Although life annuities are not as popular in Switzerland as they are in countries which do not have compulsory retirement schemes, a number of Swiss insurance providers do offer life annuity insurance policies. These include Zurich, Helvetia, Swiss Life, Vaudoise, Baloise, Allianz Suisse, Generali and AXA Winterthur.
What is a life annuity?
A life annuity is an insurance product which pays out benefits in the form of a recurring annual pension (annuities) from the time the policyholder reaches a certain age until they die. The policyholder pays for the life annuity with either a single large premium when the policy is taken out, or with regular premiums paid from the time the policy is taken out until it reaches maturity.
When premiums are paid over time, the period over which premiums are paid is known as the accumulation phase. The policy matures at a predetermined date, from which point on the policyholder stops paying premiums and receives a recurring annuity until their death. The period over which you receive your pension is known as the annuitization phase.
Example: You take out a life annuity policy when you are 40 years old and pay a premium of 500 Swiss francs per month until you reach the age of 70, or a total of 180,000 francs in premiums. Once you reach the age of 70 (if you do), the policy matures and instead of having to pay premiums, you receive a guaranteed annuity of 700 francs per month until your death.
Life annuities can also be purchased using a single, lump-sum premium. Using the above example, you could take out the same life annuity by paying just one premium of 180,000 francs. Single premium life annuities can mature immediately – meaning you begin receiving your pension immediately after taking out the policy – or they can mature at a predetermined later date.
When does using a life annuity make sense?
Using life annuities can make financial sense if you expect to live to an old age and you want to insure yourself against the “risk” of outliving your retirement savings. Using life annuities without residual capital value (more on this below) can make sense from a tax perspective because when you retire you receive a relatively small recurring pension rather than a large lump-sum (which could bump you into a high tax bracket).
There are few other scenarios in which using life annuities is more profitable than simply saving for retirement and dividing your savings up across your expected retirement term when you reach retirement age.
However, using life annuities can also be helpful if you do not have good financial management skills and find it helpful to be (forcibly) charged a recurring premium and then receive a guaranteed recurring pension when you retire. This is especially true if: You are self-employed; you expect to move outside of Switzerland and want to have a steady pension plan which you can continue contributing to; you moved to Switzerland later in life and therefore do not have sufficient pillar 1 (OASI) and pillar 2 (occupational pension fund) benefits to provide sufficient pensions when you retire.
In every case, taking out a life annuity policy only makes financial sense if you are completely sure that you will be able to afford to pay the premiums until the policy matures. Failing to pay premiums will result in your losing your policy or being forced to surrender it for its residual capital value.
With or without residual capital value?
This is one of the most important point to consider when taking out life annuities. In Switzerland, it is possible to get life annuity policies which have a residual capital value (RCV) and policies which do not have a residual capital value. There are important differences between these and you should consider them carefully.
A residual capital value policy is a policy which you build equity in (see also: cash value). Over the accumulation phase or when you pay a single premium, the portion of your premiums which is not used to cover administrative costs is applied to the policy’s residual capital value. The residual capital value is then gradually depleted over the annuitization phase as annuities are paid out. The advantage of residual capital value life annuity policies is that, if you die during the accumulation phase or early on in the annuitization phase, your policy’s remaining residual capital value can be inherited by your legal heirs. Another advantage is that, if at some point during the accumulation phase you are no longer able to pay premiums, you can generally surrender the policy and receive the residual capital value paid out.
But there are significant disadvantages as well. Residual capital value policies have high administrative fees. A (large) cut of the premiums you pay is used to cover these costs. This results in your receiving a substantially lower pension than you would if you use a life annuity which does not have residual capital value. Because administrative fees are deducted from premiums paid before premiums are applied to residual capital value, the residual capital value of your policy may be significantly lower than the combined premiums paid. When you take out a residual capital value policy using a single premium you pay a stamp duty equal to 2.5% of the single premium paid.
Life annuity policies without residual capital value are pure insurance products. If you die during the accumulation phase or early on in the annuitization phase, the premiums you have paid are simply absorbed by the insurance company. There is no residual capital value which can be claimed by your legal heirs. You do not pay the 2.5% stamp duty on single premiums.
While that may appear to be a disadvantage, life annuities without residual capital value generally make more financial sense as a tool for insuring yourself against the risk of longevity. The administrative fees are lower, which means that you receive a significantly higher pension in relation to the cost of premiums than you do with a residual capital value life annuity policy; You do not pay a stamp duty when you buy a life annuity using a single premiums; your taxable wealth is not impacted.
