AXA (Crans-Montana)

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**Retirement planning - looking beyond 50

Taking care of your pension in time to live your retirement to the full** In Switzerland, the old-age pension system is based on three pillars: public provision (1st pillar), occupational provision (2nd pillar) and individual provision (3rd pillar). This system leaves plenty of room for private initiative and optimization. If you make use of this flexibility and start planning your retirement early enough, you can look forward to it with peace of mind.

For most people, retirement is a major turning point in life. It affects leisure time, relationships with partners, finances, social status and many other areas.

No one knows what retirement is, but it's possible to prepare for it by benefiting from the knowledge of others and anticipating this new life to come.

Particularly from a financial point of view, it's a good idea to plan your retirement in good time, as you can still optimize your pension provision a few years before retirement. The Swiss old-age pension system gives you plenty of room for manoeuvre.

**The three-pillar system The Swiss pension system is built around three pillars: public, occupational and individual. Public pension plans are compulsory for all, while individual pension plans are optional. Employees earning an annual salary of CHF 20,880 or more are obliged to take out occupational pension insurance, while self-employed people are free to do so if they wish.

In principle, the 1st pillar - the public pension scheme - covers basic needs. The 2nd pillar, or occupational pension plans, are intended to maintain the usual standard of living after retirement. The 3rd pillar, or individual pension provision, is intended to fill any gaps.

**1st and 2nd pillar benefits are generally not sufficient to maintain the usual standard of living.

1st pillar: public pension schemes (AVS/AI)

The 1st pillar includes old-age and survivors' insurance (AVS), disability insurance (AI) and, in certain cases, supplementary benefits (PC). The AVS is Switzerland's most important solidarity scheme; it was created in 1948 and has been revised ten times since.

The AVS was designed to compensate for loss of income due to age or death:

• The old-age pension enables insured persons to retire from working life with financial security.
• Survivors' pensions prevent the death of a spouse or parent from creating insurmountable financial difficulties for the survivors.

AHV is compulsory insurance. All adults living or working in Switzerland are insured. Swiss nationals working abroad can take out voluntary insurance to avoid gaps in their contributions. Children and people not in gainful employment, such as students, invalids, pensioners and housewives, are also subject to AVS.

AVS is financed on a pay-as-you-go basis: contributions paid by the working population are immediately used to finance current pensions. The insurance is therefore based on the principle of solidarity between generations.

However, for many years now, the gap between contributors and pensioners has been widening, as the proportion of older people in the total population continues to rise. In the long term, demographic change threatens the AHV system in its current form, to the extent that the retirement age may have to be raised sooner or later.

OASI benefits are not colossal sums and only guarantee a minimum standard of living. Old-age pensions are calculated on the basis of years of contributions and average annual income. They are adjusted in line with wage and price trends; currently, the maximum annual pension is CHF 27,840 for a single person and CHF 41,760 for a couple. The minimum pension is half the maximum pension.

To find out how much pension you will be entitled to, you can order your individual AHV statement at www.ahv.ch If you're over 40, we'll send it to you free of charge.

Maximum AVS annual pension:

• CHF 27,840 for single persons** **CHF
• CHF41,760 for couples** **Maximum annual AHV pension

2nd pillar: occupational pension plan (BVG)

Pension funds have been around for over 100 years, yet occupational pension provision remained optional for a long time. It was only incorporated into the Swiss Federal Constitution in 1972, to form the 2nd pillar of old-age provision. And it wasn't until 1985 that the "Federal Law on Occupational Pension Plans" made the 2nd pillar compulsory.

Occupational pension plans are based on the following principle: a portion of income - representing between 3.5% and 9% of insured salary, depending on age - is credited to an individual account, rather than being paid directly to the employee. The employer pays into this account an amount at least equal to the employee's contribution. The individual account is thus topped up every month by a sum of between 7% and 18% of the insured salary, depending on the age group to which the employee belongs.

The money invested in this account over the years constitutes the retirement savings capital, which earns interest at the minimum BVG/LPP interest rate. Currently, in 2011, this rate is 2%. When you retire, you can withdraw this capital as a lump sum, or request that it be converted into a life annuity. For further details, please see page 18 of this brochure.

Unlike the AHV, the 2nd pillar is not a solidarity scheme; in principle, everyone saves for themselves. Employees aged 17 or over must be insured with a pension fund through their employer, if they pay AHV contributions and earn at least CHF 20,880 a year. Until January 1 following their 24th birthday, employees who pay BVG contributions are only insured against death and disability, after which they start building up their retirement capital.

The following persons are not subject to compulsory occupational benefits:

• self-employed persons
• employees with an employment contract of up to three months,
• persons working on a farm who are members of the farm owner's family, and
• persons who are at least 70% incapacitated according to the AI.

For higher incomes, the salary is not fully subject to compulsory insurance. The part of the salary exceeding the maximum BVG/LPP amount of CHF 83,520 is known as the "extra-mandatory" part, and is not subject to any legislation. You will find full details of the extra-mandatory portion of your retirement savings in your pension fund regulations.

