New BVG 1e plans create interesting new optimization options for investors
Since October 2017, new possibilities for optimized wealth accumulation exist for entrepreneurs with the so-called BVG 1e plans. This offers investors and businesses new freedoms in designing their pensions. Andreas Arni, Head of Entrepreneurs & Executives, in an interview on benefits and drawbacks of the 1e plans.
Until recently, 1e plans were unheard of in wealth planning for entrepreneurs. But suddenly, they are gaining a lot of interest. Why is this?
Pension assets were always the most privileged asset pool for entrepreneurs – both from a tax perspective as well as because of prior claim in the case of bankruptcy. The 1e plans were newly regulated by lawmakers as of October 1, 2017. In the 1e area, there are new, tactical benefits for entrepreneurs.
And what are these new benefits?
1e pension assets are fully segregated from existing pension fund assets, meaning that every person insured saves into their own "pool," similar to the 3rd pillar. The benefit here is that they can determine their investment strategy themselves and do not have to accept any redistributive effects to their fund. Redistributive effects, unfortunately, are a fact of life today in Switzerland, determined by demographic trends and the state of interest rates.
You've talked about the benefits of the insured. Are there also advantages for companies?
Yes; companies that report in accordance with IFRS or US GAAP must include provisions for risks for pension fund solutions in Switzerland which burden equity capital. 1e is the only way to avoid these provisions and as a result, equity capital can be freed up. Even companies that report according to Swiss GAAP FER standards are affected in the case of shortfall.
Unlike other pension solutions, the investor has an investment risk with the 1e plans. How easy is it to estimate this?
That's correct. That's why it's very important that every insured person seeks advice when choosing an investment strategy and regularly reviews their portfolio. But the interesting thing is, by adopting this risk, opportunities arise. A positive performance is credited directly to the investors. What's more, one has plenty of control over the cost of one's investment. And this is a deciding factor in the long term for wealth accumulation.
What happens if someone chooses a higher-risk strategy, but their private financial situation changes later on? Is it possible to make changes?
The strategies can be changed on a monthly basis. In this case, again, it is important that the insured regularly consults with their advisor.
The 1e solutions are aimed at entrepreneurs and executives with an income of more than CHF 126,900*. To whom would you recommend the 1e pension plans in this group, and who wouldn't you recommend this to?
This solution is most suitable for entrepreneurs who will use their pension as a tactical instrument in their withdrawal strategy. Particularly for entrepreneurs who have non-operating reserves on various levels and have been reluctant to transfer these reserves to private assets. Because, let's not forget, in about two years – if we look at the population patterns – tax regulation 17 will be put into effect and then dividends will be taxed higher than they are today. We've been receiving a lot of inquiries about 1e since October. Because the effects from the higher taxation can be reduced by depositing dividends into the 2nd pillar.
* As of January 1, 2019, the entry threshold (minimum annual salary) for 1e plans increases to 127,980 francs.