What is the conversion rate? And what does it mean for your retirement pension?
The conversion rate is an essential element in the Swiss pension system. It concerns the conversion of accumulated pension capital into a retirement pension. This rate determines your annual pension from your accumulated pension capital.
For example, someone who has accumulated CHF 100,000 in their pension fund at a conversion rate of 6% will receive an annual pension of CHF 6,000, or CHF 500 per month.
In Switzerland, the 2nd pension pillar (or LPP) is compulsory for all employees and is managed by private or public pension funds. Each contribution you make to your pension fund is used to accumulate pension capital, which is then converted into a retirement pension when you reach retirement age.
Each pension fund sets the conversion rate that matches a percentage of the accumulated pension capital paid out each year as a retirement pension. Switzerland's current average conversion rate is between 4% and 7.5% but can vary depending on a person's age, sex, state of health and the pension fund's policy.
It is important to note that the conversion rate significantly influences the amount of retirement pension you receive because the higher the conversion rate, the higher the retirement pension. However, a high conversion rate can also entail a risk to the financial stability of the pension fund, as it means that pension funds must pay higher pensions to their members.
In short, the conversion rate is a key element in the Swiss pension fund, as it determines the amount of the retirement pension you will receive each year from your accumulated pension capital. Understanding how this rate works and learning about your pension fund's policies on conversion rates is essential.