Third pillar retirement schemes are very popular in Switzerland and this type of pension fund has a lot to recommend it. The biggest benefit is that you enjoy attractive tax deductions when you make payments into your fund.
Money paid into pillar 3a retirement savings can either be placed in a 3a high-yield retirement savings account, or a pension fund. Investment schemes available for 3a pension plans are commonly the same as those used for pillar 2a funds.
There are a number of things to look out for when choosing the right investment fund. We’ve listed the most important points here:
- Risk: In the past, retirement funds offered higher yields, on average, compared to what you could earn through interest with a savings account. But there is no guarantee that things will remain this way in the future.
Secondly, pension funds do not guarantee yield rates. Funds are typically more volatile and risky than savings accounts, and may suffer significant value losses in a bad year. You will have to be able to wait out these lean periods.
Tip: Only opt for a pension fund if you are well endowed with the virtue of patience.
- Investment strategy: Pension fund managers offer several different investment funds, with varying compositions. Funds usually include stocks, bonds and other investment vehicles like property or money market investments.
The rule of thumb here is: More stocks equal more risk. Plans now offer both funds with conservative investment strategies and higher-risk funds. The portion of a retirement fund that can be made up of stocks is legally limited to a maximum of 50%.
Tip: Make sure to choose a strategy that matches your tolerance for risk.
- Performance: Pension fund performance is published on a regular basis. But while these statistics are interesting, it’s important not to overestimate them. Firstly, not all charges are included in these assessments. Secondly, and most importantly, a pension fund’s performance in a given year is no clear indicator of its future performance. Don’t be surprised if performance across the entire portfolio looks completely different year on year.
Tip: Don’t build your expectations on predictions you make based on fund performance. A fund’s fee structure will tell you more about the kind of asset growth you can expect.
- Costs: A thorough cost comparison is a must when choosing the right retirement plan. Many funds charge prohibitively high fees that can eat up your profit and easily cost you thousands of francs over the years.
The most notable cost is the annual TER charge (more about this below). But one-time costs for individual fund trades may also be added. These trading fees may be levied on purchases or sales of securities that make up a fund (so-called transaction fees). Most fees are presented as a percentage of total fund assets.
Example: If you could save just 1% on fees per year on 100,000 francs worth of assets, over a 10 year period you would save more than 10,000 francs!
Tip: Compare all costs before you choose a fund.
- TER: The so-called «total expense ratio» or (TER) is the official measure of retirement fund fees. This is primarily made up of the fund’s management fee. In Switzerland, the TER typically comes to anywhere from 0.3% to 2% of total assets per annum.
A more exact cost estimate can be found in the synthetic TER, which takes TER fees of third-party funds included in a pension fund into account. If 10% (or more) of a Swiss retirement fund is made up of third-party funds, the fund is legally obligated to report the synthetic TER.
A TER (or synthetic TER) of more than 1% makes a pension fund unprofitable. The more of a fund is made up of shares, the higher the fees you can expect to pay. Also note that, TER aside, additional costs like transaction, deposit, issuing and redemption fees may be incurred.
Tip: Choose a pension fund with a low TER.
- Issuing fees: When funds are purchased, some fund managers collect one-off fees when the fund is «issued». This fee can be as high as 3% of invested assets at some banks and insurance companies.
Buying into funds that charge high issuing fees is not recommended. Redemption commissions are now rarely charged, and when they are, they are usually low.
Retrocessions are not fees and are not directly charged to you as a pension fund customer. However, they can be problematic in that they may create a conflict of interests.
Tip: Choose a fund with low redemption fees, or better yet, with none at all.
- Deposit fees: As if the administration and withdrawal fees were not enough, some fund managers also take deposit fees (or custody fees). These may add another cost equal to 1% of your total assets per annum. Note that this is not referring to a fund’s internal deposit fees which are included in the TER.
Tip: Choose a pension fund which charges no deposit fees, or very low ones.
- Active or passive: Most fund providers now offer passive exchange traded funds (ETFs) in addition to more expensive actively managed funds. As a rule, passive retirement funds are cheaper, making them the best choice in most cases.
Tip: If possible, opt for a passive pension fund.
- Consultant: Considering how high pension fund fees are, it’s no surprise that consultants earn sizable kickbacks for bringing you on board. Be wary of consultants who make expensive managed funds sound like a great deal. It’s their great sales pitches that make it possible for banks to rake in so much money in fees.
Tip: Ask your consultant for a complete cost breakdown of the funds they recommend. Try to compare fees yourself to avoid being misled.
- Insurance coverage: Beware of pension plan salespeople who try to sell you a fund which includes an insurance policy. Representatives receive a fat commission for insurance sales. In most cases, high-kickback products primarily benefit providers, and not you as a customer.
Fund policies which, in addition to assets, also include insurance (life insurance, for example) are not recommended. If you want life insurance coverage, you should obtain a separate life insurance policy.
Tip: Pension funds with integrated insurance policies are usually not worth it.
- Fund sales: As a rule, you will have to sell your funds when you reach retirement age. This rule applies, for example, to funds provided by investment foundations.
An early sale can be less than ideal in the event that you want to wait out poor rates to avoid losing money. That’s why transferring assets from funds into pillar 3a retirement savings accounts as much as several years in advance, at a time when rates are good, is often a good strategy.
You can also choose a securities fund which has an option of converting to a regular investment fund after you retire. Some banks offer the option of transferring your fund assets into an analog investment fund free of charge. Other banks, including Bank Coop and PostFinance, do not give you this option.
Tip: Timing is everything when selling funds. Take care to choose the time of sale carefully.
- Multiple 3a accounts: If possible, try to establish several retirement relationships at banks or insurance companies. The benefit of doing this is that when you retire, you will not have to withdraw all of your 3a assets within the same year.
If you stagger the cashing out of your (multiple) 3a accounts over several years, you can avoid being bumped up into a high income bracket. This applies to both 3a retirement savings accounts and 3a pension funds.
Tip: If you have a reasonably large amount of 3a assets, make sure to open multiple 3a accounts and pension funds.