Private pension provision (3rd pillar) serves to close the pension gap from the 1st and 2nd pillars. Pillar 3a is particularly interesting in this respect, as it allows additional tax savings to be made. The amount of the possible annual contribution is limited, but it can be completely deducted from taxes at the end of the year. In return for this tax incentive, the money can usually be withdrawn no earlier than five years before reaching the statutory retirement age.
Pillar 3a pension assets can either be saved in a pension account, paid into an insurance solution or invested in a securities account. The latter in particular offers greater flexibility and the opportunity to invest your assets over a long period of time to increase their value.
In this article, you will learn more about the investment solutions in pillar 3a, how the funds have been invested in the past and the advantages of investing directly.
Contents
The most important facts at a glance
- Investing 3a assets makes sense in most cases because the investment horizon is often very long.
- Over a long period of time, it can make a big difference whether you invest defensively or dynamically.
- Investing 3a assets via simple and digital solutions (apps) is becoming increasingly popular, which means that young people are also getting involved with the topic at an earlier age.
- The new option of investing in direct investments offers several advantages, such as greater transparency, lower costs and more precise control of portfolios.
- No matter which investment form or provider you choose, the main thing is to let your assets work and generate annual returns.
Why it makes sense to invest pension assets
In the case of private pension provision with 3a, we are generally talking about a long-term investment horizon. Pillar 3a can be drawn down no earlier than five years before reaching the regular AHV retirement age.
An early withdrawal is strictly regulated by law and only possible under specific circumstances. As a result, the capital remains in the account for a long time and is therefore suitable for investment in securities. This is where the so-called compound interest effect comes into play, which is often underestimated. This describes the fact that invested capital increases exponentially, even with a constant return. This is due to the fact that generated returns on capital are reinvested and thus generate new capital, which in turn generates capital. Thus, it quickly becomes clear that the increase in value is highest at the end of an investment period.
Of course, this effect also occurs with a fixed interest rate on a savings account. However, a difference of 1-2% return per year over 20 to 30 years can make a significant difference in the final capital.
As an example:
- If you invest CHF 100,000 at 3% per year for 30 years, you will receive CHF 242,726.
- If you invest the same capital at 4% per year, you will already receive significantly more at 324,340 CHF – that is a difference of 81,614 CHF or 33.6% more capital.
You should therefore definitely consider whether it doesn’t make more sense to invest your pension assets more in equities, where the historical return over a long period of 30 years is much higher at around 7% per year than with bonds or a fixed-interest account. As mentioned at the outset, the time factor plays the decisive role here, and that is precisely what is usually abundant in the case of pension assets.
How pension assets were invested in the past
In the past, Pillar 3a assets were often placed in savings accounts, which in the past at least still had a respectable interest rate. However, with the onset of the low-interest environment in 2009 as a result of the financial crisis, there was effectively no longer any savings interest on account balances.
As a result, 3a assets were increasingly paid into pension funds of major banks or insurance solutions in order to at least compensate for inflation. With the advent of new, digital providers, low-cost investing in ETF and index fund portfolios became increasingly popular. Unlike insurance or mutual fund solutions, this allowed people to personalize their investments for the first time, albeit to a limited extent.
These solutions were easy to open, transparent and could be easily managed independently via the respective app. In the normal case, however, investors can only choose between a selection of a few ETFs and index funds. What was already normal in traditional asset management unfortunately did not exist in 3a retirement planning until much later: discretionary mandates with investment in direct investments.
Reading tip: Pillar 3a funds: tips & return opportunities
Advantages of direct investments
Discretionary mandates are investment portfolios consisting of direct investments in individual stocks, bonds, etc., which can be fully customized to each client’s preferences and preferences. These portfolios are managed individually and independently from other portfolios, which significantly increases the management effort.
For this reason, this concept is often reserved for high-net-worth clients in the private banking sector. Yet the advantages for the investor cannot be denied:
- By investing in direct securities, the portfolio can be specifically tailored to the client’s wishes and needs, as well as his risk appetite.
- By being able to see what is in his portfolio at any time, he also gains the maximum possible transparency. In this way, investment in undesirable companies can be avoided.
- In addition, not using collective investments such as funds and ETFs brings the advantage that no additional product costs are incurred. This, in turn, contributes to general transparency vis-à-vis the customer.
Since the customer is not allowed to manage his retirement savings account independently, this task must be left to an asset manager or a bank. From the asset manager’s point of view, the direct investment approach has the additional advantage that client portfolios can be managed much more precisely. This makes it possible to react even better to certain market conditions, which ultimately benefits the return on the client’s portfolio. Furthermore, specific investment strategies and styles can be implemented, where ETF and index fund portfolios often implement pure risk optimization from modern portfolio theory.
For more information on the direct investment approach, see our blog post on active investing and on asset management mandates.
Summary of pension provision with 3a
Pillar 3a is currently enjoying great popularity, and rightly so. Thanks to the introduction of simple and intuitive retirement planning apps, the younger generation in particular is looking at building up their retirement assets at an earlier stage. This is probably also due to the fact that nowadays you are more often confronted with the topics of retirement provision and retirement provision with 3a in advertisements and magazines. The recent changes to the AHV system in particular have meant that this topic is now also receiving the attention it deserves among more and more women.
In order to make the most of one’s pension assets over a long time horizon, regardless of the amount, it is essential to invest them. Using our example on compound interest, it became clear that the long-term outcome can change significantly depending on the decision of whether and how to invest the assets. With the current trend of rising interest rates, even simple interest savings accounts are becoming more attractive again. However, the past shows that it has always paid off to invest your capital as dynamically as possible over 20 to 30 years. Ultimately, it is a very personal decision how risky to invest, but also which provider suits you best.
The new direct investment offering is particularly interesting for those who want a portfolio that is as transparent and individual as possible, in which it is clear exactly which companies they are invested in. Others, on the other hand, are satisfied with a passive ETF portfolio that simply covers the broad investment market. However, the most important thing is to invest your capital in the first place and to use the long investment horizon for yourself in order to be in as comfortable a financial situation as possible in old age.
