Of course, you want to try to get to a reasonable level at the pension. After all, it is in old days that one should enjoy life and only be able to reap the fruits of all the work that one has done during his adult life. To make sure that you have a pension that is sufficient for what you want to do, private pension savings are a fairly important part – but what should you think about when saving privately? Here comes a basic guide with quite a lot of information and tips.
Important changes in recent years
It is best to start with the most important thing first. In the past, private pension insurance or Individual Pension Savings (IPS) was a good alternative since you could deposit money here and make tax deductions for up to SEK 12,000 per year. This deduction has now been completely eliminated so that you cannot deposit money tax-free.
This means practically that you treasure for the money both when you deposit them and then again when you withdraw them. That’s not a good deal right away. It will be double taxation and you obviously want to avoid that. The best thing is to simply stop saving in private pension insurance or IPS and choose another form of savings. The best option is probably an Investment Savings Account (ISK). I will go through this option a little further down.
Most people hopefully have control over these changes and that you can no longer make the same deduction for their private pension savings and this is something that, for example, banks and pension companies usually inform you, so that you do not make mistakes and lose money. However, if you did not control this, you should review your savings and make sure that you do not put money into these savings forms.
Self-employed people and people without occupational pension can make deductions
If you are self-employed or for some reason lack an occupational pension, you can still use the deduction right. As of 2016, you can deduct 35 percent of your income but a maximum of 10 price base amounts (which this year is SEK 443,000). However, keep in mind that if you make a deduction for pension savings, your pensionable income will instead be lower and then your general pension will be based on a lower amount.
The recommendation is to only make deductions for salaries or profits that exceed the limit for state tax, which is SEK 36,933 in 2016. In this way you can avoid the imposition of state tax while you deduct money for your pension and be allowed to deduct for this.
Savings in funds
The most common way to save for the long term, for example, is to invest in mutual funds. There are different types of funds that consist of slightly different things.
Equity fund – An equity fund is a fund that consists of a large number of different shares selected by the fund manager. You can then participate in investing in shares but you do not have to choose your own shares and you also get a good spread on the risk because you do not spend all your money on just a few companies. The equity fund can still be seen as a fund with higher risk and at the same time slightly better chances of higher returns.
Fixed income fund – An fixed income fund consists of various types of interest-bearing securities such as bonds. It is a fund with a lower risk, given that interest-bearing securities have no major changes, nor will the returns be so great. It is the interest rate that affects how a fixed income fund develops. Fixed income funds are seen as a safe investment with little return. There are long and short-term fixed income funds.
Mix Fund – The Mix Fund does as its name says and mixes types of investments. These are partly equities and partly interest-bearing securities. Since it is a mix, it also becomes a medium risk level. The shares give a little more risk and a little better return and interest-bearing securities create more security but less chance of return. The fund manager can choose a small percentage of the shares and interest-bearing securities in the fund, based on what the market looks like.
Hedge fund – Hedge funds are a concept that collects funds that have a little less strict regulation of what they can invest in. A hedge fund can simply invest in a little bit of anything they think will make money. It can be investments in shares such as an ordinary equity fund, but also the lack of shares, derivatives or ordinary lending (like a bank), etc. The manager decides what is best. A hedge fund has often been associated with higher risk, especially for ordinary savers, but there are now quite a few different alternatives even with lower risk.
Different types of equity funds
Equity funds are of interest to many precisely because they can yield slightly higher returns. However, they can also go bad and the risk is greater, as we saw last year and this year. You can easily be seduced by the big ups, but you must not forget the risk. Here, however, we will go through some important concepts and types of equity funds.
Index Fund – This is a fund made to monitor developments in a particular stock market or stock exchange. The fund manager selects which index they want to follow and then selects shares that best represent this index. An index fund has no active management and for this reason becomes cheaper. This is often a good alternative as indexes can often have a fairly good development and with a reasonable level of risk. The fact that index funds are so cheap is also a big plus.
Sweden Fund – This is simply a fund that invests in equities in the Swedish stock market. It may be a fund that is trying to follow the index on a Swedish stock exchange or is investing in something a little more specific and with different high risk. There are many different Swedish funds and basically it is for those who believe that the Swedish stock market will go well in the future. There are similar funds for different markets / countries such as US funds, European funds, Russian funds etc., each focusing on a particular market.
