Why should you make your own pension provision? We show you how easy it can be to save for retirement and how pillar 3a can help. When should you start, and how do you do manage everything easily?
Author: Olga Miler
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 6,826 (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.
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 6,826 a year into your pillar 3a account with frankly (that’s about CHF 570 a
· This will give you CHF 398,700 when you retire at the age of 64, or even as much as CHF 1,315,300 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: equity weighting of 75%, hypothetical return of 3.9% (net after costs); saving with securities is subject to fluctuations, the hypothetical return cannot be guaranteed and tax effects are not included in this forecast.
1. You supplement your retirement provisions so that you can live well in old age.
2. You save on taxes today.
3. You protect yourself and your family.
Pillar 3a is not (only) there for your old age, it can also help you:
· realise your dream of owning your own home
· facilitate your transition to self-employment
· if you wish to buy into a pension fund
· when emigrating from Switzerland
· if you should get a divorce
· if you unexpectedly receive a full disability pension
In all these cases, you can fall back on pillar 3a before you retire and have your money paid out early.
Whether you feel more comfortable with securities or a savings account is a matter of preference. Unless you make an advance withdrawal for the reasons mentioned above, your retirement benefits will only be needed in the distant future and will often be paid in regularly (e.g. once a year). These are ideal conditions for exploiting the potential returns of securities.
The advantages and disadvantages of investing in securities:
1. Higher potential returns: your money is more likely to grow, as a long-term securities investment offers higher potential returns than a savings account.
2. With a long-term investment (over ten or more years) you have a potential for higher returns, which you can also control via your risk profile.
3. You can also make your money do more by investing in sustainable securities
4. Your assets are exposed to the fluctuations of the financial markets, although you can smooth them out somewhat by making regular deposits, for example via a standing order.
5. The costs of investment products, a custody account and transactions may reduce your income to some extent.
Looked at from another perspective, when you invest in a savings account, your money feels safe but over time it can be imperceptibly eaten up by inflation. If you want to bear less risk, you can also opt for multiple 3a pillars, a combination of savings account and securities, or investment products with different proportions of securities, for example.
1. It's worth starting early. Ideally, you should start saving as soon as you enter into employment. But even if you haven’t done that yet, it’s always worth starting.
2. Even small amounts can make a difference. If you’re not able to save the maximum amount of CHF 6,826 per year just yet, just put away what you can. You will gain more by being proactive than waiting until you have enough money available.
3. Calculate the amount you wish to deposit and have it debited directly by standing order each month.
4. Decide whether you prefer to provide for your retirement with securities or a savings account. A savings account means you have less risk, but with very low interest rates you also have much less opportunity to let your money grow. You may also suffer a loss of purchasing power over time, meaning your money would be worth less in 20 years’ time. Investing in securities can help you avoid this.
5. Choose a suitable provider, open a pillar 3a account and make regular deposits. With a digital solution, this can be easily done in less than eight minutes.
6. Check your pillar 3a account regularly and enclose your tax certificate with your tax return so that you can benefit from the tax advantages.
7. Check your pension amount if necessary – either once a year or when your circumstances change..
Olga Miler is a financial and innovation expert. She has received numerous awards for her transformative work in the financial industry, including “Inspirational Woman of the Year 2019” (CityWealth Magazine), Top 200 Women in Fintech Powerlist (Innovate Finance) and recognition in the global press such as BBC News, CNBC and the Financial Times.
As an advocate for financial education, she regularly speaks at international conferences and writes the “Women & Money” blog for Watson News as a freelance columnist. After working at various banks she founded her own start-up, SmartPurse, a platform on which she offers digital courses, workshops and coaching on finance for women.
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