We're living much longer: after reaching age 65, men can expect to live another 19 years and women another 22. This is good news, but it can strain your finances: most people spend as much in retirement as they did when they were working. The AHV / AVS pension and the mandatory pension fund only cover about 60 percent of the last salary earned. You need to take action if you want to avoid the risk of a liquidity squeeze. The earlier you set a budget and savings targets for yourself, the more freedom you'll have to enjoy your retirement.
In 1948, when the AHV was introduced, there were 6.5 workers per retiree. Today there are only 3.7. By 2060 it's predicted there will be just 1.8 workers for each retiree in Switzerland. The AHV and pension funds are under pressure (although immigration could defuse the problem through additional workers). What can be done? To put it simply: you have to save using pillar 3a (UBS Fisca). Individuals with a pension fund may pay as much as 6,739 francs per year into the system. It's worth doing if only because you can deduct this amount from your taxable income and end up saving on taxes now.
Ailing pension funds
If you examine to what extent the obligations of the pension funds are covered by capital investments, you'll come up with a disturbing result: two-thirds of public pension funds and 20 percent of private funds have a shortfall (as of mid-2012). This means that their pension promises are not fully covered. However, restructuring is difficult due to the mandatory interest rate, weak stock markets, and the overall economic situation. If a pension fund is showing a significant funding gap, it's worth considering whether you should even pay in any additional funds. In any case, before changing your job you should certainly check the financial health of the new employer's pension fund.
There are 2,265 Swiss pension funds managing a total of 600 billion francs. Since the markets have been in turmoil for some time, most pension funds are generating only modest returns. Not surprisingly, the Federal Council has reduced the statutory minimum interest rate for pensions several times - from 4 percent to 1.5 percent. So it makes sense to save even on top of pillar 3a.
Politicization of the conversion rate
The conversion rate is used to calculate the size of the pension paid out. It will be gradually reduced to 6.8 percent by 2014. At a minimum rate of 6.8 percent, a capital sum of 100,000 francs will yield an annual pension of 6,800 francs - an amount that retirement funds can no longer pay without drawing on their reserves. In other words, the working population is subsidizing the elderly. Despite this, Swiss voters rejected reducing the BVG minimum conversion rate to 6.4 percent. It will take a political decision to restore the financial balance.
Nils Aggett heads up Retirement Services and the retirement initiative at UBS.
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