COVID-19’s impact on your wealth : Five actions to take

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COVID-19’s impact on your wealth : Five actions to take

Gilles Panchard - Financial Planner<br/>LO Patrimonia SA<br/>Lombard Odier Group

Gilles Panchard

Financial Planner
LO Patrimonia SA
Lombard Odier Group
Thomas Wyss - Head Wealth Planning <br/>Lombard Odier & Co AG Zürich

Thomas Wyss

Head Wealth Planning
Lombard Odier & Co AG Zürich

The impact of the public health crisis must be taken into account when managing and safeguarding wealth. This is particularly true for business owners, independent professionals and senior executives, whose personal and professional lives have been affected to varying degrees, either by a possible decrease in business, costs linked to amortisation of COVID loans, relatives who have contracted the disease or reduced social and professional contact.

As this extraordinary year draws to a close, we believe it is time to step back, take stock of recent months and "rethink your wealth architecture" in order to make the necessary adjustments to build your plans for the future. As a personalised analysis is essential for implementing a suitable strategy, we have put together the following five easy actions to take to help shield your wealth.

1. Make Pillar 2 buybacks to reduce your tax burden 

Occupational pension plans* offer several ways to reduce your tax burden, while offering appropriate insurance coverage. These include buying back years of contributions. This is particularly attractive for business owners, independent professionals and senior executives, who generally have considerable buyback capacity due to the shape of their career paths; their associated tax savings here could therefore be substantial.

The principle behind buybacks is that they enable the insured person to make up a shortfall in earnings compared with current conditions. In other words, if you are 50 years old today and have a salary of CHF 100,000 you can theoretically buy back years of contributions. Thus it would be as if you had contributed to your Pillar 2 with a salary of CHF 100,000 back when you were 25. Of course, some special conditions apply to the calculation.

The buybacks therefore bridge a "pension shortfall", which could be due to a number of reasons: significant salary variations throughout your career, a change of profession or periods with no work (for example, this year due to COVID), or even the impact of a divorce.

They are fully deductible from the contributor’s taxable income, and the money used to finance the buyback is deducted from their taxable assets.

They are fully deductible from the contributor’s taxable income, and the money used to finance the buyback is deducted from their taxable assets

Buybacks can be made at any time after assessing buyback capacity, and if made before the end of December, will be taken into account for tax year 20201.

These acquisitions contribute to fiscally efficient overall management of the assets of business owners and independent professionals, encompassing private assets, pension assets and cash. If you would like advice from an expert  to implement this strategy, it also makes sense to allocate the securities most exposed to taxation to a pension scheme, such as a supplementary plan, to limit the overall tax burden. If left in a private portfolio, they would be subject to the maximum taxation. 


2. Real estate: renegotiate your mortgage

Real estate is still a significant asset class for private clients, whether they are business owners, independent professionals, senior executives or in charge of the family's assets. In principle, the low interest rate environment we are in looks set to continue. This is therefore a generally favourable climate for renewing your mortgage, including loans over longer periods, such as 15 or 20 years. It is also possible to split a mortgage into several tranches to avoid becoming "dependent" on interest rate movements when these tranches fall due.

It is also possible to split a mortgage into several tranches to avoid becoming "dependent" on interest rate movements when these tranches fall due

Our close relationships with the main Swiss mortgage brokers mean that we can offer our clients access to an overall view of the market, while taking into account other wealth factors in our comprehensive analysis and advice, such as retirement, maturing investments or a possible inheritance.

It is also important to assess whether your debt level is appropriate, as it is essential to perform a comprehensive analysis of your situation as each mortgage rate expires. Just like considering financing and the ideal level of debt when buying, this analysis should take into account your investor profile, how your cash is invested, interest rates, the marginal tax rate and your future plans.


3. Plan, spread out, optimise

Assessing how sound the foundations of your wealth are not only aims to consolidate them at a specific time, but is also an opportunity to plan over a number of years. In Switzerland, planning applies in particular to pensions, where it is possible to put in place strategies at any age, with expected returns over the short and long term.

