Pension Funds in Switzerland: Explanation
A pension fund in Switzerland is a form of savings based on long-term investment. It is generally used to finance the retirement of the 3 pillars of Swiss retirement :
- 1st pillar: Also known as AVS, contributions to this pillar are compulsory.
- 2nd pillar: Also known as the BVG (Occupational Pensions Act), both employee and employer contribute to this scheme.
- 3rd pillar: Private pension provision, which is optional
However, the Swiss pension fund is not limited to retirement benefits. It can also be used if the member has a disability or if they pass away.
How do Pension Funds Work in Switzerland?
There are several steps involved in setting up a pension fund in Switzerland.
Contributions
When you are a member of a pension fund, you make regular contributions to it. Sometimes, contributions are compulsory, as is the case for the 1st pillar.
In other cases, as in the case of the 2nd pillar, you are only affiliated above a certain salary (from CHF 22,680). As for the 3rd pillar, you are free to set one up or not.
Defining Duration and Risks
When setting up a pension fund in Switzerland, you will need to determine :
- The duration of your investment (short, medium or long term)
- The type of risk you are willing to take (high, medium or low-risk investments)
High-risk investments can increase your capital quickly, but they can often be unstable or complex. For example, investing in equities offers high returns, but also exposes you to the instability of the stock market.
On the other hand, there are investments that keep risk to a minimum, such as Swiss government bonds or real estate. In any case, diversifying your investments is always a good idea. The organization in charge of your provident fund should inform you about all these aspects.
Capital Expenditure
Once the risks and duration have been determined, the contributions paid to it can then be invested to generate a return over a period of time. This increases the amount of capital available to you.
You can choose to invest part or all of your contributions, and you can also invest in different things.
Risk Management
Pension funds assess and manage the risks associated with investments and future commitments. They must comply with strict regulations to guarantee their solvency and their ability to honor promised benefits.
Payment of Benefits
During your retirement or in the event of disability or death, your pension fund pays out the increased amount over time in the form of annuities or lump sums to the beneficiaries.
The Advantages of a Pension Fund
As we saw earlier, a provident fund enables you to achieve a higher return through diversified investments. In addition, pension funds enable you to reduce your tax burden since the contributions you make can be deducted from your taxes.
Frequently Asked Questions
What is a pension fund in Switzerland?
A pension fund in Switzerland is a form of saving based on long-term investment. It helps finance workers' retirement and is one of the three pillars of the Swiss pension system, providing financial security for the future.
What are the three pillars of retirement in Switzerland?
The three pillars of Swiss retirement provision are Pillar 1 (AHV), Pillar 2 (BVG) and Pillar 3 (private pension provision). The 1st pillar is compulsory, while the others are optional, offering additional pension options.
What is the 2nd pillar in Switzerland?
The 2nd pillar, or LPP, is an occupational pension scheme. It is compulsory for employees with incomes above a certain threshold. Contributions are shared between employer and employee to provide a supplementary retirement pension.
How do you determine risk in a pension fund?
When setting up a pension fund, it's important to define the duration of the investment (short, medium or long term) and determine the level of risk you're prepared to accept, based on your financial objectives.
What types of investments present a high risk for a pension fund?
High-risk investments, such as equities, can generate high returns, but they are also exposed to market instability, particularly stock market fluctuations. It is therefore important to diversify investments to limit this risk.
What are the low-risk investment options for a pension fund?
Low-risk investments include assets such as Swiss government bonds or real estate. These options are generally more stable and less volatile, offering greater security for pension funds.