Getting a life annuity without residual capital value is generally a better way to insure against the risk of longevity because you get a higher pension in relation to costs than you do from residual capital value policies. If you want to protect your dependents against the risk of your dying during the accumulation phase or early on in the annuitization phase, using a separate term life insurance (you can compare these here) to do this generally makes more financial sense.
Single-life or double-life?
Many insurers also provide the option of taking out a life annuity on more than one life. When one policyholder dies, the second policyholder continues to hold the policy and receive the annuity. This can be useful if you want to insure another person in addition to yourself. For example, if you take out a life annuity which covers you and your spouse, your spouse will continue to receive the annuity for the remainder of their life after you die.
The downside of double-life policies is that the annuity you receive is relatively low in relation to premiums paid.
Pillar 3a vs. Pillar 3b
The advantages of getting a pillar 3a life annuity are: Premiums can be deducted from your taxable income; the residual capital value (RCV policies) does not count as taxable wealth.
The disadvantages are: You can only hold a pillar 3a policy as long as you live in Switzerland and are employed or self-employed; your premiums cannot exceed the annual pillar 3a contribution limit (existing pillar 3a savings can be used without limits), which limits the size of your pension; the highest age at which a pillar 3a life annuity can mature is 64 (women) or 65 (men) unless you remain employed – in which case the policy can mature 5 years later; the earliest that a pillar 3a policy can mature is 5 years ahead of legal retirement age; the annuities you receive during the annuitization phase are 100% taxable as income (instead of the preferred rate which applies to pillar 3a account withdrawals and pillar 3a life insurance benefits).
The advantages of pillar 3b life annuities are: You can get or maintain your policy even when you are not employed or self-employed in Switzerland; there is no legal limit on the size of premiums you can pay and the subsequent pension you can receive; a pillar 3b life annuity can mature when you are as old as 75 years old, making it a useful tool for insuring against longevity; you can use a pillar 3b policy to supplement pillar 3a savings.
The disadvantages of pillar 3b life annuities are: Premiums cannot be deducted from your taxable income; in the case of residual capital value policies, the residual capital value of pillar 3b life annuity policies must be declared as taxable wealth; 40% of each annuity you receive during the annuitization phase counts as taxable income, so you pay tax once on income used to pay premiums and again when you get your money back as an annuity.
Typically, insurers give you the option of migrating from a pillar 3a policy to a pillar 3b policy when your situation changes and you are no longer eligible to make pillar 3a contributions.
Guaranteed annuity vs. hypothetical annuity
When choosing a life annuity, it is important to use the guaranteed annuity as your point of reference. Life annuity policies generally specify a guaranteed annuity – the annuity which you are guaranteed to receive when you reach the specified age – and a second, hypothetical annuity which accounts for possible dividend distributions. Insurers often market the hypothetical annuity, but in the current low interest environment, actual returns can be low or non-existent. It is best to ignore hypothetical annuities and look at guaranteed annuities only.
The conversion rate defines how high your annual pension is in relation to your policy’s residual capital value (in the case of RCV policies). For example, if your policy has a residual capital value of 100,000 francs and a 4% conversion rate, you will receive 4% of 100,000 francs – or 4000 francs – each year. Conversion rates vary between insurers and policies, and it is important to compare these.
Typically, the conversion rates applicable to life annuities are lower than the government-mandated conversion rate applicable to occupational pension funds. If you are eligible to make voluntary contributions (pillar 2b) to your occupational pension fund, this may be a more profitable alternative to investing the money in a life annuity. Note: The conversion rate specified in your policy is generally fixed, while the government-stipulated conversion rate for pension funds can change.
Risk of insurance company bankruptcy
Like banks, insurance companies can go bankrupt. Unlike bank account balances, insurance benefits are not insured by depositor protection guarantees. Taking out more than one life annuity from two or more different insurance providers as opposed to investing all your capital in just one life annuity spreads the risk of losing money in the event of insurance company bankruptcies.
Life annuities are rarely a profitable retirement savings solution. If you are eligible to use the pillar 3a, saving with a pillar 3a retirement savings account (you can compare pillar 3a accounts here) generally makes more financial sense than using a residual-capital-value life annuity. If you have higher risk tolerance, investing with a pillar 3a retirement fund (you can compare retirement funds here) is another alternative. If you are not eligible to use the pillar 3a, you can use a regular savings account or investment fund (an affordable ETF, for example).
Life annuities are primarily useful for insuring against the risk of outliving your savings. For example, if you have enough savings to add 1000 francs per month to your pillar 1 and pillar 2 pensions from the time you reach retirement age until you turn 75, you could consider taking out a life annuity policy which matures when you turn 75. Life annuities without a residual capital value are best-suited to this purpose.
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