Beyond the buybacks mentioned above or implementing supplementary pension solutions, very simple measures can also be put in place quickly, such as opening several restricted 3a pension accounts rather than just one.

This does not change the annual ceiling for tax deductions2, but instead reduces the tax burden when the lump-sum benefits are withdrawn. For an identical total amount, it will therefore be more attractive to withdraw the capital over several tax years from several accounts rather than all at once.

For an identical total amount, it will therefore be more attractive to withdraw the capital over several tax years from several accounts rather than all at once.

As a reminder, the lump-sum benefits from Pillar 2 and 3 accounts due in the same calendar year are considered together when calculating the tax burden. The same applies to benefits drawn in the same tax year within a married couple or registered partnership. Spreading out the Pillar 2 and 3 pension capital over several fiscal years is therefore essential to achieve tax savings.


4. Anticipate the impact of relocating on wealth and tax

Despite restrictions on mobility due to COVID-related government measures in 2020, numerous clients are considering relocating abroad or to another canton to be closer to their loved ones or to improve their quality of life. According to a recent global survey of wealthy individuals, almost half of those questioned indicated that they wanted to be nearer to their family3. It also found rising interest in relocating to the countryside, with 46% of those surveyed stating that they wanted to permanently leave the city. For those considering settling abroad, it is vital to understand and anticipate the legal and financial consequences of such a change well in advance, particularly by analysing the key elements of residency and tax requirements for individuals for all options under consideration.

… it is vital to understand and anticipate the legal and financial consequences of such a change well in advance

This analysis and planning also applies to moving within Switzerland, given the considerable differences between cantons. This is applicable both to people who are working and those who have already retired. The tax treatment of occupational pension and Pillar 3 benefits differs depending on the type of benefit, i.e. pension or lump sum, as well as the place of residence of the beneficiary. For beneficiaries resident in Switzerland, pensions are taxed according to the regular rate along with other income, while lump-sum benefits are taxed separately and benefit from privileged taxation. As the cantonal rates are set by the cantons, some have a more favourable tax regime for pension benefits.


5. Get organised to manage your wealth, or transfer it

Uncertainty and the difficulty of planning for the future will certainly define 2020. While it is still extremely difficult to make personal plans such as travelling, it is possible to take certain steps in planning to protect your wealth, be it personal or professional.

These measures include putting in place an "incapacity mandate". Since 2013, any person able to exercise civil rights may set up this type of mandate and put in place advance measures in the event of their incapacity to act. This mandate can entrust one or more people to give them personal assistance, manage their wealth and/or represent them in legal relationships with third parties. It can cover all of the aforementioned areas or only some of them. For independent professionals and business leaders, a simple accident can hamper business and adversely impact them if there are no plans in place, not to mention more serious illnesses or disabilities. By setting up this mandate, they can designate a person of their choice – a co-director, fiduciary, spouse or friend, etc. – and thereby specify who will be in charge of the day-to-day running of their company in the event of their incapacity to act.

By setting up this mandate, they can designate a person of their choice – a co-director, fiduciary, spouse or friend, etc. – and thereby specify who will be in charge of the day-to-day running of their company in the event of their incapacity to act

Setting up this mandate therefore enables them to limit state intervention to the minimum.

In addition, business owners can also consider a possible change in the legal form of their company, from sole proprietorship to limited company, for example. They can also consider salaries versus dividends as well as passing on the business. More generally, and for all types of wealth, it is important from the age of 60 onwards to discuss the global transfer of assets.
 

1 Contact your pension fund to find out the deadline for buybacks so that they can be taken into account in the current year.
2 The Federal Social Insurance Office sets the maximum authorised payments each year. For 2020, these total CHF 6,826 for workers affiliated to a pension fund, or 20% of annual revenue or a maximum of CHF 34,128 for workers not affiliated to a pension fund.
3 New World Wealth Report

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.

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