Do you have a pension gap?
The five most important tips for retirement planning
Use these five tips to plan your retirement provision and avoid the most common mistakes.
Content:
Content:
- Close any gaps in the OASI and pension fund.
- Start your retirement provision in pillar 3a as early as possible.
- If you have more time until you retire, you can consider custody accounts.
- Having multiple pension solutions may optimize the tax you pay.
- Following simple rules of thumb allows you to make rational rather than emotional decisions about your retirement provision.
- To the conclusion
Many people assume that the pensions provided by the state and their pension fund are sufficient to finance their retirement. The first pillar of retirement provision – and for many employees, the second pillar – is mandatory. The state, your employer and your pension fund organize the collection of contributions and payment of retirement benefits (capital and pensions), relieving you of much of the burden involved so your own responsibility for retirement planning seems less urgent.
Nevertheless, today’s retirees can receive a relatively high retirement benefit on average with the OASI pension and the pension fund. However, additional protection for the future is recommended, because it’s a fact that the situation will change in the long term. The demographic change in society means that the proportion of retirees in the population is increasing and life expectancy is rising. This puts pressure on the first two pillars of the pension system. For example, pension funds have been lowering their conversion rates for years, resulting in lower pensions.
To ensure the stability of the OASI and pension funds, reforms such as the recent OASI 21 and BVG reforms are needed every so often. However, even if the first and second pillars are financially stable, the law says that pensions and withdrawals have to cover around 60 percent of the last salary. As a rule of thumb, many retirees need 80 percent of their previous income to cover their expenditures when they retire.
Based on your current situation, would your OASI pension, pension fund benefits and flexible retirement provision (pillar 3) assets ensure a sufficiently high pension? You can find out whether you currently have a pension gap using our retirement calculator. This allows you to take stock.
If there is a gap, you have the option of reducing it, for example, by purchasing benefits in your pension fund. To close the gap and reach a pension level of 80 percent of your pre-retirement income, the Swiss pension system has a third pillar – voluntary retirement provision. If you have any contribution gaps in the OASI, you should clarify whether you can close them.
Tip 1: Check your OASI and pension fund entitlements
Request your individual account statement from the OASI compensation office. You can see whether contribution years are missing, for example, because you were abroad. Each missing contribution year reduces your future pension by around 2.3 percent. You can close the gaps by making additional payments up to five years afterwards.
Also check whether there is a purchasing gap in your pension fund. You can usually find this directly in your annual pension fund statement. If you have a gap, you could reduce it by making voluntary pension fund purchases.
All part-time employees face the threat of lower second pillar pensions later as a result of lower contributions.
Plan your retirement at an early stage
When you think about your retirement, you are faced with some important decisions. Let’s draw up a plan together based on your personal wishes, so that nothing stands in the way of a relaxed financial future.
Tip 2: The sooner you start saving, the better
When is it too late to make provision for retirement? Although many people are concerned about this issue, little attention is paid to pension provision, especially among younger people. However, financial security for your retirement is ideally something you build up over several decades. It’s best to lay the foundation for this early, as this will allow your money to work for you for longer and provide you with a financially secure retirement. This is especially true if you are aiming to take early or partial retirement, i.e., draw a pension before you reach the reference age.
If you start saving early, you will have more time to benefit from the compound interest effect. In this way, the capital you have put aside will generate higher income – year after year in the best-case scenario – which you can also invest.
If you don’t manage to start early, you should start saving and investing as soon as you have the opportunity to do so. If you don’t deal with the question of your retirement income until just before you retire, you will have little room for maneuver.
Tip 3: The longer, the more risk-tolerant
People like to play it safe when deciding how to invest money. This is due to a kind of fear of loss: We find a loss painful and want to avoid it. We are pleased about a profit, but less than we are annoyed about a loss of the same amount.
That’s why many people don’t opt for equities or funds in their retirement provision so as to avoid potential fluctuations in value – even though such investments generated higher returns in the past. They prefer to choose a pension account that pays little interest, as it does not appear to cause them any loss.
However, low-interest account balances can hardly be considered to maintain value or even generate a profit if inflation is taken into account. One Swiss franc today may still be one franc in nominal terms in the future, but its buying power will have fallen due to the effects of inflation. This undermines retirement savings in the long term. That’s why a certain return on investments is a worthwhile goal – not just aiming to maintain value.
When investing your private retirement savings, let yourself be guided by the investment time horizon. The more time you have until you retire, the more risk you can take on. UBS models show that if you have an investment period of more than 15 years, you can maximize your return by investing a large portion of your retirement capital in a diversified equity portfolio.
The closer you get to retirement, the less risky your investment portfolio should be. The shorter time horizon prevents you from being able to wait calmly until equities have recuperated potential losses in value. In the years shortly before retirement, check whether it makes sense to sell your investments in your retirement custody account at a certain time. This reduces your risk.
You can also extend the investment time horizon beyond the start of your retirement. As a rule, you only need a portion of the retirement assets accrued at the time. If you leave the rest as an investment, your flexibility and the potential return will increase. The money would be available later, for example if you had to cover additional healthcare costs. One option in pillar 3a: at UBS, actively managed fund units can continue to be held in a regular UBS custody account upon retirement.
How much can I save on taxes with pillar 3a?
You benefit twofold when you pay into pillar 3a because you are providing for the future and reducing your tax burden. Calculate how much you can save on taxes.
Tip 4: Multiple pension products instead of just one
No one can predict the future when it comes to interest rates or share prices. It may therefore make sense not to rely solely on one pension product simply because it has provided the best returns in the past. Just expecting a successful pattern to continue in the future often leads to people distributing their retirement capital across too few assets and thus taking on high risks. Having a retirement portfolio with multiple pension solutions also has benefits during the payout phase. For example, if you have multiple pillar 3a accounts or custody accounts, you can have them paid out in stages. This staggering breaks the progression of taxation in many cantons, as you do not draw the pension capital in a single year but spread it over several years. However, you will need several pillar 3 accounts, custody accounts or policies that you have invested in during your working life.
Tip 5: Act rationally, not emotionally
When you are planning your retirement provision, you are looking far into the future. The decisions you make have a major impact. They should be based on solid facts, not your gut feeling. However, as is often the case, important options for pension provision are not dealt with rationally but tend to be put on the back burner or are influenced by emotions and incomplete information.
To avoid falling into such traps, you should be aware of the potential sources of error. Then you can search for information to give you a better basis for making your decision.
It is more difficult to control emotional behaviors. However, simply being aware that our decisions are often based on a gut feeling can be helpful too. When planning for retirement, use the following tips to guide you.
For many gainfully employed persons, the pensions from the OASI and pension fund are not sufficient to maintain their accustomed standard of living after retirement.
Those who use this insight as an opportunity to do more about their retirement planning than before will notice that there is a good reason that the system of retirement provision is based on three pillars rather than two. Pillar 3a enables you to save tax and close potential pension gaps. The important thing is that you take action.
Disclaimer
Disclaimer
