How the Swiss save money for retirement

Having dreams is an important, even an essential part of people's lives, as the famous American author Mark Twain once observed: "Don't part with your illusions. When they are gone you may still exist, but you have ceased to live." You too have dreams, no doubt. To achieve them, you need a plan. And for the plan to work out, adequate financial resources are required.

It's essential to put money aside, for short-term goals and also for the time when you will be more independent and freer than at any other time in your life: retirement. Your pension fund (pillar 2 occupational retirement provision) and a private pension (pillar 3) are reliable means to reaching this end.

Pillar 1: Old-age and survivors' insurance (AHV) provides for a basic minimum income during retirement. It is important to avoid contribution gaps in order to receive the maximum AHV pension amount later on. Such gaps may occur while studying, for example, completing a stay abroad or taking an extended career break. Missed AHV contributions may be back-paid within a period of five years.

Pillar 2: More than 4.2 million people are actively insured under an occupational pension plan and can rely on their pension benefits to allow them to maintain the standard of living they are accustomed to after retirement. If your employer pays higher contributions and decides to provide you with better insurance coverage, the impact on your savings options and pension is crucial. If you have a pension gap, you can make voluntary contributions to your pension fund account to supplement your retirement assets.

Pillar 3: You contribute voluntarily to build up a private pension to close any gaps left after factoring in your AHV and pension fund benefits. Your AHV and occupational pension should cover 60 percent of your pre-retirement salary. As life expectancy is increasing, retirement pensions are becoming increasingly important. Many underestimate this fact, as indicated by figures from the Federal Office of Statistics, which show that only about 59 percent of the Swiss population regularly contributes to a pillar 3 pension for themselves. It is recommended to take full advantage of the opportunities by starting to accumulate 3a retirement assets as early on as possible for you to have the lifestyle you desire with a few extras here and there during retirement. Pillar 3b (unrestricted pension plan) options include private savings vehicles (life insurance policies, bank account balances, shares, bonds, etc.). 

Swiss people do not have a strong desire to save up for long-term goals. They prefer spending money to meet today's needs, such as travel, buying a car and advancing their careers, as revealed in a study conducted by Zurich University of Applied Sciences ("Decision-making Behavior in Connection with Private Pensions", ZHAW). The study found that over 40 percent of German-speaking Swiss people do not give enough attention to the issue of personal retirement savings, if at all. Yet the Swiss have great savings potential, as the disposable portion of household income (after deducting non-optional expenditures) is, on average, 18 percent nationwide, according to the Federal Office of Statistics (FSO). Thus, of the average income of 7,499 swiss francs calculated by the FSO, 1,410 swiss francs could be set aside. But according to the ZHAW study, only 18 percent of survey respondents are saving that much.

So why are we so reluctant to save for retirement? The reasons given in the ZHAW study are laziness, aversion to thinking about old age, a preference for the present, and fear or dislike of the complexity of issues surrounding retirement. These are the reasons why only 58.5 percent of respondents said they are on track to reach their individual retirement goals. There are considerable benefits to contributing to private pension insurance and occupational pension plans.

• The savings you put into your pension fund grow over time. Your pension fund invests the contributions of its insureds in long-term vehicles for accumulating retirement assets. The investment Returns that are generated increase your pension with interest and compounded interest, so that at the time of retirement you receive significantly more than you contributed, either in the form of a lump-sum distribution or a lifelong pension, depending on your preference.
• Investing with a pension fund protects you and your family members against life's vicissitudes. In the event of your death, your surviving dependents receive a pension and death benefits. If you become disabled due to illness, the pension fund pays you annual pension benefits in addition to your disability insurance pension.
• The Swiss Confederation grants tax advantages to encourage private pension saving. You can reduce your annual tax bill by putting money in pillar 3a vehicles. Employees who are pension fund members can contribute up to 7,056 swiss francs per year, and self-employed individuals who are not part of a pillar 2 pension plan can contribute up to 35,280 swiss francs.
• Do you want to buy or renovate a home? You can draw on your accumulated pension fund and pillar 3a assets to do so. You can draw down your personal and occupational pension balances to buy a home or pay off your mortgage. If you pledge your retirement assets as collateral instead of taking a withdrawal, your accumulated capital continues to earn tax-deferred interest and you retain full entitlement to pension fund retirement benefits as long as the pledged collateral is not claimed.
• To start your own company it takes confidence in one's own ability, courage and often a bit of capital too, in order to pay for an office, warehouse, product development and/or marketing, for example. At the same time, you need a financial buffer to cover your living expenses. Your accumulated capital in a pension fund and your pillar 3a and 3b savings and investments can be drawn on to achieve your dream of being your own boss.

When you invest in a private and occupational retirement provision, you don't have to wait until retirement to benefit — you may in fact benefit at any stage of your life. Many savers find it helpful when their funds are earmarked for specific purposes, such as exclusively for their home, for becoming self-employed, or for moving to a foreign country. In an interview with the business news publisher Handelszeitung, Reto Spring, Chairman of the Swiss Association of Financial Planners (FPVS), recommended as a rule of thumb that people with gross pay of up to 100,000 swiss francs should contribute 10 percent of their earnings toward their personal retirement, or 20 percent for earnings above this level.

However, the most important thing for being able to realize one's plans, current and future, is starting to save early on. You will never make up for those missed years when you failed to pay into a pillar 3a pension vehicle. Only the maximum deductible 3a amount for the current year may be contributed. Early savers also benefit substantially from compounding interest.

Thus, it is well worth it to think about your retirement and to plan and act accordingly. Just like Mark Twain said, you should never part with your dreams.

Leonie W., age 35: Running her own business thanks to the ability to draw on her pension fund assets

Leonie W. always had a mind of her own. Instead of listening to her parents, she decided to study photography at a technical college. After getting her degree, she worked for a photographer for several years. Perceiving big opportunities in food photography — an area her employer was not involved in — she decided to take up self-employment in her sole proprietorship.
To purchase photography materials and finance a studio, she drew from her accumulated pension fund assets. It was a risk, but it paid off, as she now has a profitable business. According to her calculations, she will be able to make up for the resulting pension gap within ten years, a realization that for her is proof that she made the right move in striking out on her own.

Reto M., age 44: Disciplined saving is half the battle

Reto M. was committed: he wanted to own his own home. A house with a yard for his three boys to play soccer in, and where his wife could keep chickens. To make this dream come true, Reto M. and his wife regularly contributed to pillar 3a pension insurance.
By age 43, the time had come for Reto. The house he and his wife wanted to buy had a surrounding yard big enough for their boys to race each other all the way around it. They didn't have enough funds to buy the house outright, but thanks to an early withdrawal of his pillar 3a funds, Reto and his family will now soon be moving into their new home. It won't be long until the chickens move in too, as Reto and his boys have already built a coop. That means fresh eggs for breakfast every day!

Serge O., age 68: Retirement: a time of freedom

Shortly after completing his apprenticeship as a carpenter, Serge O. went on a tour of Australia with his best friend. They worked on the side to fund the trip and stayed in inexpensive hostels or camped out. Many a time his wife and kids would later hear him say, "It was the best time of my life."
For the next forty years, there was no time or money for major travel. Serge had had to wait until after his retirement to finally get to show his wife Australia. And now the wait is over, as he and his wife just the other day went over to the bookstore around the corner to get some travel literature. Much appears to have changed in Australia since he was a young man, but thanks to his pillar 3a savings, he will have the opportunity to see it all for himself. And his friend from way back then is even going to meet them there.