Attractive vested benefits solutions in the event of unemployment

Private pension provision
Reading Time: 5 Minutes
Written by
Fabio Preite
Partner, Managing Director PensFree, Pens3a & Independent

If someone becomes unemployed before the age of 58 and exits the pension fund (PF), the mandatory retirement provision (AHV salary up to CHF 84,600) can remain intact in the BVG contingency fund. Alternatively, the PF assets can be placed in a vested benefits foundation. The best option is to choose foundations offering the maximum possible scope for investment so the capital can be allocated efficiently. That can be especially helpful for older pension fund members who have less chance of finding another job. They can maintain a long-term perspective. The longer the investment horizon, the higher the returns. The investment horizon does not have to end when you withdraw capital, which you have to do on reaching 69/70 years of age.

 

In vested benefits foundations, the investment portfolio can be managed by an authorised asset manager with a free choice of investment strategy within the BVG framework and managed with private assets. On withdrawal it can be transferred to a private custodian account. Normally, only a good 50% of the capital can be invested in equities, although higher shares can be invested if allowed under the investment regulations. A high equity component has paid off in the past in most investment cycle phases. In the past five years, strategy funds have posted average returns of up to 7% a year. That exceeds the official conversion rate on mandatory capital of 6.8% discounting capital consumption.

 

Some vested benefits foundations also offer other interesting options. For example, it’s possible to pay for your own home from vested benefits through special investment instruments. One-off payments are also an option for larger sums. There are also vested benefits foundations for extra mandatory pension assets, which offer a lifelong annuity combined with an optional partner pension from a certain asset level.

 

Persons resident in Switzerland at the time of the payout are taxed at a reduced rate defined by their place of residence. To further disrupt any tax progression and increase flexibility of withdrawal, the vested benefits should be transferred to two different vested benefits institutions. That way the withdrawal can be staggered over a number of years. When moving abroad, it’s important to choose a foundation based in a low-tax canton as that is the rate you will be taxed at when your assets are paid out. It may be possible to have the source tax refunded depending on the conditions of the applicable double taxation agreement.

 

People need to proactively structure and manage vested benefits accounts to exploit their full potential. That calls for a certain level of knowledge and professional advice in complex cases. Pension provision involves many pitfalls, even apart from the investment issues, that must be avoided at all costs, for example relating to taxation, inheritance and bankruptcy law.

 

Written by
Fabio Preite
Partner, Managing Director PensFree, Pens3a & Independent