The benefits paid out by the pension fund and the AHV are intended to ensure that insured persons maintain their usual standard of living after retirement. However, due to the many changes that have taken place since the introduction of the BVG, this objective is rarely achieved today.

The return on retirement savings, for example, has been significantly reduced. The conversion rate, which defines how much of the accumulated retirement savings is paid out each year in the form of a pension, has also been lowered. When the BVG was introduced, this rate was set at 7.2%. But as the population ages, it is to be reduced to 6.8% by 2014. This small difference in the rate is not without consequences: for retirement savings of CHF 400,000, the annual pension was CHF 28,800 with the initial rate, whereas in 2014 it will be just CHF 27,200.

**Maximum annual pension under the compulsory BVG scheme: approx. CHF 27,000.

**The 3rd pillar: individual pension provision

If 1st and 2nd pillar benefits are not enough to maintain your usual standard of living, you can close the pension gaps - at least in part - with the 3rd pillar.

There are two types of individual pension provision:

• Pillar 3a, also known as tied pension provision, comes with tax benefits: you can deduct the amount paid into Pillar 3a from your income, saving up to CHF 2,000 in tax. A reduced tax rate is applied to subsequent withdrawals of Pillar 3a retirement capital. However, there is a limit to the amount that can be transferred to Pillar 3a each year.
• Pillar 3b, also known as unrestricted pension provision, is more flexible, but offers no tax advantages. Pillar 3b includes all forms of private savings other than Pillar 3a: savings accounts, cash, various savings and investment products, life annuities, home ownership, valuables, etc.

**Pillar 3a saves up to CHF 2,000 a year in taxes.

"It's essential to include your partner in your planning.

Why plan your retirement when the law has already taken care of everything?** Bruno Kaufmann: There are many things you can and should plan for yourself. Bruno Kaufmann: There are many things you can and should plan for yourself, starting with the following questions: Do I intend to take early retirement? How do I manage the transition from working life to active retirement? How can I organize my time wisely when the time comes? Should I withdraw my pension fund savings in the form of an annuity or a lump sum?

**When should I start planning for retirement? Ideally, from the age of 50. At this age, children have generally come of age, needs are no longer the same, there's still time to make up for any financial shortfalls, and people generally enjoy a stable professional situation, and therefore a comfortable income. Self-employed people, on the other hand, have to start thinking about retirement as soon as they set up their business, at least from the point of view of succession planning.

How do you plan for retirement? What do I need to pay attention to? It's very important to include your partner in your planning. Talk to a specialist pension advisor, who will look at your occupational pension options: can you buy back to increase your retirement capital? Can you afford to request a lump-sum payment or consider early retirement? What will your retirement pension and that of your partner be in the event of your death?

**What steps can you take now to improve your financial situation in retirement? There are several possibilities. The first is to buy back insurance years with your pension fund, which offers tax optimization benefits, improves your retirement pension and may even facilitate early retirement. Building up a Pillar 3a tax-advantaged personal pension plan is another solution. But the most important thing, in my view, is to make savings at your own level: you need to eliminate over-insurance and double-insurance, and reduce your costs, for example by increasing your health insurance deductible.

**Retirement planning: taking charge of your future in ten steps

Three pillars, capital withdrawal, pensions, retirement assets - it all sounds very complicated. In reality, however, it's not that difficult to plan financially for retirement. Here's how to do it in ten easy steps.**

1. Start your planning by determining the budget you'll need to cover your day-to-day expenses during retirement. Think about the projects you'd like to carry out in the future, your future lifestyle and the financial and health risks you'll have to assume. You should also take into account any personal wishes you may have, such as major investments in your home.

   **Let's assume that your current retirement expenses will amount to CHF 80,000 per year.

2. To find out how much your annual AHV pension will be, ask your AHV compensation fund for an individual statement of account.

   The pension is capped at CHF 27,840 per year.

3. Contact your pension fund to find out how much BVG pension you will receive each year.

   In this example, we assume that the BVG pension is CHF 27,160 per annum.

4. To determine your annual pension shortfall, calculate the difference between your current expenses and the pensions you will receive from your pension fund and the AHV.

   80'000 CHF - 27'840 CHF - 27'160 CHF = 25'000 CHF.

5. Now you can estimate how much capital you'll need at age 65 to cover your pension shortfall. Assuming an average life expectancy of 85 years, you'll need to make up your annual pension shortfall over a period of 20 years.

   **20 x CHF 25,000 = CHF 500,000 (capital required).

6. Calculate the amount of capital you have available today (effective capital), i.e. the assets you already own. Bear in mind that your capital is interest-bearing until you retire.

   **Current amount available: CHF 200,000. Thanks to interest, this capital will rise to CHF 260,000 by the time you retire (effective capital).

7. Differentiate between effective and required capital to determine your capital needs and how much you'll need to save until retirement to meet your current expenses.

