Pension planning according to life phases
What’s important at what age
If you want to have no financial worries in old age, you should start planning as early as possible, starting with the third pillar.
by UBS Insights
25 Oct 2018
The sooner, the better
When you’re young, you want to discover the world, launch your career and enjoy life. The thought of saving for retirement is often the last thing on your mind. But this is the wrong way to go, simply because the sooner you start saving, the better. It’s worth paying into the third pillar on a regular basis, even fairly small sums. This will lead to a gradual increase in your retirement assets – thanks to preferential interest rates, the compound interest effect and, in the case of retirement funds, returns on investments.
What’s more, your tax bill is reduced because payments into pillar 3a can be deducted from taxable income up to a certain amount. And the money you save there is not “lost” should you need it later to buy a house or found a company, since in such cases you don’t have to wait for retirement to use it.
There are other reasons for taking care of your provision at an early age: To get the maximum AHV pension when you retire, it is very important to avoid gaps in contributions such as can occur, for example, if you don’t make payments while you’re studying. Provision for retirement should also be taken into account if you plan to spend a longer period abroad or take a career break.
Providing for your family
With your career progressing, the thought of starting a family might arise. It may now make sense to take out a life insurance policy as part of your private provision – to protect your family from financial difficulties in the event of your disability or death.
In particular, couples who live together without getting married need to think seriously about their financial security. The AHV does not pay a widow’s or widower’s pension to an unmarried partner. Under certain circumstances, however, they may benefit in pillars 2 and 3. But this requires them to become proactive; it is not regulated by law.
If you regularly pay into pillar 3a, you should maybe think about a second account. As a rule of thumb, this makes sense after you’ve saved up 50,000 francs. The reason for this is that if you have different accounts, the money saved can be paid out bit by bit in retirement – keeping your tax burden to a minimum.
Pensions made simple
You’ll find concise, helpful tips about retirement planning in our guide “The ABCs of retirement planning.”
Around this age people often decide to buy a house or apartment of their own. Money from the second and third pillars can be used for this. All the savings in pillar 3a are available for financing real estate for your personal use. The amount you can withdraw in advance from your pension fund is limited from the age of 50 on. Please note: an advance withdrawal from the pension fund reduces the amount of money available to you in retirement and possibly also your insurance coverage for death and disability. Alternatively, pension fund assets can be pledged as a security for the bank, which has no effect on your old-age benefits. The downside of this is a higher mortgage and thus a higher interest burden.
Your retirement provision can also be used to indirectly amortize (repay) your mortgage: your debts remain unchanged; instead you pay the money into a pillar 3a account. The 3a capital must then be used to repay the mortgage when you retire.
Things don’t always go as expected in life: in the event of a divorce, your pension will also be affected. It is worth seeking professional advice to keep an overview.
Can your wishes be financed?
It’s high time now to take a closer look at your retirement. The first thing to do is talk about your wishes. What standard of living do I want when I retire? Do I want to work fulltime until the normal retirement age or might I consider part-time work? Is early retirement in the cards?
These wishes must be balanced with your financial options. If gaps become apparent, there is still time to make changes. Either you have to scale down your wishes or – if possible – increase the financial cushion for old age.
Voluntary purchases of pension fund benefits are a popular solution, and are an option if you discover what is known as a pension gap. This can come about through wage increases, time spent abroad or career breaks (e.g. for family reasons). Whether this is possible can usually be seen from the benefits statement. One advantage of these purchases is that they can be deducted from your taxable income.
Other ways of increasing the financial cushion are to make payments into pillar 3a or build up capital outside the tax-privileged framework (pillar 3b).
An important question remains
When you retire, your savings can be harvested. Before that, however, a crucial question still needs to be settled: pension, capital or a mix of the two? The question is whether your pension fund assets should be paid out as a lump sum or as a monthly pension.
There is no simple answer to this. The decision depends on your life circumstances, your willingness to take risks, your financial know-how as well as on your income and assets.
A regular pension provides greater security: The pensioner receives a dependable monthly income for the rest of their life. In the event of death, the surviving spouse benefits from a life-long guaranteed survivor’s pension, which is usually less than the deceased’s pension. A lump-sum payment, on the other hand, offers more flexibility. And in the event of death, the unused retirement savings pass on in full to the heirs.
Apart from this, the payout of pillars 2 and 3 needs to be coordinated before you retire. A staggered payout brings advantages from a tax perspective.