false to say that expenses reduce dramatically when you retire, not least because the fixed costs for housing, insurance, and health insurance contributions remain largely unchanged. Your expenses might even increase during old age due to increased costs for healthcare and care services.

Myth 6: I am married and have no children so I don't need a will

One myth with serious consequences is the belief that a will is not necessary. Not having children does not mean that everything will go to your spouse. Without a will or early inheritance planning, the surviving spouse can often find themselves in financial difficulties, especially if the assets include real estate or businesses. In this case, a quarter goes to any immediate family. By law, the surviving spouse only receives the full assets if there are no living immediate relatives. The immediate family includes the parents or, if the parents are predeceased, siblings. A will ensures a clear situation after your death. To be valid, a will must be drawn up by both spouses individually, and must be either handwritten or publicly notarized. It is not possible to draw up a will jointly.

Myth 7: Our marriage means that my spouse and I are financially secure

Although marriage gives you more rights in relation to family matters (which perpetuates the myth), it does not provide a guarantee of financial security for spouses. And financial security is particularly important for married couples who own a home together. In the absence of appropriate provisions, the surviving spouse could be forced to sell the property if they are unable to pay out the legal heirs, such as any children, from their own financial resources. One solution here could be an inheritance contract. If a contract is concluded with the children, they could, for example, waive their compulsory portion. This would provide financial security for the surviving spouse or, if applicable, make it easier for siblings to take over the company. In this case, however, the consent of all heirs entitled to a compulsory portion is required, for which they must be of legal age. Alternatively, it is possible to conclude an inheritance contract without the children and only between the spouses; the children's compulsory portions may not be violated by such a contract.

Myth 8: I don't need an advance directive – if I lose decision-making capacity, my spouse is my legal representative

The statutory rights of representation of spouses are limited to everyday matters. They include the legal capacity necessary to cover maintenance requirements, as well as the proper administration of joint income and assets. This can quickly lead to a feeling of security in other matters as well, but it is important to be aware that an advance directive is required for decisions that go beyond these everyday matters. Examples include increasing a mortgage, selling a property, or accepting or waiving an inheritance. In the absence of an advance directive, the spouse must obtain the consent of child and adult protective services (CAPA) for the relevant legal acts. In some cases, it may even be necessary to call upon adult protection law. However, this makes the process considerably more time consuming and administratively complex. As with a will, an advance directive must also be handwritten or publicly notarized.

Conclusion: Don't underestimate the importance of good pension provision

Dealing with retirement provision may seem challenging, but dispelling myths and starting planning early are crucial for a secure financial future. Planning prudently for the future means that you can ensure not only your own well-being in old age but also that of your loved ones. A retirement provision is a fundamental building block for a carefree retirement and therefore deserves our full attention.