Is any FIRE person seriously considering not using one of the possible options to pull the 2nd pillar out of the system when FIRE and wait until official retirement age?
4 Likes
Well, youâd need to transfer your whole pension and youâd get an effective 4.2%. Technically, they give you 6.8% on the mandatory, but reduce the non-mandatory part to give you an overall 4.2% rate.
Maybe the 4.2% is still attractive to some, but I also wonder whether even this rate is sustainable for the pension fund if it has no corporate backing to contribute to shortfalls.
4% is the standard safe withdrawal rate for an individual, over 30 years, with inflation adjustments.
2nd pillar annuities are not inflation adjusted.
The life expectancy of Swiss people reaching 65 years of age isnât 95 years yet.
Mutualisation of risk means that the scenarii where people die with a lot of money pay for part of the scenarii where the person gets broke before dying.
On the other hand, there is an annuity for spouse and children in case of death that could push the âmeanâ effective duration during which annuities have to be paid and mutualisation of costs also means that healthy people should pay something for the people who receive disability annuities shortly after having joined the fund.
My conclusion without actual data or calculations would be that the actual safe withdrawal rate for the 2nd pillar should be âwellâ above 4%. Mine offers me 5.5% for the time being (which is also where my previous 3 ones were).
2 Likes
The cost of all this is broken out on your pension fund certificate as ârisk shareâ (Risikobeitrag) and funds could, if unwilling to carry that risk, reinsure it. Thereâs a reason the area around Rentenanstalt in ZH is so pretty ;p
2 Likes
Thinking more about it, I think I could have left it out entirely. Weâre comparing the conversion rate for annuities vs a lump sum payment at retirement so taking into account only what happens to the capital claim that reached retirement age seems fair enough.
If things are handled correctly, there should be no cross-financing between the risk coverage of working people and the retirement part of the second pillar, at the very least past the age when the lumpsum/annuities are taken out.
Did you check this for a certain ratio of mandatory:non-mandatory accumulated capital ? My naive assumption was that the non- mandatory part has fixed conversion rate (lower and different from mandatory part of course) for all retirees within the same pension fund, so that final overall effective rate would vary from person to person depending on their ratio of mandatory:non-mandatory accumulated capital.
I think it is applied to give 4.2% rate regardless of how much you have in the non-mandatory part. Essentially, those with bigger pensions will subsidise the others.
Assuming this is correct, its terrible.
The second pillar voluntary buy-in to make up for previous years (that goes into extra mandatory part) sounds more like a theft now. You save tax this year to lock away the principal, its future growth, and get crap conversion rate at the end.
Not only those with bigger pensions, but also those who arrive late, start earning later, and try to make up for âlostâ years end up subsidising pensions for others.
I have found new respect for those who sell pillar 3a insurance.
1 Like
This is just for the specific pension fund mentioned by TeaGhost. Iâm not sure how other PFs handle it.
1 Like
So just to be clear
If you happen to retire early and have no desire to continue working, your option is to move 100% of your pension to this Fund (stiftung auffangeinrichtung ) and then government gives you 6.8% on mandatory and X% for rest if you choose annuity.
What are the conditions exactly
- Do you have to move all your assets ? Including VB ? Or you can choose to move only mandatory portion
- Do you have to take annuity for 100% of the amount or you can choose annuity for a portion and lumpsum for rest?
I donât understand this focus on the conversion rate inside the FIRE community (except for transfer of wealth reasons if it is unsustainable). Do we really expect to or plan to take a 2nd pillar pension vs a lumpsum?
Maybe because if everyone can have 6,8% for mandatory portion then why FIRE folks shouldnât be able to access it?
The rate mentioned by @PhilMongoose is not universal. Every fund has a different âblendedâ conversion rate . Based on these rates, people choose how much they want to take out as annuities and how much would be better off as lumpsum.
Mandatory always get 6,8% and rest depends on what the individual fund can do. These numbers are typically published by the company fund internally.
I am not sure I understand the logic of subsidising things for others. Everyone knows 6.8% is unsustainable conversion rate with current life expectancy. If you try to take private annuities the rates would be much lower. So the lower blended conversion rate is not because of subsidies, but because itâs practically not possible to have higher conversion rate.
How I see it is following -:
Blended rate = fx (official rate for mandatory, market rate for private annuities)
Because not everyone can have 6.8% for the mandatory part. Pension funds have broad discretion as to how they calculate the conversion rate in the over-obligatory regime.
The few funds Iâve gone through, which are among the ones open to most SMEs and paying very low interests, practice a singular conversion rate that applies to the whole amount (which isnât a combination of 6.8% on the mandatory part + a lower % on the over-obligatory one). They can do so as long as the resulting annuity isnât lower than what an annuity on only the mandatory part at a conversion rate of 6.8% would be.
As an example, there is no way for me to get 6.8% on any amount of my 2nd pillar assets (save for changing employer or convincing them to change their pension provider).
Continued insurance is an exception that applies to older people in case they get fired close to retirement. Far from everybody gets access to it.
4 Likes
I understand this -: but for an individual, if they believe that can get a better rate outside , then they can simply ask for annuity for mandatory portion, take lumpsum out for rest and buy a private annuity.
In this way they would get 6,8% for mandatory and market rate for rest.
For example -; letâs say total value is P
P = M + E
If blended rate for P is not interesting, you can take out E and put it in private annuity / allocation and only ask for annuity for M.
In this way you will get 6,8%
1 Like
Not with the pension schemes Iâve been a part to. Some pension providers would allow that, my experience is that those dealing with standard small business apparently usually donât (or Iâve happened to be affiliated only to the ones with the worst conditions).
Got it
I didnât know that how much can be taken out as lumpsum is also different for different funds. I was under impression that full flexibility exists on how much anyone wants as lumpsum
The key lesson here is that everyone should read their pension fund regulations very carefully 
- conversion rate
- Blended rate
- flexibility for Lumpsum vs annuity
1 Like
I donât know about the lump sum on retirement but in my pension fund if I want to take out the money for home ownership, the money first comes out of mandatory part of accumulated capital and then the rest. At least thatâs what I understood from simulations I could do on the provided interactive portal.
In my understanding the non mandatory part is really subsidising the high conversion rates of mandatory part. So the more you have in non mandatory part via higher contribution or voluntary buy in, the worse return you get on the non mandatory part
I think I see what youâre trying to say. I had misunderstood it so far (which doesnât change the substance of my answer).
My understanding is that the blended rate can be applied as long as the annuity it would give when applied on P is at least equivalent to the annuity one would get with M x 6.8%.
Depending on the pension fund own rules, this could apply no matter how big E would be (it doesnât matter what annuity you actually get, just that you could have gotten at least the annuity provided by law if you had elected to do it). Thatâs what the funds Iâve been affiliated to do (but other funds can handle the calculation differently).
I work neither in the pension scheme nor the legal field so my understanding can be lacking.
My fund publishes conversion rate by retirement age and its blended. It goes higher depending on age of person at time of retirement. And partial or total lumpsum withdrawals are also allowed.
Maybe that convoluted my understanding as I thought this is normal. Seems itâs not
1 Like