Spot and close your pension gaps early

A pension gap can’t happen to you? After all you have paid into the AHV and pension funds over the years. Wrong conclusion. If you only build up the 1st and 2nd Pillars then actually a pension gap is the rule rather than the exception.

What is a pension gap?

To maintain the standard of living you are accustomed to, you should have about 80% of your current income at your disposal in your retirement. If your pension is likely to fall below this, then you probably have a gap in your pension cover.

How do they happen?

Here are some examples of how pension shortfalls can happen:

You missed contribution in certain years: Due to pregnancy, studies, traveling the world, or whilst working abroad
You had a higher income: The more you earn, then in comparison the less pension income you will receive from the 1st and 2nd Pillars
You get divorced: If each partner has different credit built up in their pension plans, one of you can suffer a capital loss. Having a marriage contract in itself doesn’t affect this. The contributions made during the partnership are always equally split between each partner
You retire early: As a consequence, you and your employer pay less into your 1st and 2nd Pillars. That shortens your pension years accordingly. In addition, you are missing the interest and compound interest from the pension fund
The State lowers the conversion rate: This percentage rate is used to calculate the annual pension income from your accumulated pension fund credit. If it goes down then correspondingly you receive a lower pension income

Want to know exactly how much?

To estimate how big your pension gap is, first calculate your estimated annual pension income. This is usually the AHV and the pension fund combined. You can get an estimate of your AHV pension from the cantonal compensation office. The pension income from your pension fund is shown on your pension statement.

Now deduct the amount you need to live on from your estimated annual pension income. Is it a negative figure? Then you have a pension gap.

Retirement benefits as % of annual salary

How can you close the pension gap?

There are different ways to close these gaps:

You can make voluntary tax advantaged purchase contributions to your pension fund and so increase your pension. The best returns for a pension fund purchase are attained in the last years before retirement. Then as a rule your salary is at its highest and you save more due to progressive taxation. Before making a purchase in a pension fund you should definitely check the fund’s financial condition (for example the coverage rates). Or ask a pension specialist.

A further possibility is to pay into a private pension plan. For this purpose, the restricted Fisca 3a and the unrestricted retirement account 3b are available. The state provides your additional pension for the 3rd Pillar. You can offset up to 6,768 francs (Effective:2016) against taxable income. This is conditional upon you being affiliated with a pension fund. The capital paid into Pillar 3a is however restricted until retirement. You can only withdraw this capital in exceptional circumstances, for instance when buying a home – crucially: You must live in this home.

With the Pillar 3b retirement account, you have total freedom of choice. You can even invest in property. Or put your money into equities. The disadvantage of the restricted retirement account is basically that payments in are not tax advantaged. For that reason, you can invest as much as you like. And you decide for yourself how readily available your money is.

In the following case study see how a family discovered, calculated and closed their pension gap:

Case Study