Tax Planning Strategies for Retirement Assets: Insights from Our Expert

This article is a translation of an original interview published in German in the Handelszeitung, featuring insights from Yusuf Savmaz, our Head of Switzerland Domestic Market. The discussion covers key strategies for optimizing retirement assets through diversified investments and tax-efficient planning.

Tax-Advantaged Transfer of Profits into Retirement Assets

Sandra Wilmeroth, Handelszeitung
24.10.2024

1e plans offer employees an opportunity to optimize their retirement savings. Entrepreneurs have more flexibility, as investment expert Yusuf Savmaz explains.

You advise clients on financial planning and retirement. Yet, many prefer to manage their finances on their own. What should they particularly pay attention to?

For those who like to handle their finances themselves, it is crucial to ensure good diversification. This is a key point because it is the only “free lunch” that markets offer, often forgotten, especially by real estate investors. They often argue that they have always had good experiences with real estate investments and feel less inclined towards other types of investments. But proper diversification protects against surprises, and good diversification includes more than just direct and indirect real estate investments.

When is a portfolio well diversified?

Much depends on the individual situation and preferences of the client. Generally, a portfolio should include investments that are low-correlated across various asset classes and, ideally, globally distributed—from stocks to bonds to commodities, with the proportions of each component individually adjusted.

Given the interest rate trend, would you currently recommend bonds for a well-diversified portfolio?

The downward trend in interest rates has just begun. With corporate and fixed-interest bonds, you can still position yourself well and benefit in the medium term from further rate cuts. Furthermore, bonds can reduce the overall risk of the portfolio and provide income through interest payments.

Do you also recommend investments in digital assets like cryptocurrencies?

For some risk-tolerant investors, it might make sense to include them in their portfolio, but at BNP Paribas, we remain cautious regarding cryptocurrencies or digitized assets due to regulatory requirements.

What about investments in Private Equity, which have become accessible to private investors through the new Eltif fund structure?

Private Equity and other private market investments are only weakly correlated with classic asset classes like stocks and bonds and can, therefore, contribute to a portfolio’s risk diversification. The lower the correlation, the better the diversification within a portfolio. It thus makes sense to invest part of the portfolio in private market investments. However, it is essential to note that these generally have a long-term and illiquid character.

Does this long-term nature make private market investments suitable for retirement planning?

Yes, that’s correct. However, the universe of private market investments is vast, with numerous providers and market-specific characteristics like limited liquidity. The topic is complex, but there are indeed some pension funds that invest in private market assets within the framework of the regulatory investment guidelines of the Occupational Pension Ordinance (BVV 2). Regulation allows up to 15% alternative investments for Swiss pension funds. Currently, the average Private Equity share of Swiss pension funds is below 2%.

Do you also consider how a client’s pension fund assets are diversified in individual financial planning?

It makes a lot of sense to consider pension fund assets, which typically invest about one-third in stocks, as well as employee plans for executives and entrepreneurs in investment advice.

In what way?

Suppose a person has accumulated two million Swiss francs in their pension fund, with 30% invested in stocks and the rest in bonds and other assets. If this person has a greater appetite for risk and higher risk capacity, for example, because they are young and still have plenty of time until retirement, they would need to invest at least 1.4 million in stocks to achieve a balanced portfolio of 50-50.

What alternatives are there?

In such cases, one could use 1e plans for supplementary pension plans. Here, individualized investment solutions can be pursued according to the respective risk profile, and insured persons can select the investment strategy based on their specific preferences and profile. Insured persons with longer time horizons can choose a higher equity share according to their higher risk tolerance, which can lead to higher returns and, consequently, a larger retirement fund over the long term.

But doesn’t this also involve risks?

Yes, if the markets correct, the return can also turn negative. Often, this happens during economically challenging times. And if the employment relationship ends or a job change is imminent at the same time, the retirement assets in the 1e plan would have to be realized at an unfavorable moment, potentially resulting in losses.

What makes purchases into the pension fund so attractive?

Purchases into retirement assets can be deducted from taxable income, providing a tax saving that would otherwise have to be generated in private wealth. For instance, if a person—assuming a corresponding pension gap exists—deposits 500,000 into the pension fund, they could save 150,000 Swiss francs in income tax with an assumed marginal tax rate of 30%. Without this one-time payment, those 150,000 would have to be earned in the financial markets. Over time, one can use the effect of voluntary payments multiple times until the pension gap is closed.

But won’t taxes apply upon withdrawal?

That’s correct, but it will be taxed separately from other income and at a favorable rate. Staggered withdrawals can further optimize the tax component. To make a partial withdrawal, the workload must be reduced by at least 30%.

What flexibility do entrepreneurs have in planning their retirement?

An entrepreneur can influence their salary level. If they are also the principal shareholder and the business is thriving, they can raise their insured salary, creating pension gaps that can be filled with voluntary payments, thus transferring business profits into the entrepreneur’s retirement assets in a tax-optimized way. There are good options for tax optimization, but it is essential to have good advice to avoid any assumption of tax evasion. Retirement planning is certainly something to examine closely, especially if you have more flexibility as an entrepreneur.

When should one start planning business succession?

As an entrepreneur, the process of retirement planning, especially business succession, should begin early. Ideally, ten years before the desired retirement date, one should consider the future of the business—whether it will be taken over by family, taken on by management, or sold as the best solution.