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University of Basel

A better way to save.

Text: Martin Bornhauser

The point of investing is to multiply your assets – as a provision for older age, for example. Shares offer a higher yield than a retirement savings account. When choosing a private pension plan (known as pillar 3a in Switzerland), fees and transparency are important considerations.

Person holding a jar full of bank notes
(Photo: Simon Mumenthaler, unsplash)

When we are young, worrying about retirement is not usually a top priority. After all, it is still a long way off. It makes sense to get started with private pension arrangements early on, however – precisely because of the extended amount of time in which you can let your money work for you.

What is more, “there is a very big difference between leaving your money in a savings account with a 0.5 percent interest rate, and earning an average of 6 percent per year with an equity fund,” says Jacqueline Henn, a research associate at the chair of financial market theory at the University of Basel. “In the first example, after 36 years 10,000 francs will have grown to around 12,000 francs; in the second, to more than 80,000 francs.” This is due to the phenomenon of compound interest, according to which your capital grows exponentially.

The “Rule of 72” is used to calculate the time it will take for the initial sum to double. The number 72 is divided by the annual rate of return, so for an interest rate of 6 percent it takes twelve years to double one’s capital – assuming steady growth of share prices, which is not what happens in reality.

In Switzerland, pillar 3a gives employed persons with an income subject to AHV contributions (old-age and survivors’ insurance) the option of paying a given amount into a private pension scheme each year. As of 2021, the maximum tax-deductible amount is 6883 Swiss francs. This applies to people who belong to a pension fund. Self-employed persons who do not benefit from pillar 2 can invest up to 20 percent of their net income, or a maximum of 34,416 Swiss francs, in pillar 3a each year. For flexible pension schemes, which make up pillar 3b, no upper limits or tax deductions apply. These schemes are open to everyone, and the capital can be accessed at any time.

Henn recommends having multiple pillar 3a accounts. “This is beneficial as withdrawals are subject to taxes that are not income-based and rise progressively,” warns the financial expert, who teaches a continuous education course in personal finance at the University of Basel. The assets can only be withdrawn five years before retirement at the earliest. If a person has five retirement savings accounts, for instance they can liquidate one per year so as to save taxes, Henn explains.

Savings account or pension fund?

Essentially, pillar 3a offers a choice between a retirement savings account, at present offering an interest rate of around 0.1 percent, and a pension fund. Insurance companies also offer pension solutions that include insurance against death and invalidity.

When investing in a fund, it is important to consider the investment horizon. “The younger you are, the more you stand to gain from the compound interest effect and the more risk you can bear.” For example, a long-term horizon allows you to wait for the next upswing after a share price crash,” says Henn. After the age of 50, on the other hand, it makes sense to gradually scale back shareholdings to reduce risk.

Beware high fees

With funds, it is essential to consider the associated fees and frequent lack of transparency. Many pillar 3a funds invest in shares and other securities, but only disclose the share ratio, and at most the largest holdings. Moreover, active pension funds of this sort, which buy and sell shares and other securities more often, are frequently expensive, charging annual running costs of up to 1.5 percent regardless of performance.

There can also be additional charges, such as an issue and redemption commission, that further eat into the returns. It can therefore make more sense to choose funds with a passive investment approach, which track share indices and tend to be cheaper. This allows investors to participate in the performance of the stock market without being dependent on the investment success of a portfolio manager. It also ensures that the investments remain transparent.


More articles in the current issue of UNI NOVA.

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