Are Swiss third pillar retirement savings necessary?

I already pay money to Swiss social security and a Swiss pension fund through my job. Do I need private retirement savings as well or are the mandatory pension savings enough?

Hi there,

Private retirement savings (3a and 3b) are meant to complement the pensions your receive from social security (1a) and your occupational pension fund (2a).

The pensions you receive from social security and your occupational pension fund are dictated by the Swiss federal government and - in part - by voters themselves. This provides a certain amount of security but also makes these pensions vulnerable to economic and demographic changes. If the government decides that the social security system or the conversion rate at which occupational pensions are paid out is unsustainable, your pensions could be slashed - tearing a hole in your budget. Savings through private retirement solutions spreads the risk, providing greater security for your old age.

It is also worth noting that Swiss social security pensions (1a) are relatively low compared to the cost of living. In 2017, for example, the lowest pension you can receive - if you make at least the minimum contribution over your entire working life - is just 1,175 Swiss francs per month. The highest pension you can get, regardless of how much you earned and contributed over your working life, is just 2,350 Swiss francs per month. If you did not contribute to Swiss social security over your entire working life, your pension will be even lower. Needless to say, a social security pension alone will not afford you much luxury in your old age.

Occupational pension funds (2a) supplement your social security pension. The pension you receive is based on a "conversion rate" set by the federal government. This is a percentage of the total amount of assets you have contributed to the fund, plus interest accrued. In 2017, for example, the conversion rate is 6.8%. At that rate, if you have 500,000 francs in pension fund savings, you receive a pension of 34,000 Swiss francs per year - or 2,833 francs per month. As you can see from this example, even large amounts of pension fund savings do not translate into a very large monthly pension. The less you contribute, the lower your pension will be. The conversion rate may also be lowered in the future, leading to even smaller pensions. So even Swiss social security and occupational pensions combined do not add up to the equivalent of an average Swiss salary.

That is where private retirement savings come in. Swiss law allows your to put away savings for retirement on a tax-deductible basis through the 3a category of retirement savings - within certain limits. The 3b category extends your options by allowing for additional private retirement savings. Although 3b contributions are not tax deductible, they can be withdrawn on a tax-preferred basis when you reach retirement age.

You can compare Swiss retirement accounts using the comprehensive 3a retirement savings account comparison tool.

Best regards from Moneyguru