   **500,000 CHF - 260,000 CHF = CHF 240,000 (capital requirements) **.

8. How long do you have to save the missing capital?
   To find out, deduct your current age from your retirement age.

   **65 - 45 = 20 years

9. You can now calculate the amount you need to save to cover your capital needs.

   **CHF240,000 over 20 years = CHF 12,000 per year or CHF 1,000 per month **.

10. Compare the amount you need to save with your financial resources. Will you be able to save enough between now and retirement to raise the necessary capital? If not, you have several options for optimizing your budget. The first is to limit your spending after retirement, to reduce your annual financial needs. Another option is not to retire until the age of 67, which gives you more time to close the pension gap. Alternatively, you can reduce your current expenses to save more money until retirement. Perhaps you'll find other ways to optimize your investment strategy and achieve a better return.

**Build wealth quickly and use it with peace of mind

Planning your retirement means you know how much money you need to put aside to enjoy a worry-free retirement. But you need to start building up your assets as soon as possible, and think about the best investments for the period after you retire**.

In most cases, income from the 1st and 2nd pillars only covers 40% to 60% of the last salary received before retirement. If you want to maintain your usual standard of living in retirement, you need to build up additional capital. The earlier you start saving, the better, as the effect of compound interest increases over time.

**Yield or security When it comes to investing, there are no big gains without big risks. Unfortunately, no investment instrument can escape the law of the risk/return ratio; no investment can guarantee high returns while offering maximum security.

Similarly, there is a conflict of objectives between liquidity and profitability: investments available at short notice are often synonymous with lower returns.

The interplay between yield, security and liquidity involves constant trade-offs. In all cases, the choice of the optimal form of investment depends on your personal needs; there are no universal investment strategies that are optimal for everyone.

Few people can risk losing their retirement capital in financial investments. If you're investing money you'll need for retirement, security must take precedence over return; only take high risks with capital you can afford to lose in whole or in part.

If you're unsure about where to invest your retirement capital, opt for security, even if it means losing out on returns. In addition, as you approach retirement, choose investments that give priority to security, because the more time passes, the more valuable your assets become.

Naturally, it's frustrating to bet everything on security and see people around you making high profits on their investments. But the financial crisis has shown us that a sharp rise always conceals a high risk of fall.

**A skilful balance between yield, security and liquidity.

Building capital with pillar 3a**

When it comes to building assets for retirement, it's usually worthwhile first to take advantage of all the tax-advantaged possibilities offered by Pillar 3a - tied pension provision.

You can deduct the annual amount invested in Pillar 3a from your taxable income. Later, when the capital is withdrawn, a reduced tax rate applies instead of the normal rate.

However, Pillar 3a investments are subject to a number of restrictions:

• The amount you can contribute each year is limited; currently, in 2011, this is CHF 6682 for employees insured with a pension fund, and CHF 32,832 for the self-employed.
• You can withdraw the accumulated capital no earlier than five years before your normal retirement date, unless you move abroad, start a self-employed business or buy your own home.

In principle, a Pillar 3a investment solution can take two forms:

• a banking solution, or
• an insurance solution.

With a bank solution, you deposit money into a 3a account and benefit from a preferential rate. There are also 3a accounts linked to investment funds, which allow you to participate in the performance of a fund. These accounts offer attractive casco return prospects, but the risks are correspondingly high. You decide how much to invest each year.

As part of the insurance solution, you also benefit from protection: part of the annual premium is used to cover the risks of disability and death. In the event of death, the insurer pays the agreed sum to the beneficiaries. If you become unable to work, the insurer pays the premiums. The lump-sum payment is made when the policy expires. However, the security features of this solution limit the return. As with the banking solution, you can also choose insurance products linked to investment funds.

The choice of one or the other will be dictated by your personal situation and plans. You can also combine the two solutions by opening a 3a account with a bank and taking out a 3a savings policy with an insurance company. The total amount invested in either solution must not exceed the maximum deductible amount.

**Building up capital with Pillar 3b You don't want to submit to the restrictions of Pillar 3a? Then you can invest as you wish in Pillar 3b. The so-called "free" pension plan may not come with any tax advantages, but it does offer a great deal of freedom. It offers a wide choice of banking and insurance solutions, from complex structured products to life insurance policies of all kinds.

**Pillar 3a contributions: capped at CHF 6682 for salaried employees.

Diversify your investments As each type of investment has its own advantages and disadvantages, it's generally a good idea to diversify your investments.
Here's an example:

Each year, you invest CHF 3,400 in a traditional life insurance policy and pay CHF 3,166 into a 3a bank account linked to investment funds. In terms of the "magic triangle" formed by yield, security and liquidity, this gives the following picture:

• Yield: Pillar 3a linked to investment funds and the resulting tax advantages offer you good yield opportunities.
• Security: life insurance guarantees you a one-off payment of a pre-determined sum, which you can draw on at age 65, for example.
• Liquidity: you are free to determine the sums paid into the 3a account at any time, up to the legal maximum; should you need a littl