In insurance and retirement planning, the term conversion rate denotes the size of an annuity or pension in relation to cash value or pension benefits.
When you pay contributions to a pension fund, the contributions accumulate to build pension benefits. This is the accumulation phase. During the annuitization phase, you no longer pay contributions and instead you receive a pension. The same applies to life annuities and other annuity products. The premiums you pay during the accumulation phase build the policy’s cash value. During the annuitization phase, you receive an ongoing annuity.
The conversion rate determines how high your pension or annuity will be.
Example: The legal minimum conversion rate for compulsory Swiss occupational pensions is currently 6.8 percent per annum. If you were to accumulate 100,000 Swiss francs in compulsory occupational pension fund benefits by the time you retire, you would receive a pension of 6800 francs per year (6.8 percent of 100,000 francs).
Swiss pension funds are required to pay compulsory occupational pensions (pillar 2a) at the federally legislated minimum conversion rate or higher. There is no legal minimum conversion rate for voluntary benefits (pillar 2b). Conversion rates for voluntary occupational pensions vary between pension funds and individual pension plans.
Example 2: If you have a Swiss life annuity with a conversion rate of 3 percent per annum, and you accumulate 100,000 francs in cash value over the accumulation phase, you would receive an annuity of 3000 francs per year during the annuitization phase.
More on this topic:
Swiss executive pension plans explained
Swiss life annuities explained
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