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Expats and Personal Finances - The Swiss Conundrum

Expats and Personal Finances - The Swiss Conundrum

So you are an international professional now based in Switzerland. You’ve been given relocation advice, the ABC’s of living here, how to navigate the schools system, health insurance, car insurance, paying taxes, and so on. But what about your personal finances?

What have you done about that, or more pertinently, where do you turn to do something about it? You don’t often see an information ‘roadmap’ for this in the ‘How To’ guides. From my experience of working with a multitude of professionals from around the globe who have come to Switzerland, two particular challenges are constantly encountered which are common to almost everyone, regardless of profession or country of origin. The first is disjointed, unstructured and underperforming pension plans. And the second is surplus cash sitting in zero growth bank accounts. Finding effective solutions to these simultaneous challenges is what I like to call ‘the Swiss Conundrum’.

There are some variations, such as for those who have worked in the UK, who have greater opportunity to transfer and take more control of their dormant and underperforming pensions. Or for Americans, who have difficulty doing basic banking in Switzerland because of the impact on them of new U.S. legislation, the Foreign Account Tax Compliance Act (FATCA). It must be peculiarly jarring as citizens of the leading global democracy to be turfed out or turned down as customers of banks in Switzerland!

There is also a certain complacency about taking proactive steps to make hard earned money work harder because of the perceived security from the high salaries and generous bonus schemes. In truth, they mask an underlying financial vulnerability that can hit hard with any unexpected, but very possible, negative turn in your life and/or career. It is also a product of how we have been living for some time in a ‘now society’, where longer term planning and saving has been devalued and deprioritised.

Disjointed & Underperforming Pensions

This is the single biggest financial planning challenge commonplace to the expat community. When did you last look at your combined future pension entitlements and calculate their value to you at retirement?

It is not untypical to have worked a number of years in a number of countries before coming to Switzerland and starting in your new company pension scheme (the 2nd Pillar of the 3 Pillar Swiss pension system). One of the major problems is that you cannot combine your different pension schemes to generate the compound growth which is so essential in creating added value in your pension plan. This is accentuated by the miserly growth rates on your Swiss pension plan (many at below average European inflation levels).

The final let-down is when, for many expats, you take up a new position in another country, you have to either park your low growth lump sum 2nd Pillar fund here or find a new investment home for it abroad. The net result is that it is now virtually impossible for most expats to come close to reaching the widely accepted target of two-thirds of final salary as a pension from their various company pension schemes alone.

The Demise of the Defined Benefit Pension

The era of the Defined Benefit pension with its guaranteed annual income for life on retirement based on final salary levels is now well and truly buried. It has left a daunting legacy for the mid 30s-50s age bracket today. While younger professionals are more readily accepting of the new reality, acceptance and response is more reluctant among those in their 40s and upwards. The examples are widespread and sobering – the total deficit in the FTSE 100 index companies’ pension schemes at the end of September 2013 was an estimated £51 billion.

The challenge is further compounded by the continuing pressures on the Swiss Pension System where the pension deficit for companies on Switzerland’s benchmark SMI index increased by 24% to CHF27.7 billion in 2012. The conversion percentage rate that is set for turning your capital pension fund into your annual pension payment is also now falling consistently, thereby reducing the projected pension payout from your fund. Why is this? Primarily, because life expectancy has increased so significantly so more people are drawing their pensions for longer than ever before.

This is why it is so essential to take proactive charge of your personal financial planning. There are considerable opportunities available to expats to meet these challenges. As we move towards the end of one year and the beginning of the next, make a resolution to do something to make any surplus cash work more efficiently for you. After all, you are working damn hard for it.

Daniel O’Leary is an Irish expat based in the Zurich area and works as a wealth manager.

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