Interest rates continue to drop month after month across all financial sectors, and Swiss retirement savings in the second and third pillar have not gone unscathed. Average interest rates for Swiss 3a retirement savings now sit at just 0.49% per year.
That is a new record low, and the end of the downward cycle is nowhere in sight. The tendency is towards 0% interest on retirement savings. For the sake of comparison: In June 2014, the average 3a interest rate was 1.4%. By December 2015, that average had sunk to 0.67%. The only possible comfort for those saving for retirement is that it is still unlikely that their retirement savings will be slashed by negative interest rates.
Major discrepancies in interest rates across the third pillar
An assessment of 93 Swiss 3a retirement accounts showed that, in spite of the record low average interest rates, there are major differences in interest earned on savings at individual banks. The interest-rate spectrum ranges between 0% at the most stingy banks and 1% at the most generous. Over time, even that relatively small difference in interest rates can add up to thousands of francs, depending on the amount of retirement savings in question.
Example: Lets say you were to start off your retirement savings account with an initial deposit of 20,000 francs and add another 5000 francs in contributions every year. If you placed that money in the highest-yield account available, you would earn 1500 francs more in interest over your first five years of saving than if you had put your money in the lowest-yield account. After 10 years, the difference in interest earnings would come to 4400 francs.
Crédit Agricole tops, PostFinance flops
The highest interest rate is offered by the Caisse d’Epargne de Cossonay with 1% interest per annum. Unfortunately that rate is only available to residents of the Canton of Vaud. The BancoStato (cantonal bank of Ticino) offers a decent rate of 0.825% on its 3a retirement account, but only for customers who also use its Prima private account. Crédit Agricole Financements Suisse delivers 0.7% interest per year through its 3a retirement account.
Other banks which offer above-average interest rates are the WIR Bank (0.65%), the Neue Aargauer Bank (0.6%), the Cornèr Bank (0.6%) and Credit Suisse (0.55%). UBS offers a somewhat lower interest rate of 0.5%. From 2017, PostFinance sits well below-average, offering interest of just 0.3% per annum.
Earnings on vested benefits now almost non-existent
The situation is far worse for assets held in vested benefits accounts: On average, banks pay just 0.2% interest on vested benefits. Interest yields range from 0% (Liberty) to 0.5% (Caisse d’Epargne de Cossonay for customers residing in the Canton of Vaud). Interest rates offered by major banks like UBS and Credit Suisse are average, at 0.2% per annum. Other large banks like PostFinance and Zürcher Kantonalbank only pay a paltry 0.05% in interest.
Third pillar savings still make sense
Third pillar savings are voluntary and still pay off despite the low interest earnings. The main financial benefits of placing your money in this type of account are the tax savings you get. Contributions can be deducted from your taxable income. Depending on the size of your contributions and your income, the tax savings can come to more than 1000 francs.
In 2017, the maximum contribution which a person who also participates in a second pillar pension fund can make is 6768 francs. Those who do not participate in a second pillar pension fund (self-employed people, for example), can contribute up to 20 percent of their income (maximum 33,840 francs over the year) to 3a retirement savings.
Alternative: Retirement Funds
Retirement funds offer an alternative to interest-based retirement savings. These funds allow you to invest in stocks and bonds. However, it is important that consumers fully understand the costs and risk of investing their retirement savings in a retirement investment fund.
Depending on the economic situation and the makeup of an investment portfolio, your retirement fund investments may yield no returns or even create negative balances over long periods. Keeping a long-term investment focus is crucial for anyone participating in a retirement fund. Additionally, investors must compare the costs of retirement funds and choose an affordable fund to invest in.