The interest-rate-desert has spread to the vested benefit accounts
Regardless of how you make the comparison, the result is always the same: you no longer earn interest on vested benefits accounts. At an inflation rate of 0.9 % (2018), money loses almost one percent in value every year. That is bad news.
The good news is that for those who are not satisfied with this situation, there is an alternative: investing their vested benefits in securities. But this way out of the interest-rate-desert needs to be considered carefully. We explain what needs to be considered in this article.
Splitting vested benefits can be very advantageous
Before we get started, an important note: If you are about to withdraw from a pension fund, you can request your vested benefits to be split (Art. 12 para. 1 Vested Benefits Ordinance). You can split your vested benefits and have them transferred to two different vested benefits institutions.
There are many advantages of splitting: On the one hand, you gain more flexibility in investing your vested benefits. You can have one part transferred to Vested Benefits Foundation A and another to Vested Benefits Foundation B. On the other hand, you can (possibly) keep one of the two pots when buying back into a new pension fund. In this way, you can continue to invest the remaining pot in a self-determined manner and suffer less from the widespread redistribution effects in the second pillar pension system. Last but not least, several pots allow you to draw down your retirement assets in stages, thereby saving considerable tax amounts in some cases.
When does it make sense to invest vested benefit assets?
Now back to the actual topic, the question of whether it makes sense for you to invest your vested benefits. The most important factor in answering this question is your investment horizon. Can you leave the money invested until you retire*, or will you soon have to invest it again in a pension fund? The longer the investment horizon, the sooner temporary losses in value can be recouped. Although there are also investment opportunities for short investment horizons, we recommend a low-risk strategy. However, even then you will not be able to avoid price fluctuations completely, as bonds are also subject to price fluctuations. In contrast to the fluctuations of equities, however, these are less pronounced.
Another important criteria for your decision on whether or not to invest vested benefits is your overall financial situation. If the vested benefits account is only for a small proportion of your assets and you are otherwise rather low-risk invested, you can generally take more risk. You do not run the risk of losing a large part of your assets in poor stock market conditions. If your vested benefits account represents a high proportion of your assets and you are dependent on them when you retire, your risk capacity is limited. You should have a long investment horizon or leave investments alone and deposit the money in a vested benefits account.
After all – and this probably applies everywhere in life – your risk capacity depends on how well you know your way around. Do you have experience with investment products such as bonds, equities or alternative investments? By that, we do not imply that you can make a difference with as much knowledge as possible (e.g. choosing the right time to enter and exit). After all, even professionals have a hard time doing that. However, the experience will help you to assess the risks, especially if you have already been through a financial crisis.
Costs must not erode revenues
A decisive disadvantage of many offers for the investment of vested benefit is the high cost. In extreme cases, this can lead to the fees eroding the income completely. The unfair aspect is that you have to bear the risks for a return that you do not receive because it is wiped out by the fees. This is why finpension created the digital vested benefits foundation valuepension two years ago, which sets new standards with its range of products. With valuepension, you can invest from 0.49 % in index funds in the zero-fee class (no TER). The costs of joining this fund category (Institutional Fund Access) with Credit Suisse are covered by the foundation. The index funds used are optimized for withholding tax, which means that they outperform non-optimized investment products up to 0.5 %.
What makes 0.75% difference in performance and cost over time is shown by the following value-added calculator.
*Vested benefits can be withdrawn up to five years before or after the normal retirement age (women 64 / men 65) (Art. 16 para. 1 Freizügigkeitsverordnung).