Nine key terms related to pension provision. Explained briefly and concisely in videos.
What the heck is... retirement provision? The pension system in Switzerland is based on three pillars: state, occupational, and private pensions. The key terms related to AHV, BVG, and Pillar 3a explained in nine brief videos.
Pension provision in Switzerland
Retirement is a topic that concerns everyone. So it is essential to think about AHV, BVG, and private pension provision early on. But this is such a complex topic with so many specialized terms that it can be confusing. In nine videos, young adults provide brief explanations of the key terms related to pension provision.
The pay-as-you-go system is a method of financing benefits and is put into practice in Switzerland, for example, in the form of the AHV (Federal Old Age and Survivors’ Insurance). Under this system, the benefits paid to those entitled to a pension during the course of a year are financed through contributions by employees made that same year. The contributions are "allocated.” In this way, the younger generation finances the pensions of the older generation, and later on they will be financed by the generation after them.
Splitting is used to determine the AHV retirement pension of married, widowed, and divorced individuals. To do so, the incomes received by the two spouses during their marriage are divided, and each spouse is credited with half. The same principle applies to persons in a registered partnership.
The Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) governs the mandatory employee benefits insurance, and thus the 2nd pillar of the Swiss pension system. Combined with the 1st pillar (AHV), the benefits are intended to amount to around 60% of the employee's last salary. In order for employees to be able to maintain their accustomed standard of living in retirement, they generally need a private pension provision 3rd pillar.
The pension fund is an element of employee benefits insurance and within the three-pillar system it belongs to the 2nd pillar. In general, when employees turn 25 a portion of their income is deducted each month to help them build their retirement assets. After they retire, employees may take their retirement assets as a monthly pension, as a lump sum, or as a combination of the two.
The conversion rate or conversion factor is the percentage used by pension funds to calculate the amount of the annual pension. Upon retirement, the rate is multiplied by the retirement assets that an individual has saved. The conversion rate for mandatory employee benefits insurance is determined by the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG). For the extra-mandatory portion, the pension fund determines the conversion rate at its discretion.
In most cases, the pension received when someone retires is lower than the (net) income they earned prior to retirement. A pension gap is a term used to describe when the benefits from employees' state and occupational pensions are not sufficient to allow them to maintain their accustomed standard of living after they retire. One of the options for closing this gap is by making voluntary savings into the 3rd pillar.
The 3rd pillar, or private pension provision, used to close gaps in the 1st and 2nd pillar provisions. It consists of Pillar 3a (tied pension provision) and Pillar 3b (flexible pension provision). The 3rd pillar is voluntary and helps employees to maintain their accustomed standard of living after retirement.
Deposits into Pillar 3a can be used to build up your private retirement provision. You can either save in a pension account – 3rd pillar or invest in securities with a pension securities account – 3rd pillar. The deposits can be deducted from taxable income up to a statutory maximum amount which, depending on your individual tax burden, can amount to several hundred Swiss francs per year in tax savings.
In addition to the familiar pension account, Pillar 3a pension foundations generally also offer the option of investing deposits and accumulated capital in securities – in the so-called savings with securities – 3rd pillar. The retirement capital can be invested in one or more investment products. Securities typically offer a higher return potential, but are also subject to price fluctuations. Saving with securities is best suited for those with a medium- to long-term investment horizon.