Many workers who pay into pillar 3a opt for a retirement savings account – a logical decision, considering it offers security and, in the past, maybe capital growth too. However, since the Swiss National Bank introduced negative interest rates at the end of 2014, pension accounts now pay hardly any interest. In the event of rising inflation, a fall in value in real terms is possible. However, most employees stick with their existing retirement account. In this article in our “Sensible retirement planning” series, we explain why you should consider alternatives.
The above-mentioned behavior patterns are based on a tendency which behavioral economists refer to as ”loss aversion bias.” This states that the pain caused by a specific loss is perceived to be greater than the joy of an equally high gain. When it comes to retirement provision, this means we opt for the retirement account that won’t lose us money, but which does not pay interest either. By contrast, it seems too risky to put our money into stocks which, despite fluctuations, have paid higher returns in the past.
How high are your actual living costs each year? And what is left over for retirement savings?
Added to this is the ”cash illusion bias”, which leads us to believe that money does not lose value, since 1 franc remains 1 franc in nominal terms. But this is deceptive because inflation reduces its purchasing power. Although inflation in Switzerland has been low for some time and is expected to remain so in the coming years, it undermines pension savings in the long term.
A shrinking investment horizon
Those saving long term for their retirement need to be aware that the decisive factor in determining the level of risk is the investment horizon. Modeling by UBS shows that, with an investment horizon of more than 15 years, you can maximize returns by strategically investing most of your pension capital in a diversified equity portfolio. It is then very likely that a nominal loss can be avoided by the end of the investment horizon, even if financial markets suffer setbacks during this period. Over a shorter horizon, the risk should be kept lower by investing only some of these savings in equities.
Looking beyond the start of your retirement extends your investment horizon, increases your flexibility and maximizes your potential returns. This is because you’ll only require a small part of the capital you’ve saved at the start of your retirement. Most of your private savings should be kept for later in retirement, when the money saved in the occupational pension scheme no longer goes as far and when you could be facing additional healthcare costs.
Good to know: Pillar 3a accounts must be closed when you start your retirement, but investment funds can be maintained and transferred to a custody account.