Switzerland's pension system has been based for decades on the three-pillar principle. But the foundation of this system is crumbling: At a time when state reforms for old-age provision are meager, private provision must be addressed. How not to be left with empty pockets at an advanced age.
Private retirement planning is on the minds of many Swiss people. Individual saving is becoming more and more important, because the Swiss pension system has problems to finance itself. How to ensure that capital is also secured in old age?
Time-tested but in need of renovation
Swiss politicians have been struggling for years to reform the pension system. The state pension insurance AHV wrote losses of over 2 billion francs in 2018. Partial successes give a boost again, even if only temporarily. In 2019, for example, the Swiss electorate adopted the AHV tax bill. However, this temporary stabilization does not solve the main problem of the AHV: The number of pensioners is increasing at an ever faster rate compared to the working generation. Thus, the AHV spends more money on pensions than it can collect in contributions from working people. That's why experts see black for the financing of the AHV and forecast negative figures for 2023 already again.
Time to act
The Swiss pension system is structured in such a way that payouts from the first and second pillars account for around 60 to 70 percent of the final salary after retirement. This monthly amount paid out should enable the retired to continue their standard of living as usual. But practice shows that this has not corresponded to reality for many for quite some time: While the AHV is having a hard time for the reasons mentioned above, the pension fund has repeatedly cut its benefits and, as a result, also income from the second pillar. Financial blogger Fabio Marchesin, better known as FinanzFabio, believes that employees need to look at the third pillar of the pension system, especially under these circumstances: "AHV and pension funds can both no longer deliver on their promise to allow the continuation of the usual life support in an appropriate manner. Taking responsibility for your own money is more important today than ever before."
The third pillar for old age
Possible income gaps in old age can be closed with the help of pillar 3a. It is a form of pension plan established by the constitution, which focuses on personal responsibility. In Switzerland, banks and insurance companies are allowed to offer pillar 3a under different conditions. The client then has the option of paying in a maximum amount each year, which is intended for old age. It is important to note that the deposit rules at the bank are different from those at an insurance company: the insurance company sees the deposit as a fixed premium and requires the customer to pay it in regularly. But it also offers the customer risk protection. In the event of disability, the insurance company takes over future payments, so that there is no gap. A bank, on the other hand, does not set a deposit amount and leaves it up to the customer to decide how much he or she wants to put aside. However, this is also how gaps in savings can occur.
The state pension insurance AHV wrote losses of over 2 billion francs in 2018. Partial successes give a boost again, even if only temporarily.
"If you only want to save money, this insurance is not for you. Anyone who needs coverage for themselves and their family should go to the insurance company and get individual advice," says FinanzFabio. Both institutions offer two different savings solutions: Interest savings or securities savings. With interest savings, you opt for a safe savings solution with low returns. Saving on securities generally allows higher returns, but involves a greater risk of loss with investments in shares and bonds.
Don't just save for retirement
Employed persons with a pension fund can pay in a maximum of CHF 6,826 for the year 2020. For employees without a pension fund and the self-employed, the maximum amount is CHF 34,128 or a maximum of 20 percent of earned income. This saving for the future also brings benefits for the present. In addition to the fact that the money earned is invested consciously, one also benefits from a lower tax bill. The contributions paid in the year can be deducted from taxable income. At the same time, the interest income is not subject to income or withholding tax. Pillar 3a is also a safeguard for loved ones: In the event of death, the money saved is not lost, but goes to the heirs.
The saved capital in pillar 3a is basically reserved for retirement provision. This can be paid out five years before retirement at the earliest. The exception is a so-called advance withdrawal, where you can withdraw the money extraordinarily. The law allows you to draw on the capital you have already saved in your Pillar 3a account to take up self-employment, to finance your own home and the associated mortgage, or to emigrate.
Be smart about your own retirement planning
As soon as you are subject to AHV and until you retire, you can pay into the third pillar. "If you earn money regularly, it makes sense to take out a pillar 3a," says FinanzFabio. During a vocational apprenticeship, studies or other initial training, income is usually rather scarce. "But those who work part-time can also pay something in according to their workload," the financial planner continues. Irregular or low incomes limit savings potential, but every deposit has a positive impact on retirement savings. For young people interested in saving, FinanzFabio has another tip: "Invest in financial education first. Read books, watch relevant videos and learn about personal finance before investing money."