Last update: 17.09.2024 08:35
The NZZ headlines “Many Swiss have no idea about old-age provision” 1and SRF 10vor10 reports on a pension fund model that provides for temporary pensions – in the extra-mandatory scheme. We think it’s time to take a closer look at the pension fund. Because that’s what matters.
While the 1st pillar – AHV is intended to provide us with social security, the 2nd pillar – the BVG occupational pension scheme – serves to build up assets for old age. The AHV is financed on a pay-as-you-go basis and capped. In the best case scenario, you will receive a maximum pension of CHF 2,450 per month from the AHV for individuals (as at 2024) and one and a half times this amount for married couples – CHF 3,675 (= CHF 2,450 * 1.5). The occupational benefit scheme is capital-financed. It pays out what you and your employer have paid in, plus interest. So “more is more” applies here. The pension fund usually makes up the lion’s share of your pension income, so let’s take a closer look.
In Switzerland there are around 1,700 pension funds, with which over four million people are insured for their retirement. Your employer chooses the pension fund.
How pension funds calculate: Defined contribution, mandatory, coordination deduction and conversion rate
Most pension funds operate according to the defined contribution model. You and your employer make contributions to the pension fund. Your assets accumulate there with interest. The more you pay in, the more you will have in old age. Your pension fund assets belong to you.
In the compulsory scheme compulsory contributions are paid on income from the BVG entry threshold up to the BVG upper limit. The thresholds depend on the maximum AHV pension and change every two years. You can find the valid values for 2024 in this specialist article. Compulsory contributions apply to all pension funds – it is compulsory. In addition, voluntary contributions can be paid into many pension funds on income above the BVG upper limit. These are extra-mandatory benefits.
There is also the coordination deduction. This is an amount of your annual income that is already insured in the AHV and is therefore not insured again in the pension fund. It is deducted from your annual income to determine your insured salary. If you earn little (your income is between the BVG entry threshold and the coordination deduction), the pension fund insures the so-called minimum insured salary – that is a few thousand francs. Above this, the following applies: income (up to the BVG upper limit) minus the coordination deduction equals your insured salary.
When you retire, you will receive your effective interest-bearing assets either paid out in full or at a certain conversion rate as a lifelong pension or as a combination of pension and lump-sum payment. The regulations of your pension fund determine whether you are free to choose this. The minimum interest rate is redefined each year by the Federal Council. You can find the current value in this specialist article. Your fund may, but does not have to, pay higher interest on your assets. The amount of your contributions, the interest rate and the conversion rate therefore determine how much money you get out.
Our tip: Check out our matching article
How much money does a pensioner need in Switzerland: having enough to make ends meet in retirement
How much money a pensioner needs in Switzerland varies from person to person. What you can assume, however, is that as a retired person you will have much less than today without your own precautionary measures. And around 40% less income that you have to get by with. How does this loss of income come…
Demography puts pension funds under pressure
Although pension funds are still doing relatively well on the whole, they are under pressure due to the low interest rate environment and the increasing life expectancy of their policyholders and pensioners. The returns that pension funds generate and how long they have to pay pensions from assets determine how much they can grant their insured persons in benefits and pay out as a pension. In other words, the conversion rate with which your assets are converted into a pension.
Is it then worthwhile to rely on benefits that go beyond the BVG mandatory scheme? If, for example, pension funds do not make a coordination deduction from the insured salary, this means that pension fund contributions are paid on your income from the very first franc. Or even if income above the BVG upper limit is insured, this means higher contributions – for you as an employee and also for your employer. You have to make more savings contributions from your income, but you also get more credited to your pension fund account.
The pension funds are free to set the conversion rate for these extra-mandatory benefits . Typically, a so-called enveloping conversion rate is then applied to the total retirement assets , which is then lower than the minimum BVG conversion rate. Higher contributions lead to higher retirement assets and therefore to a higher pension – but to a lower enveloping conversion rate. More is no coincidence. And yet more remains “more”.
Mach den ersten Schritt zur finanziellen Unabhängigkeit
In einer Minute siehst du deine Vermögensentwicklung und dein Einkommen während der Rente.
