Pillar 3a Investment Funds: 12 Key Tips

The pillar 3a enables you to pay less taxes by saving for your old age. The interest rates of pillar 3a savings accounts leave a lot to be desired. Investing your pillar 3a savings in securities can yield much larger returns. But hidden fees can reduce your profits. Fluctuating market prices and possible losses in the value of your investments are also a risk.

Conventional banks and some pillar 3a asset management services use classic mutual funds within the pillar 3a. There are many asset management services that let you invest in a portfolio made up of multiple funds. For you as the customer, the difference is largely irrelevant. The tips in this article apply to both of these models.

The following tips tell you how best to go about investing your pillar 3a savings in stocks and other securities.

Tip 1: Know how long your money will stay invested

You should only invest in securities if your money will stay invested for a long time. The value of stocks and other assets constantly fluctuates over the short term. As a rule of thumb, you should only invest in stocks if your money will remain invested for at least seven to 10 years. For most people, saving for retirement is, by default, a long-term project.

But if you plan to withdraw money from the pillar 3a in the next few years, then investing is not suitable. That could be the case if you will make an early withdrawal – for home financing or on account of becoming self-employed, for example. For short terms, it is better to use pillar 3a savings accounts. That way, you avoid the risk of making a loss due to unfavorable markets when it comes time to withdraw.

Tip 2: Accept your own boundaries

Many people underestimate the importance of this point. Not everyone can stay calm when the value of their retirement savings crashes. If that is the case with you, then a pillar 3a savings account is likely a better solution for you. While the returns you earn from interest payments are very low, you eliminate the risk of your account losing value.

Investing in securities is also unsuitable for people who get nervous when market prices fall. In this case, there is a big risk that you may sell your investments out of panic, which can result in huge losses.

Tip 3: Diversify your investments

It is important to invest your retirement savings in a wide variety of stocks across many different regions, industry sectors, and currency areas. Broadly diversifying your investments greatly reduces the risk of loss.

The concept behind diversification: If one region, sector, or currency weakens, the loss can be compensated by gains in other markets. Always avoid unnecessary concentration risks.

Tip 4: Use index funds

Tax-optimized index funds are the most sensible vehicles for investing retirement savings. Funds that are licensed exclusively for retirement savings are ideal, as these funds can recover many foreign withholding taxes on dividends. This results in higher returns.

While exchange-traded funds (ETFs) are often an ideal instrument for investing outside of the pillar 3a, they lack the advantage of being able to recover withholding taxes in many countries. That makes them less ideal for pillar 3a investing than retirement index funds.

Both index funds and most ETFs invest in a passive way by simply replicating market indexes. That greatly lowers the cost, because they require very little work from investment experts.

Many established banks and financial advisors, on the other hand, focus primarily on actively-managed mutual funds. These are comparatively expensive. The experts who manage these retirement funds try to invest in a way that outperforms overall markets. However, actively-managed funds rarely perform better than the market, after accounting for costs.

Tip 5: Avoid investing in bonds

Investing in bonds does not make sense for small investors. For many years now, low-risk bonds have had extremely low interest rates. Investing in these bonds often results in a loss.

In other words: Bonds may, in the best-case scenario, deliver slightly higher returns than pillar 3a savings accounts. But unlike the balances of savings accounts, which retain their value in Swiss francs, bond investments can lose value.

If you only want to invest part of your retirement savings in the stock market, it is best to use a combination of investment solutions and pillar 3a savings accounts. Tip: Simply pay the investment portion into pillar 3a retirement funds with no bond component, and place the rest in pillar 3a savings accounts.

Tip 6: Look at the total costs

Always look at the total costs when deciding on which pillar 3a investment solution to use. Add up all of the different fees and charges. Important fees to look at include:

• Asset management fees: The asset management fee is typically a flat-rate fee that covers the costs of buying, holding, and selling securities, as well as the retirement foundation’s administrative costs.
• Custody fees: Some banks charge custody fees for holding shares of their own retirement funds on your behalf.
• TER fees: Whether you use a stand-alone retirement fund or an asset management portfolio, the funds used have their own fees and charges. These ongoing TER fees detract from your returns. These costs are shown as the total expense ratio (TER) of a fund.

Depending on the service provider, other costs like brokerage fees or currency exchange markups may also be charged separately.

Tip 7: Consider online-only retirement saving solutions

Over the past decade, a number of pillar 3a retirement saving solutions have appeared that offer their services exclusively online. These retirement saving apps stand out with customer-friendly mobile apps, online account opening, and low-cost investment solutions. Some of these service providers give you the option of customizing your investment portfolio.

When choosing a pillar 3a investment solution, make sure to get informed about offers that are only available online.

Tip 8: Do not place too much emphasis on past performance

An investment fund’s past performance says little about its future success.

Often, service providers use impressive past performance in their marketing. In the case of actively-managed pillar 3a funds, the performance can vary sharply year by year. The performance of index funds and passive ETFs, on the other hand, is generally similar to that of the replicated index.

Good to know: The stock market, as a whole, also experiences good years and bad years. When looking at the performance of pillar 3a funds, it is helpful to account for the overall market’s performance in the given year.

Tip 9: Keep your payments regular

It is beneficial to add new money to your pillar 3a investments on a regular basis. Setting up a standing order at your bank automates the process so that you do not forget to make your pillar 3a contributions.

Studies have shown that investing a fixed amount on a regular basis lets you benefit from a cost averaging effect. Your money buys more assets when market prices are low, and less assets when prices are high. But there are also studies that relativise the benefits of cost averaging.

Tip 10: Avoid pillar 3a funds linked to life insurance

Many Swiss life insurance providers offer retirement funds. These are often bundled with whole life insurance products with cash value. This kind of insurance-based investment product is generally untransparent and inflexible, and in many cases very expensive. Ending your insurance before the insurance term ends typically results in you losing money.

It is generally better to clearly separate saving from insurance. Use a pure investment solution to invest your pillar 3a savings and pillar 3a savings accounts to save. If you need to insure yourself against risks, you can get pure term life insurance or disability insurance separately. In many cases, it makes more sense to get these insurances in the pillar 3b, instead of the pillar 3a.

Tip 11: Rearrange your portfolio on time

As you near retirement, you may need to restructure your retirement portfolio. Because you will be cashing out your pillar 3a savings soon, there is a risk that markets may fall before you sell your investments, which could result in losses.

In the event that the stock market collapses shortly before you withdraw, you could end up with much less savings. In the years leading up to retirement, you should begin selling off your pillar 3a fund shares when prices are favorable. The resulting money can be transferred to pillar 3a savings accounts, locking in your gains.

Tip 12: Use multiple pillar 3a accounts

It is beneficial to divide your payments into the pillar 3a across multiple pillar 3a accounts. These could all be at the same bank or other service provider, or you could use several different providers. When you use pillar 3a investment funds or asset management portfolios, each portfolio is linked to one pillar 3a account.

Using investment solutions from multiple pillar 3a service providers helps spread risk, and lets you take advantage of different investment strategies.

Cashing out pillar 3a savings should be done over several different calendar years, and should be coordinated with any lump-sum withdrawals from your occupational pension fund or vested benefits accounts. By spreading withdrawals across different calendar years, you spread the tax burden across multiple tax years. This helps reduce the total amount you have to pay for retirement capital withdrawal taxes.

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