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Investing in the third pillar
The type of investment best suited to private retirement provision with pillar 3a depends on a number of factors.
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Drawing on built-up assets during retirement: what we can do to secure our standard of living for as long as possible.
Firstly, make a list of all your assets (account balances, securities, residential property, pension fund and pillar 3a assets, life insurance policies etc.). Make sure you include any debts, such as mortgages and loans.
Now, work out your income after retirement. The expected benefits from the OASI (1st pillar) can be calculated using a pension forecast. The pension fund (2nd pillar) benefits upon reaching retirement age are indicated on your pension certificate. Further sources of income may include investment or rental income, for example.
Create a budget for your living expenses during retirement: housing, food, hobbies and health. Take into account rising health and nursing care costs as well as travel expenses.
Compare your income with your planned expenditure to identify any shortfalls. Rule of thumb: you will need 80% of your final salary to maintain your standard of living. Pillars 1 and 2 often only cover two-thirds of this amount, so the rest needs to be made up by assets from pillar 3 and any other assets. Otherwise, it may be wise to reduce any unnecessary expenditure and debt you may have before retiring.
Tip: Professional financial planning—which is available at Migros Bank, for example— will provide you with a detailed overview of your financial situation up to and after retirement and highlight ways to improve it.
Irregular or insufficient contributions to the OASI will result in gaps – and, in turn, to a lifelong reduction of your pension. That's why it's advisable to order an OASI account statement every few years before you retire to identify any gaps at an early stage. Gaps that have arisen over the last five years can be paid in arrears.
Early retirees are also liable to pay OASI contributions – until they reach the statutory retirement age of 65. The amount of the OASI non-employee contributions is based on the assets and the pension income multiplied by a factor of 20. The minimum amount is currently CHF 530 and the maximum CHF 26,500 per person per year. Those who do not pay the contributions risk their OASI pension being reduced.
Any gaps in your pension fund can still be made up after 60. You should regularly review the retirement assets you have saved in your pension fund. The level of voluntary contributions that can be made depends on how large the gap is. Whether and to what extent the purchase of additional benefits is worthwhile needs to be assessed based on your personal situation.
Please note that no capital withdrawals may be made during the first three years after the purchase of additional benefits.
As retirement approaches, the investment horizon for assets in 3a funds shortens. The greater the equity component, the higher the risk that the fund's value will be lower at the time of disbursement than when purchased. Reducing the equity component may be a good option.
It is also worth paying into pillar 3a when you are 60 and over. What's more, the contributions can be deducted directly from your taxable income. However, you will need a taxable income subject to OASI contributions. The full tax benefit can be achieved by paying in the maximum annual amount (2025: CHF 7,258 for people who belong to a pension fund); Anyone without a pension fund can pay in up to 20% of their earned income (up to a maximum of CHF 36,288).
Minimise the risk of investment in securities: lower the equity component in your portfolio and add more fixed-interest bonds instead. As you get older, there is less time to offset price fluctuations. The investment horizon for equities should be ten years. It can be shorter for bonds though.
From the age of 60, it is wise to adopt a more defensive investment strategy. In addition to broadly diversified funds (strategy funds), dividend-bearing equities – i.e. equities in companies that regularly distribute part of their profits to shareholders in the form of dividends – are a good option. Historically, dividend-bearing equities often fluctuate less sharply than the overall market.
Anyone who owns residential property should review its affordability during retirement. To reduce the monthly financial burden after retirement, partial amortisation may be a useful option. Although mortgage interest can be deducted from the amount of taxes you will pay, this benefit often decreases with age, as income is lower during retirement which means tax breaks also decrease.
Unless the affordability of owning your own home after retirement can be guaranteed, you should consider selling your residential property or moving to a smaller one. This will not only reduce monthly costs, but also free up capital.
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