Pillar 3a: It Pays to Start Early and Consistently Make Deposits – Even with Relatively Small Amounts
In their new study on Pillar 3a, the economists from Credit Suisse demonstrate how assets in Pillar 3a can develop. Deciding factors not only include the interest or return level, but above all, how long and how regularly deposits are made.
The interest rates are currently at a record low. In this environment, capital accumulation takes place significantly slower in Pillar 3a. For example, if you calculate with a current interest rate of 0.2% over a time horizon of 35 years, during which the maximum amount permitted today is always paid, then the resulting, cumulative interest income is
CHF 8,724 and the final net worth is CHF 245,604. An extended low-interest phase significantly reduces wealth accumulation. With the interest level rising again and an average interest rate of 1%, interest income would increase to almost CHF 48,000. At 4%, a final net worth more than twice as much comes together as with an interest rate/return of just 0.2%.
It is possible to raise the yield opportunities by using securities solutions. These historically have tended to bring better returns than interest accounts. But they do involve greater risks and fees. On the other hand, temporary fluctuations in value can often be dealt with in view of the long investment time horizon. For account holders who are more willing to take a risk and have a long investment time horizon, products with a high equity component are worth considering as they make it possible to achieve potentially higher returns. Here, it makes sense to consult with an expert.
There will be savings gaps if you take breaks between deposits
Not all households pay annually into their private retirement provision. In contrast to the second pillar, missed deposits into Pillar 3a cannot be compensated later. The following scenario shows wealth accumulation with regular deposits of the current maximum amount of CHF 6,768 compared to a person who makes no deposits for a period of seven years. Based on a mixed 3a model with an interest account and securities solution, an average interest rate/yield of 2% or 3% is assumed. In Scenario A with 3% average interest, the accumulated interest income given constant deposits (A1) is almost CHF 52,000 higher than in the event of a seven-year deposit break (A2). In Scenario B with 2% annual yield, the interest loss was still around CHF 30,000.
The older they get, the Swiss tend to pay into Pillar 3a more frequently. However, for wealth accumulation, it would make more sense to start with retirement savings at as young an age as possible because anyone who saves over a relatively long period of time will achieve a higher final net worth with the same interest rate. In the following scenario, an annual deposit of approx. CHF 4,800 over a period of 35 years results in a higher final net worth than if the maximum amount of CHF 6,768 is deposited annually over a period of 25 years. Although the total deposits are identical, the "early bird" achieves assets that are CHF 25,000 higher in the end than if the savings had started ten years later. It is therefore advisable to start saving for retirement at an early age – even if it is not possible to pay in the maximum amount.