Global Fund – A fund that invests in equities from stock markets from around the world. Here you are not limited to a certain market such as in a Swedish fund but can pick out the gold barley. The advantage of a global fund is that the risk is spread further because you do not depend on the Swedish stock market to perform well. If the Swedish stock market goes badly, the US or the other European can still do well and then the global fund is not affected as much by specific downturns.
Risk diversification of funds
An ordinary saver should spread his risks and even if you invest in mutual funds that invest in many different shares and other things, you should still make sure to spread your risk even more by choosing many different funds in slightly different areas. For example, it is not so good to have only one (or more) Swedish fund, because you are then exposed if the Swedish stock market goes bad.
Ideally, you should have several different funds so that some can perform well while others perform poorly. This means that the risk is clearly less that the pension money loses too much in value and also that you have the chance to find a good level of your return over a little longer.
Having a global fund as a base is usually a tip as the global fund invests in various markets around the world. Claes Hemberg, a savings analyst at Avanza, says, for example, that you can gladly have 60 – 80% of your money in a global fund, a little depending on how secure you want to be. It is, as I said before, a little safer than putting all their money on a certain stock market to go well. We can see, for example, that Asian funds have gone quite bad for a while now and if they had had all their money in such funds they would not have been so happy.
As a Swedish, it is common to have at least one Swedish fund and there is no bad alternative on the whole as the Swedish stock exchange usually goes well. Thus, having a Swedish fund among its investments is a clearly reasonable alternative. You can also think about which other regions you think will have a good development in the slightly longer term. It could be, for example, a European Fund, a US Fund or something like that. Different regions have different risks so it is important to choose with care and if you want to avoid too high risk then it is best to drive on the slightly safer cards.
In order for it to not be too high risk in your portfolio it is not stupid to have a mixed fund as well. Then you get a fund with partial shares and partly interest-bearing paper. It has less chance of high returns but is safer and your pension money is a little safer. It does not hurt to tie up some of their money in such safe forms of investment.
If you want a slightly more offensive portfolio, you can invest in having a growth fund or an interesting actively managed fund that may have a slightly higher risk, but also the potential to get a higher return. Normally, actively managed funds should outperform the index (at least that’s the idea). They have a more expensive management fee and this fee must of course be offset by some good bonus.
The expert tips
I just mentioned Claes Hemberg, economist at Avanza. He is trying to advise people on how to build a good fund portfolio for long-term savings. He advocates that you have a clear majority of your money in one or more global funds and that you can then build on it with, for example, the sweden fund, mixed fund and possibly a growth fund.
The blog and he has three different options that can all be something to follow, depending on what you feel most comfortable with. Check out Hemberg’s distributions and options here. It should be said that the alternatives available there are simple portfolios for those who want some hassle and save in the long run. He has only invested in cheap index funds, which thus have a really low fee.
For those who want to be a little more active and are a bit more invested, several different funds can be a good alternative. You can advantageously spread your risks by having a little more different funds in your portfolio. Avanza says that those who succeed best have seven or more different shares and / or funds.
Make sure you don’t overpay the management fee
One of the biggest problems for pension savers is high fees. This applies to all types of pension savings in funds, not just to those who save privately. However, this is something to consider when choosing funds. It is also good to do a review of their existing fund choices in the usual pension savings of the pension companies, because there may have slipped into some expensive funds.
The management fee is what those who manage the fund charge for their services. There are actively managed funds and funds that are not actively managed but more are thinking of following the index and doing themselves. The actively managed funds are clearly more expensive and should have a return that exceeds the index, but it is far from always they can do this.
Nowadays, there are quite a few good index funds that have very low fees. These funds may have a fee of 0.2-0.4 per cent, which is compared to actively managed funds which can often have a fee of between 1-2 per cent instead. As long as these expensive funds have a clearly better return than the low fee index funds, it may be worth choosing them, but this is far from always the case.
For ordinary savers, choosing cheap index funds can be a really good alternative. Then you can choose to invest a majority of your money in, for example, one or a few good global funds that follow the index and a Swedish fund that follows the index (and maybe a mixed fund on top of that). These index funds may only have an average fee of 0.3 per cent, and you will then not have to lose a lot of money annually for this. Then it will be more to you instead.
When you save private pension for example an ISK, it is always you yourself who decides which funds you should have and you have to think a little about which funds feel best for you, at least on one occasion. Then you have the opportunity to choose the cheap funds. For other types of pension savings, funds can be automatically selected for you and then, as I said, there can be some expensive funds. It’s never too late to go in and change them into more affordable alternatives.
