Interesting
So you are saying that it is possible that all lumpsum withdrawals are first taken out from Mandatory portion (early withdrawal or retirement withdrawal) , so it’s impossible to get 6.8% conversion rate unless your total pot of money sits under Mandatory portion.
I don’t know for sure how this works. Need to investigate.
I guess in an extreme case, the non-mandatory part could be paid with 0%. i.e. used to fully subsidize the mandatory part.
This may not be allowed by the PF. If it is, you can imagine that if everybody does that, the economics for the coverage of the mandatory conversion rate will get even worse. So I guess from a purely game-theoretical perspective, it makes sense not to allow it. I guess it is a form of prisoners dilemma setup.
This is also what I understood, but I never found out the rationale for this.
Fascinating
Need to find out for my own fund as I was under impression M & E are two pots and at time of retirement one can choose where money is taken out from as lumpsum.
Finpension has a good article about this
https://finpension.ch/en/knowledge/pension-conversion-rate/
And the following one about what can be withdrawn
https://finpension.ch/en/knowledge/pension-or-lump-sum/#:~:text=The%20law%20allows%20for%20at,therefore%20possible%2C%20but%20not%20mandatory.
Your recommendation to read the PF regulation is essential !
In mine, when retiring with a mix of capital and annuity, the capital withdrawal was proportionally taken from the M and E pots; as consequence, the conversion rate remained identical, it was independent of the withdrawal amount
At first I didn’t like it, I would have preferred to deplete the extra-mandatory pot first…
But in the end, I consider it fair that the conversion rate to annuity does not depend on making a withdrawal or not.
I am quite sure that it was already posted somewhere and this is my understanding: No, @Abs_max , you can’t withdraw only overmandatory part. That would be too easy to game the system.
But which system is being gamed?
Do you mean that this is by design that extra mandatory is supposed to fund the conversion rate of mandatory because mandatory is not self sufficient.
By the way, mandatory is not very high number anyways it seems. Based on what I read 4500 CHF per annum is current contribution to the mandatory pot (including both employee & employer) assuming someone has the salary enough to reach the maximum.
After reading a bit it seems there are two types of cross transfer happening
#1 is easy to understand but #2 is somehow lost in the conversion rate blend and not always obvious
**Average blended conversion rate for Switzerland is about 5.3%. Assuming this is a bit of suppressed due to cross transfer of money, I think it still remains very high.
This rule prevents people withdrawing extramandatory contributions and get 6.8% conversion on the mandatory part.
No, I don’t think so. It just happened because of changing life expectancies and falling interest rates and therefore falling nominal yields and investment returns.
Got it. And most likely that’s why there was the proposal to reduce the conversion rate to 6.2% which got rejected.
Which is not realistic anyway since it would have to be lowered again in the future. The motive was to just relieve some pressure from the system but this was never a definitive solution, that would be conversion rate tied to life expectancy. This is also not a realistic solution since the biggest voting power is in the hands of short to be retired because of their sheer number.
#1 is the ponzi aspect.
#2 I thought was pretty obvious as the whole pillar 1 and pillar 2 is essentially set up to get the richer to pay the poorer. For example, you benefit under Pillar 1 is capped, but your contribution amount is practically unlimited. And Pillar 2 aspects we just discussed.
I understand Pillar 2 to be set up to benefit richer people too. 1E is specifically designed for bigger earners and the more raises one get, the more buy-ins one can do. Those buy-ins also bring more benefits the higher our marginal tax rate is.
I think the tax savings and lumpsum deal is pretty attractive in regards to taxable alternatives if one has an interest in the returns/risk profile of Pillar 2 pension funds. It becomes less so if one is willing and able to take more risk and would like stock-like returns with their pension assets.
My employer doesn’t offer 1e but a supplemental pension fund above a certain gross income not far from the 1e limit. In last 5 years the performance and interest earned in this supplemental pension fund has been same as the basic pension fund all employees have.
Any buy-in I will make will first go into the above mandatory portion of basic pension fund. (Confirmed by the simulations I did)
So to be able to benefit from the any hypothetical 1e buy-in I first will have to subsidize the unsustainable conversion rate of the mandatory BVG of my colleagues within pension fund, and only then can I benefit in the hypothetical 1e buy-in ( if this can be called a benefit at all)
For reference, the ‘potential buy-in’ in my basic pension fund is 1.5-2X my annual gross salary. Suffice to say, I am never ‘benefitting’ from the any 1e buy-in ever.
As noted, you only pay into 1e after you fully subsidized Pillar 2.
The biggest gift to the rich is that capital gains are not taxed.
The 1e trade-offs are:
Out of curiosity, does it mention the benchmark used? I’ve got a similar table for my pension fund, but both returns and benchmark are significant higher (and lower) in given years, like 11% instead of 6% in 2024.
Couldn’t find the benchmark, either. Is it some comparison based on asset allocations?
Actually it was the report at the link shared by @wapiti