What you need to know about private pensions

For many of us, old age and retirement are some way off and the idea of a pension seems rather abstract – especially when we are still in the prime of our lives. We know that we’ll need it, but it’s not necessarily something we want to spend our time thinking about now. Retirement is simply too far in the future for that. If you feel the same way, you’re not alone.

But pension provision is like many things in life. Starting early and sticking at it will pay off in the long term, just like with fitness training, skiing, education or eating properly. That’s why it’s worth planning for your retirement now.

1. It’s easier: Since you can spread your contributions over a longer period of time, it’s easier to reach your goal. If you start saving at the age of 50, for example, you have to put much more aside. What’s more, the maximum annual amount that can normally be paid in and deducted from tax is currently CHF 7,056 (retroactive payments are not possible under current law). This means that you would then have to save separately in order to avoid a pension gap.
2. Save on taxes today: You can deduct the contributions for your private pension from your current taxable income. With a taxable income of CHF 85,000, for example, you could save up to CHF 2,500.

Ideally, you should start saving for retirement as soon as you enter into employment. It is possible to start at any time from the age of 18 onwards.
 

You can also still pay into the third pillar up to five years after you reach AHV retirement age. The only requirement is that you are gainfully employed in Switzerland and that you have an income subject to AHV contributions. To see the maximum amount you can pay in this year, click here. 

Together, the AHV (pillar 1) and your pension fund (pillar 2) will probably only cover 60% to 70% of your income after you retire. The following points are also important to bear in mind:

• Your cost of living often falls much less than expected in old age previous standard of living.
• Your healthcare costs may increase.
• You must have enough money for a longer life.
• You still have to pay taxes after you retire.

To maintain your standard of living after you retire, you need a private pension.

> How does the pension system in Switzerland work?

Let’s assume you are 30 years old, female and have an annual income (gross) of CHF 60,000. If you retire at 64, you will receive an estimated CHF 37,200 (CHF 3,100 x 12 months) per year from the AHV and your pension fund, which is about 62% of your gross income of CHF 60,000.

In order to maintain your standard of living, you will need an additional CHF 14,400 each year.

Say you live to be 84 years old, that’s CHF 288,000. If you don’t have a private pension, you will most likely have to lower your standard of living. However, if you save privately, you can reduce or even avoid this gap.

Is it impossible to save CHF 288,000?
This sounds like a huge amount of money now, but is absolutely achievable. 
Here’s how it might work:

• Suppose you’re a woman and you’re currently 30 years old.
• You haven’t yet made any provisions for your private pension.
• You start now and pay CHF 7,056 a year into your pillar 3a account with frankly (that’s about CHF 588 a month).
• This will give you CHF 382,500 when you retire at the age of 64, or even as much as CHF 923,200 in the best case scenario.

How does this work? By investing in securities and based on possible performance over time. You can run your own calculations using our pension calculator: 
 

Assumption: Balanced investment strategy with a hypothetical return of 3.2% (net of costs). Securities savings may fluctuate, the hypothetical return cannot be guaranteed and tax effects are not included in this forecast.