Different types of savings for private pension savings
When the right of deduction for pension insurance and individual pension savings (ISP) disappeared, these alternatives also became poor. Saving in this way means double taxation on your money, both when you deposit them and when you withdraw them later. Instead, you should choose another way to save money for your pension.
Investment Savings Account (ISK)
The brightest star in terms of private pension savings seems to be the Investment Savings Account. This is a fairly new platform that is intended to make it easier to manage investments. There will be less hassle with accounting for purchases and sales and the fee for an ISK is also relatively low.
If you buy shares or funds through your ISK, you do not need to tax the profits as you would otherwise. At the same time, losses cannot be offset either. Instead, you have to pay a “fee” annually (in the form of a standard tax) for your holding, which depends on how much you have invested in your account and what the government loan rate is at the moment. Since this interest rate is now very low, the fee for ISK will also be low.
The calculation is done so that a standard income is calculated. To do this, you take the government loan rate + 0.75 percentage points and then take this value and multiply it with your capital base. At least 1.25 per cent may be multiplied by the capital base. The capital base is calculated by adding up the value found on its ISK on four occasions during the year and dividing it into four. You then pay 30 percent tax on the standard income. If it sounds a little complicated, it is not that dangerous, because your bank or savings institution does these calculations automatically.
Take a look at the Swedish Tax Agency’s information and examples for ISK
Who is an ISK suitable for?
With ISK, you do not need to make a declaration when you have sold shares or funds. If you plan to sell / exchange shares and funds frequently for one year, this is a good alternative. If you plan to invest in shares or mutual funds, it is often a good alternative.
The return should exceed the government loan rate + 0.75 percent, which is about 1.4 percent. If you expect to have a better return than during the year, all profits from this will be “tax-free” when compared to trading shares and funds in the usual way. 1.4 per cent return over a year is usually not particularly difficult to obtain, so in most cases ISK is a good choice.
When does ISK fit less well?
Since you have to reach a certain return annually, it is not so good for those who want to invest in interest-bearing securities, at least not now as long as interest rates are so low. The return is simply too poor for it to pay off.
Another disadvantage, if you want to see it this way, is that you have to pay taxes / fees for your ISK, regardless of how your investments went during the year. If it has gone down, you still have to tax for the money that is in your account. This is different from ordinary fund and stock trading where you only estimate profits and can use losses to offset. So you can say that you should not use an ISK if you plan to reduce your investments, but it is certainly not something you usually plan.
Asset insurance as an alternative
The alternative to ISK is capital insurance, which in many ways works in a similar way. You also pay a flat tax here and you can sell and exchange shares and funds without having to tax the profits. The differences are as follows. First, you have no voting rights for shares that you own through a capital insurance (you have that if you own them through an ISK). Secondly, investor protection does not apply to securities owned through the insurance.
The fact that it is in this way is because you are not yourself the owner of shares and funds when you save in a capital insurance. So does the insurance company. Since you are not an owner you have no voting rights and no opportunity to use the deposit guarantee if something goes wrong.
On the whole, it’s hard to say that one alternative is much better than the other. You can make your own choice here. ISK may feel a little easier for most people, but you are of course free to read on and choose what suits you best.
Other types of pension savings
All ways to save are good except the bad ones. If you do not want to save by buying, for example, shares and funds, you can try other alternatives. It is probably the best return in relation to the risk level to save in funds, but you always have the choice to try what you believe in.
An alternative to spending money on investments in eg funds may be to repay their mortgages. It may sound like a little weird way to spend their money, but it’s actually not that stupid. The repayment part of the mortgage is to be seen as an investment, since each installment on the loan means that you get a little less in interest expense.
Now that the interest rate is low, an extra payment may not make that much difference, but the interest rate is now unusually low and it will not last. Over time, we will get a more balanced interest rate situation and then there will also be a bigger difference when you repay. If you pay off a little on your mortgage, the interest cost will decrease and over time it will lower monthly costs for you. When you become a pensioner it can be nice to have little or no debt on your home and then you can also live very cheaply.
Mixed tips for private pension savings
There is quite a lot to think about when it comes to long-term savings. What to save in, what strategy to have and what traps to avoid, etc. Some of that we have already gone through and with a little luck the information may have helped you along the way. Here are some mixed tips that did not fit under the other headings.
Have the right attitude to your long-term savings
Keep in mind that you invest with a long savings horizon and that the money will not be used for many years. Many of the funds and stable shares that you can buy are intended to remain in your portfolio for a long time to come. Maybe you have a savings horizon of 10 – 20 years or maybe even longer. Such long-term investments require the right attitude.
