Financial planning Retirement preparation the stress-free way

By our mid-50s, most of us have reached the zenith of our careers. So it’s worth making a start on preparing for retirement.

by Stephan Lehmann-Maldonado 20 Dec 2016

How would I like to live later on? That’s the question at the heart of retirement planning.

Retirement planning regularly hits the headlines. And yet many people put off dealing with it. The complex subject matter leaves them feeling perplexed. However, the key questions are relatively easy to answer.

Won’t my pillar 1 and 2 pensions be enough for me?

That depends on your standard of living after retirement. The fact is that, taken together, the pensions you receive from the AHV and your pillar 2 retirement plan generally cover around 60 to 70 percent of your former income from employment. Is that enough for you?

If not, you should start to close this gap in income – for example, by voluntarily buying into your pension fund and paying into pillar 3a (in 2017, up to 6,768 francs for individuals with an occupational pension plan). You can deduct these amounts from your taxable income. And the tax savings can be optimized if you spread the purchases into your pension fund over a number of years.

But watch out: after buying into the pension fund, no lump-sum withdrawals may be made over the next three years. You will not receive the AHV pension automatically once the time to retire has arrived. You have to submit an application to your compensation office three to four months before the date on which you wish to start drawing your pension.

Depending on the pension fund, a lump-sum withdrawal of retirement assets may even have to be notified up to three years in advance. Timing is important in this respect, especially for married couples: it’s best to spread the withdrawal of assets from pillars 2 and 3a over several years so as to break the progression to a higher tax bracket.

Can I afford to retire early?

It’s all a matter of planning. If you claim your AHV retirement pension early, that pension will be reduced over the entire period for which it is drawn. At the same time, you have to continue paying AHV contributions until you reach regular retirement age.

In the case of pillar 2, those opting for early retirement will have much lower retirement assets as they will have paid into the pension fund for a lesser period and lost out on income from interest and compound interest. Moreover, the conversion rate is lower for early retirement than for regular retirement. So, if you decide to take early retirement, you will have to expect a gap in income and a reduction in your occupational pension of several thousand francs.

You can close some or all of this gap by paying into your pension fund or pillar 3a, for example – both of which are attractive from a tax viewpoint. To avoid unpleasant surprises, detailed retirement planning is recommended.

When I retire should I have my pension fund retirement assets paid out, draw a pension or choose a mixture of the two?

Weigh up the pros and cons of the various options carefully. If you decide to withdraw a lump sum, you cannot later switch to a pension – and vice versa.

Which option is best for you depends on your family, health and financial situation. Drawing a pension generally provides more security. You know what amount you will receive for the rest of your life.

As a rule, drawing a lump sum gives you greater flexibility. You are free to decide how to invest the money and when to spend it.

In addition, there are differences between pension and lump sum when it comes to survivors’ benefits and taxation. Occupational pensions have to be taxed as income. And if the recipient of the pension dies, the surviving spouse usually gets just 60 percent of the original pension.

Ask your pension fund about the withdrawal options in good time. By law, you are permitted to draw at least one-quarter of your BVG assets in lump-sum form. Many pension funds even allow members to draw part of their retirement savings as a pension and the other as a lump sum.

Pension or lump sum?

 

Drawing a pension

Drawing a lump sum

Security

Lifelong security

Fluctuates depending on investment strategy

Income

In accordance with the conversion rate

Depends on the investment strategy, how your wealth is used up and market developments

Protection for survivors

  • 60% widow’s/widower’s pension
  • no mandatory benefits for common-law partner
  • unused capital reverts to the pension fund

Unused capital goes to the heirs; inheritance arrangements can be set out in the will

Taxes

Pensions are fully taxable as income

Capital is taxed at a reduced rate on payout; it then forms part of your general wealth. However, any capital gains are tax-free – only income from dividends or coupons is subject to income tax