People in Switzerland are living longer and longer. Today, a 65-year-old man can expect to live for about 20 more years on average, while a woman of the same age is likely to have about 23 more years. A proportion of the population will live to be significantly older.
The so-called "longevity risk" arises when a person who lives a long life risks running out of capital. At the same time, rising health care, long-term care and living expenses must also be taken into account.
This is because statistical life expectancy only outlines average values. If, for example, a man does not reach the expected age of 85 after retirement but instead lives to be 95, his capital must last for 30 years instead of 20. Depending on the person's state of health, these additional years of life may also result in costs for nursing or care.
Anyone who receives their pension fund assets as a pension generally receives a lifelong income. This means that the actual longevity risk is largely covered.
However, a fixed pension offers only limited protection against inflation. If the pension amount remains unchanged for many years, its purchasing power gradually declines. With an average inflation rate of 2%, CHF 5,000 in 20 years will buy about as much as CHF 3,340 does today.
Added to this are declining conversion rates in occupational retirement provision, meaning the same pension fund assets will yield a significantly lower annual pension than expected. For example, a conversion rate of 5% on capital of CHF 500,000 results in an annual pension of just CHF 25,000. At a conversion rate of 6%, that would amount to CHF 30,000.
An alternative to receiving a full pension is the Zurich Invest Payment Plan. Here, the capital remains invested in securities such as shares, bonds, real estate or gold and is paid out gradually.
This means the capital can continue to benefit from the financial markets. In the long term, this offers the opportunity to mitigate the effects of inflation and better preserve the purchasing power thanks to higher returns. The prospect of higher returns, however, is usually accompanied by greater price fluctuations in securities.
With the payment plan, the closer it gets to the end, the greater the risk reduction. Assets are gradually reallocated to more risk-averse investments, a strategy aimed at limiting any significant price fluctuations before the planned maturity date.
For risk averse investors, Zurich offers a private retirement pension, whereby a capital lump sum is converted into a lifelong, contractually specified income.
This solution is particularly well-suited to people who want planning certainty and do not wish to invest their assets directly in securities. Depending on the terms of the contract, surviving dependents may be entitled to a death benefit. This allows any remaining amount to be passed on to family members – and the same applies to the securities-based payment plan.
In contrast, with a traditional pension fund pension, the capital contributed cannot generally be freely inherited. Survivor benefits are governed by the law and the regulations of the respective pension fund.
From a tax perspective, too, a private retirement pension funded from free assets may also differ from a pension fund pension and, by comparison, result in lower income taxes, although that depends on the specifics of the solution and the individual's personal situation.
The various solutions meet different needs:
Often, a combination can be useful: Recurring basic expenses are covered by lifetime annuities, while another portion of the assets remains invested. This allows for a combination of security, flexibility, and the potential for returns.
Which solution is suitable depends on your own personal and financial situation. Comprehensive advice helps you to gain an overview of OASI, your pension fund, assets, investments, taxes and family needs – so that a long life remains an appealing prospect financially, too.