It is easy to get nervous if things start to go bad for the markets in which you are invested. For example, if you have a Swedish fund and the Swedish stock market goes down. In such cases, there is a kind of automatic reflex to try to save what can be saved and to sell to avoid losing more. But this is usually not a good idea. You invested in the long term because you believed in these stocks / funds in the long term and then you have to have enough ice in your stomach to wait out any storms.
Instead of thinking about selling, you should simply continue with your regular savings. Fill with new purchases as usual and you will soon see the stock market recover. When investing in the long term, you should avoid being affected too much by what happens in the short term.
Keep your monthly savings going
The best way to save for your private pension is to spend a certain amount of money each month. It is not easy to say how much you should spend because it depends entirely on your finances and how much you have over each month to spend on savings.
Something important is that you should continue with your monthly savings in watches and sheds. Even if the stock market goes bad. Maybe especially if the stock market goes bad. It may feel wrong in some way to continue investing in their funds if it seems that they are about to go down even more. Maybe it feels a bit like putting more money into a sinking ship? But the funds and the stock market are rarely a sinking ship but only a ship that sails on peaks and in valleys. Sometimes it goes down and then it goes up again. In the long run, however, it usually goes up more than it goes down.
When it goes down, the instinct says that it is wrong to invest but you should instead think that if the stock market has gone down a lot lately, it is also cheap to buy shares / funds. Take the opportunity to buy while it is “sale” so you will soon get this again when the market starts to recover again. If you stop investing in bad times, it only ends with you only buy when it is the most expensive and miss buying when you have a place to buy cheap.
It is proven that it is best to spread out your investments during the year because it is so difficult to pin down just the right opportunity to invest. It is best to invest just before a big upturn but you are rarely able to find the perfect timing. For this reason, it is usually best to spread your deposits – because then you dot in both peaks and valleys. If you knock it out for a whole year, it will usually be a good distribution.
Include the savings in your budget
Saving of all kinds is important. There are several types of savings and all play an important function. Buffer saving is good because you need some security for your personal finances, which saves you from unexpected expenses or lost income. Short-term saving for something you want to buy or make within a few years is important because it allows you to do more and it gives you a more stable and secure economy. You then do not need to borrow money to do things, but can take away your own savings.
Long-term savings can be pension savings but also savings for the children and the future. This is important because you want to be able to have a good life as you get older and you want to be able to give your children a good and safe life.
In order to make sure that you can save in a good way, saving must be a natural part of your economy. Let it be a part that is always there and something that you always spend money on. Not something you only do if it happens to be a coincidence. When you make your budget, you should include savings of various kinds so that there is money to put away each month. If you do not have money for savings, you have problems somewhere, for example with too high expenses in general.
Savings should be managed as an expense – something that should always be paid every month. If instead you just think that you should save what is now over each month, the only risk is that you spend too much money on entertainment and other things and that then it will not be as much left over to savings as you would like. It is best to have an automatic transfer from your regular account immediately after the salary has arrived, so that you immediately put away money for savings and do not buy them.
It is important to get into the routine of always spending money on savings. The most important thing is that you save something, just so that it becomes part of everyday life, not that you save a lot of money. The more you can save the better, but it is still the very thought and routine that is most important. Try to find a private economy where saving is a natural part and where it feels fun to save.
Follow up and review periodically
Something that is important is to not just forget about your savings completely once you have made your choices the first time. Choosing a simpler portfolio with simpler index funds with low fees and the like reduces the need to keep track of the same frequency and it is not relevant in the same way to have to switch funds here and there, but it is still important to do a check sometimes.
You may want to check your funds at least a couple of times a year just to see how they are going. This way, you are reminded that your savings are increasing and that something is happening and you can see the return, etc. A little bigger review you might be able to do at least every three years if you don’t feel like you want to be more active. You can then see that your savings goals are the same as before and that no big things have happened that can affect even long-term investments in such a way that there are reasons to make changes.
Even if you have selected simple index funds with a low fee, it may be worth checking them regularly and thinking about things. You may be able to switch a Swedish fund to another that has fared better or which has performed just as well but has a slightly lower fee. Or maybe you have got a misalignment in your risk spread because some investments have gone better than others and then it may be worth adjusting this so that the risk level is at a level that you are happy and comfortable with.
To completely forget about their funds, shares and other investments for too long is never recommended even if they can manage on their own. If nothing else, it can be nice to see that your pension money grows so that you will be inspired to continue saving and be good.