Pension packages for optimized retirement savings

man dealing with papers in front of him

Marco Salmina

Head of Asset Management Private Clients Piguet Galland & Cie SA, Genève, Lausanne, Neuchâtel, Nyon, Yverdon-les-Bains

April 28, 2021

Switzerland is one of the best countries for pension packages for optimized retirement savings. Let’s compare it to the rest of Europe. The average wealth per adult is around CHF 200.000, whereas in Switzerland it’s all the way up to CHF 500.000. That’s a huge difference. People often look at pension packages individually, however, wealth should be looked at as a whole. It can get complicated though, managing between cash accounts, security deposits, and pension envelopes, however, it is very worth it in the end. Investing time and effort into this, a person can retire with much larger funds than previously possible.

Want to learn more? Keep reading the article by Marco Salmina.

Without wishing to be haughty, we must recognize that the Swiss have a sense of saving, a field in which they are masters. A few figures are enough to convince you of this. In Europe, the average wealth per adult is just over CHF 200,000. In Switzerland, this amount is CHF 500,000. This includes financial assets and real assets, mainly real estate. These sums are all the more impressive because they are net of debts.

To stay in Switzerland, the average share of financial assets is estimated at around CHF 180,000. Pension assets account for almost half of this, which is hardly surprising. For our fellow citizens, pension savings are often the centerpiece of their assets. However, despite its potential, it must be acknowledged that it remains under-exploited, due to the complexity that it sometimes takes on outside the 2nd pillar.

The management of the LPP base (annual salaries up to CHF 126,900), which corresponds to this 2nd pillar, is easy to understand. The insured contribute, they are obliged to do so, and the pension funds manage. Within the framework of this institutional governance, the Foundation Boards are solely responsible for management choices and the insured must rely on annual reports to follow the evolution of their savings according to the LPP regulations. They, therefore, have no control over their savings and will not have any until they reach retirement age.

On the other hand, and particularly in the case of self-employed persons or company shareholders, they have much more room for maneuver with the various options contained in the area of non-compulsory pension provision. This applies to income above CHF 126,900 per year. More flexible, the so-called “Bel-Etage” programs offer their subscribers multiple advantages along two lines. The first is tax relief; the second is a personalized investment strategy. Both allow for greater scope for retirement savings and, by extension, for wealth. The same applies to vested benefits or 3rd pillar a).

Once the optimized pension cover has been set up, the tax reductions offered by the non-statutory scheme envelopes are particularly attractive. In practice, it is simply possible to transfer assets, including income, into these envelopes, for example by using the pension savings bonuses. In this way, these assets can be exempted from the taxation that normally affects returns on capital. The tax savings made on both capital and labor income go directly into savings. It is even possible to buy back missing years, which has the dual advantage of a tax reduction and a higher net return after tax than a traditional savings account. In principle, the purchase of pension gaps is fully tax-deductible and the pension benefits are improved accordingly. For individuals with an annual income of more than CHF 126,900, the introduction of so-called “Bel-étage” plans is very attractive, as it allows for a significantly larger purchase capacity and, as a result, an even greater tax break.

The second point of anchorage of the non-mandatory pension scheme is the possibility to customize the management profile in accordance with the OPP2 ordinance. In other words, depending on their level of risk aversion or appetite, members can individually decide on the investment strategy for the pension assets they have allocated to Bel-Etage, Libre-Passage or of the 3rd pillar a). The management of these savings is then similar to the free and responsible portfolio management that is specific to private banking, always in compliance with the prescribed standards for the management of pension assets. The only difference is that the portfolio in question is also and above all tax-free. This is an excellent way to strengthen one’s position in the financial markets. Especially since the so-called “Bel-Etage” envelopes are subject to less strict management restrictions than the basic 2nd pillar coverage (annual income up to CHF 126,900). They provide access to broader investment opportunities and higher potential returns. On top of this, at the risk of repeating ourselves, there is the added tax bonus: these pockets are exempt from all taxes, whether on income or wealth.

The personalized management approach gives policyholders the freedom to adjust the management of their non-mandatory savings according to their personal, family, or professional situation. But the benefits go far beyond these adjustments. More broadly, this approach facilitates the implementation of a much more balanced allocation between pension elements, free savings, and non-financial assets. It is part of a global management approach.

Pension savings, like the other components of wealth, should not be treated independently. There is no dividing line between the securities portfolio, pension savings in the broad sense of the term, and real estate. Wealth must be approached as a whole. Judiciously reallocated between cash accounts, securities deposits, and pension envelopes, it will undeniably allow the future retiree to find himself with a significantly larger retirement savings capital.

This is a delicate exercise, given the complexities of pension provision, the variants of which are infinitely multiplied, rather like the openings in a chess game. This very specific work requires the contribution of specialists capable of mastering all these mechanisms. Bankers and managers are now integrating this expertise into their range of services. They are able to implement the most appropriate strategies for both the financial portfolio and the savings accumulated in pension funds. These are the most “mobile” assets, those whose potential they can most easily increase. In this respect, their contribution is that of the personal CFO, the financial manager for personal use. Their objectives are to optimize the constitution of savings while taking care to preserve the balance of the assets they manage in the same way as they would manage a company, with the aim of maximizing the economic balance while minimizing the tax balance.

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