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 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 recurring annual payments (or “annuities”) for a predetermined period when the policyholder reaches a certain age. In Switzerland, life annuity policies are normally based on either the 3a or 3b category of retirement savings.
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.
Example: You take out a life annuity policy when you are 40 years old and pay a premium of 300 Swiss francs per month until you reach the age of 70. 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 1000 francs per month until your death.
When choosing a life annuity, it is important to use the guaranteed benefit as your point of reference. Life annuity policies generally have a guaranteed benefit – the annuity which you are guaranteed to receive when you reach the specified age – and a second, hypothetical benefit based on estimated returns on your investment. Insurers often market the hypothetical benefit, but in the current low interest environment, actual returns are low or non-existent. It is best to ignore hypothetical benefits and look at guaranteed benefits only.
When is getting a life annuity a good idea?
A number of retirement saving options are available in Switzerland, including compulsory social security old-age insurance (pillar 1a), compulsory occupational pension funds (pillar 2a), voluntary occupational pension funds (pillar 2b), private tax-preferred savings accounts, retirement funds and life insurance policies (pillar 3a) and private non-tax-preferred savings accounts, retirement funds and life insurance policies (pillar 3b).
If you live and work in Switzerland for all or most of your life, the standard retirement solutions (1a, 2a, 3a) will normally be adequate for a well-rounded retirement plan and using these is generally more beneficial from a tax perspective. But laws governing access to standard Swiss retirement saving schemes are rigid, and not everybody fits into this mold.
Social security old-age insurance contributions are based on your income so if you earn a low income over long periods your pension may be very low. If you leave Switzerland, you may or may not be eligible to continue contributing to your social security pension depending on which country you move to and how long you were enrolled while in Switzerland.
If you become self-employed, unemployed or if you leave Switzerland, you can no longer contribute to a Swiss occupational pension fund (2a), and must either place your pension savings in a vested benefits account or – if you emigrate to a country which is not an EU or EFTA member – cash them out early and pay withholding tax. If you do not earn an income or if you live outside of Switzerland, you cannot contribute to a 3a retirement savings account, pension fund, life annuity or life insurance policy.
Life annuities based on the pillar 3b – along with 3b life insurance policies – provide an alternative for those looking for a guaranteed retirement income in Swiss francs. If your social security, pension fund and 3a retirement savings are inadequate, a life annuity policy can supplement your conventional retirement savings.
Example: You have tucked away 100,000 Swiss francs in 3a retirement savings to supplement your social security and pension fund pensions. You will need to use 1000 francs of these 3a savings per month to cover your budget after you retire at 65. At that rate, your 3a savings will cover you for just over 8 years, until you are 73 years old. Just in case you live another 20 years after that, you decide to take out a life annuity which matures when you turn 73 and pays out 1000 francs per month until your death.
Advantages of life annuities
1. Typically, life annuities pay out a fixed annual benefit every year from the time they mature until your death. If you live for many years after the policy matures, the benefits you receive may outweigh the premiums you paid.
2. When your policy has a guaranteed benefit, you know exactly how much you will receive every year after the policy matures. This makes a life annuity more reliable than government-dictated social security pensions and pension fund conversion rates, which may change by the time you reach retirement age.
3. If your lifestyle or frequent relocating between countries prevents you from benefiting from government-dictated pension schemes, buying a life annuity using a one-off payment can provide an alternative to participating in pension funds. However, a 3b permanent life insurance policy may better suit this purpose.
4. You benefit from a lot of flexibility in choosing your annuity solution. You can choose from many different premium payment and annuity pay-out models. For example, you can choose to receive higher or lower annuities during different periods to fill the gaps in your other sources of income during each period. You get to choose when the policy matures, so if you plan to retire early, you can get a life annuity which provides a high pension until you reach legal retirement age. You can also choose to insure more than one person with the same policy.
5. A 3b life annuity can mature when you are as old as 75. The maximum age at which a 3a life annuity can mature is 64 (women) or 65 (men) unless you remain employed – in which case you the policy can mature 5 years later.
6. If you use a 3a life annuity policy, the tax deduction for 3a contributions applies. However, the premiums you pay cannot exceed the legal 3a contribution limits. The earliest point at which your policy can mature is 5 years before you reach legal retirement age.
Disadvantages of life annuities
1. Income tax. When your life annuity policy matures, the annuity which you receive is taxed as income – albeit at a special rate (40% of regular income tax in most cantons). However, aside from the very limited tax deduction for insurance premiums, the premiums you pay are not tax deductible like 1a, 2a and 3a contributions are. So in effect, you pay double income tax on part of your money.
2. Wealth tax. If you get a “living” 3b life annuity which can be cashed out ahead of retirement or left to your heirs after you die, the cash value of your policy is subject to wealth tax.
3. Stamp duties. When you buy a life annuity with a cash value using a single, lump-sum payment, you must pay a stamp duty equal to 2.5% of the premium.
4. Interest paid for capital invested in life annuities is very low. Because there are fees attached to maintaining your policy, your capital may actually decline rather than grow.
5. The conversion rate for life annuities is set by the insurance company, and is generally lower than the government-stipulated minimum conversion rate for pension funds. So money invested in a pension fund (by closing gaps, for example) currently delivers higher returns.
Life annuities based on the 3b category of retirement savings provide a flexible and secure solution for individuals who do not fit into standard Swiss 1a, 2a and 3a retirement schemes and shy away from more risky investments like 3b investment funds.
Unfortunately, the fees you pay, the poor interest yields and the absence of real tax benefits makes them a poor investment for most people, from a strictly financial perspective.
Placing your money in a savings account with a fair interest rate (you can use the moneyland.ch savings account comparison tool to compare interest rates) and only buying a life annuity later on in life (if you suspect you may outlive your savings) may be more profitable than taking out a life annuity policy early on because you avoid fees and earn interest.
If you expect to relocate it is worth noting that some Swiss banks allow non-residents to maintain accounts without paying high non-resident fees (see the guide to non-resident fees at Swiss banks).
Investing in your 2a and 3a retirement savings – if you are eligible – is a better move insofar as tax savings are concerned. However, 3b life annuities and 3b life insurance policies can be used to fill in the blank spaces in the rigid world of government-regulated Swiss retirement solutions.