Paul Segesser is a 60-year-old IT-specialist and earns a manager’s salary of 150,000 Swiss francs gross. He is also good with numbers. The last consultation with his house bank gave him food to thought. The mortgage on the condominium he is sharing with his partner Lydia Felder was about to expire. They had equally purchased the 1-million-franc property and paid off a quarter of the value. Ever since his milestone birthday, Paul has been asking himself many questions.

They had both already settled many things; in particular, they had a contract of inheritance regarding the freely disposable part of their assets and a life-long right of residence in favor of the other partner. Lydia is 59 years old, works part-time as a teacher and earns 40,000 francs gross. Paul realizes that they don't just grow older – they are about to enter a new stage in their lives during which they will no longer have a steady income. Instead, their available assets will come from different sources. They were actually looking forward to retirement. Nevertheless, Paul was worried about Lydia’s financial security, should something happen to him.

Her AHV and pension fund pension would amount to 33,000 francs annually, while his pension would be three times as high. Paul knew that, particularly for a cohabiting couple, these unequally high pensions would lead to a big income gap for Lydia should he die. Additionally, the affordability of their shared mortgage was calculated a little too generously. Paul also knew that part of it would have to be amortized should one of them die unexpectedly. Should they just get married so that Lydia is better secured?

Closing gaps in a targeted way

“The decisive factor in planning and implementing a successful retirement is a comprehensive solution that covers as many eventualities as possible,” suggests Linda Pavan, a pension expert at UBS Wealth Management Switzerland. Uncoordinated measures could potentially lead to big income gaps during retirement. If they have at least a six-figure yearly income, pensioners can count on two thirds of their old income; depending on the amount, this could even be considerably lower.

“Important questions often only become clear in a conversation,” says the client advisor. Because of this, and because there aren’t any universal solutions when it comes to the complex matter of retirement, it makes sense to get an expert involved. The pension expert, who advises independently of investment products, starts with a simple but essential question: What is the amount you would like to have guaranteed as income, regardless of how old you get? “Key numbers for a retirement plan are: current income, income after retirement, the desired wealth at age 85 – a reference value for the average life expectancy – as well as the decisive question of how much capital I really need after retirement,” explains Pavan. It's true, after all, that expenses are the linchpin of every plan.

Offset the pension level

What is the comprehensive solution for Paul and Lydia? Even without a marriage certificate, they found a good solution with the help of the expert. The key to a more balanced pension was that Paul could make a lump-sum withdrawal of 650,000 francs from his pension fund. He could now bequeath these assets to Lydia by amending the inheritance contract accordingly. Additionally, she can make tax-deductible purchases into the pension fund until her retirement and thus increase her pension. With this strategy, almost 80 percent of expenses are covered through pensions. “Even pensioners have to pay taxes. So when you make decisions, it’s important to keep the tax consequences in mind – for cohabiting couples, this goes for inheritance tax in particular,” explains the pension expert Linda Pavan.

The tax range for lump-sum withdrawals is generally around 8 to 12 percent, but this can vary greatly depending on the canton and amount. Apart from aligning their pensions, the couple must also decide to use their entire 3a assets to reduce their mortgage, thereby increasing its affordability.

“A well thought-out wealth structure is important for a successful pension provision. For example, you can distribute your assets in different asset pots. These are invested differently as required and allow your assets to be managed successfully,” explains Pavan and notes that this is an important aspect. Paul and Lydia paid 200,000 francs into the first pot for the first five years after retirement to cover their current expenses. This pot includes a nest egg of 25,000 francs as well as funds for buying a car. Another 150,000 francs were paid into the second pot, which will be available as of age 70 and should therefore be invested strategically. The assets are invested in diversified funds with low to mid-range risk appetite. Finally, they paid 250,000 francs into the third pot with higher risk appetite but also higher expected returns, because these assets are only needed in the long term.

“A good plan requires advice. But the solution has to feel right. The best plan is useless if it’s not executed,” concludes Pavan. Paul and Lydia intend to do so and are definitely looking forward to their retirement.

The earlier, the better

Approximately ten years before retirement, it's important to:

  • have an overview and transparency about your assets such as real estate, accounts and securities, pension savings in the second and third pillars, life insurances and entitlements;
  • One the one hand, have an overview of your current budget and your budget when you retire, and on the other hand, inquire about the income amount from the first and second pillars. Will this result in a gap?

About five years before retirement, it's important to:

  • Talk to your partner and think about when exactly you want to retire;
  • decide how much of the pension fund assets you want to withdraw as a lump sum (the amount has to be registered up to three years in advance) and how much you want to draw as a pension;
  • Take tax consequences and potential staggering into consideration and potential staggering when planning withdrawals from your pension savings – if you’re married, do this together;
  • Check if an existing mortgage is still affordable after you retire.

UBS Pension planning

An approaching retirement poses many financial questions. Three elements are essential to planning your retirement:

  1. Create transparency about the financial situation of your pension provision and determine your personal wishes for retirement.
  2. Create a finance plan to optimize pension assets, for instance with pension fund purchases, staggering and the decision whether to draw a pension and/or withdraw a lump sum.
  3. Work out an individual investment concept for paid-out pension assets.

It’s also essential to execute and regularly review your plan consistently. This allows you to adapt to personal life changes in time. UBS pension planning will support you on this path with long-standing experience and competence.

This article was written by NZZ Content Solutions on behalf of UBS.