Swiss wealth planning | December 2018
Financial Planner, Bordier
Recent studies have shown that pension planning remains a major concern for most people of working age. The root causes of their anxiety are well-known. Longer life expectancy and the low-interest-rate environment are placing heavy burdens on the pension system. Then there is the rather low effective average retirement age and “generous” old-age pensions for those who have been able to benefit from conversion rates that today seem hard to maintain over the long term.
The Swiss Confederation sets a conversion rate under the Occupational Pensions Act (LPP). It has been gradually lowered from 7.2% to 6.8%. Pension funds are required to apply this rate to the compulsory component of pension savings. For the supplementary component (which often makes up the bulk of the second-pillar pension assets of executive and managerial-grade staff), the schemes themselves set the rate to be applied. Often this is much lower than the rate applied to the compulsory component. The conversion rate currently stands at close to 5% in a good many pension funds. And it is likely to drop still further in coming years.
Against this background, can someone in gainful employment still hope to retire early? Does it make sense to make regular second-pillar top-up savings (voluntary contributions)? To cover future needs, is it preferable, on retirement, to draw down regular second-pillar pension income, take a capital lump sum or rather a mix of the two? Is a third-pillar scheme painstakingly built up throughout a working life enough to offset the present reduction in second-pillar benefits? Or does this third pillar have to be used to pay off part of any mortgage debt, as might have been the original intention? Last but not least, what guaranteed basic income is needed for a comfortable long-term retirement?
One conclusion is unavoidable: there are many questions and no one-size-fits-all solution. The individual’s circumstances are always the key factor. What is crucial is to think about this well in advance and weigh up all the tax and inheritance consequences of your planned action.
The starting-point for any financial planning for retirement must be simultaneous analysis of the household budget (overall income and spending, including taxation) and assets. Once all of the outgoings have been settled, how much is left over for saving each year? How should this be allocated? For example, you need to assess whether recurring second-pillar top-up purchases should be made on top of payments into tax-efficient private-pension solutions (for instance, tied third-pillar schemes). How are the assets invested? Are they readily accessible or tied up in bricks and mortar for instance? Another question is to work out whether freely disposable savings should be invested regularly on financial markets during your working life. The prospects for a good return on savings accounts remain limited. Rock- bottom interest rates available at present, combined with potential taxation of wealth and inflation, are even causing many people’s assets to melt slowly away. In that case, safeguarding capital is a mere illusion.
Investing on financial markets undeniably holds out opportunities for higher returns. During your working life, a significant proportion of assets will be invested by pension funds via the second pillar. As a logical step in terms of continuity, capital withdrawn either partially or in full from occupational pension schemes on retirement can be reinvested in a diversified fund adhering to the second-pillar investment guidelines.
Once the decision to pay close attention to your financial future has been taken, the question as to the ideal partner arises. Can this journey be made alone, resorting to your own skills at asset management without a specific decision-making tool or outside perspective? Any attempt to plan the financing of your own retirement calls for calculations in advance, but these are likely to be somewhat more approximate than those made by an expert with the benefit of dedicated software.
More specifically, forward financial planning for retirement is generally offered, roughly ten years before their retirement date, to individuals in employement keen to make sure they have made the right choices to prepare their financial future. Admittedly, real estate, pension planning, investments, matters of taxation and inheritance are all interdependent subjects which must be dealt with both overall and in detail.
In the final analysis, the personalised financial plan must provide a comprehensive overview of your assets and how they are going to evolve.
For that purpose, forward scenarios are compiled on the basis of calculated assumptions and the interested party’s particular needs (financing early retirement, repayment of a debt in full, partial withdrawal of occupational pension assets in the form of a capital lump sum, donation during one’s lifetime to children, etc.). The advantages and drawbacks of each scenario are examined and the impact of each measure highlighted. This consolidated vision enables past choices to be reviewed with the benefit of hindsight and points to suitable banking, insurance or contractual solutions. This all-encompassing asset approach enables a roadmap and a calendar of specific measures to be drawn up.
This article is part of the Swiss wealth planning of December 2018, see also: