When we consider placing a portion of our savings in Swiss francs, the first place we think of is one of the famous Swiss banks. And famous they are.
For generations, individuals around the world have sought financial refuge in Swiss banks. Not only do they specialize in the world's strongest currency, but they can handle nearly any financial transaction you might want. Their services range from classical commercial and merchant banking to the purchase and sale of various world currencies, stocks, bonds, and precious metals. With their fiscal acumen and conservative financial management, they have risen to preeminence among world-banking institutions.
A problem arises, however, if you are interested in long-term Swiss franc savings and interest accumulation. Banks in Switzerland offer unfortunately low interest rates and, at some deposit levels, no interest—or worse—negative interest rates. What interest is paid to nonresidents is subject to a 35 percent withholding tax. For this reason, Swiss bank accounts are most attractive for short-term savings (one to five years) or where interest return is not a consideration.
Switzerland maintains double taxation treaties with most European and North American countries. The effect of these treaties is to allow you to recover a portion of the 35 percent Swiss withholding tax when you report your bank interest to your governmental tax authority. This tax relief can be expensive, however, in that your country's own tax rate on interest may exceed 35 percent.
Table 1 shows the net interest rate you can earn on various Swiss bank accounts. For each gross interest rate, two net interest rates are shown, the difference depending upon whether you are able to claim relief under a double taxation treaty. For those receiving such relief, the net interest rate shown assumes that you are paying no tax on the interest to your country's tax authority.
Obviously, the interest rate of return on bank accounts is generally unappealingly low. This is especially true when we realize that it is hard to obtain a gross interest rate in a Swiss bank above 4 percent without severe withdrawal restrictions.
There is now available an alternative to the low net rate of interest available on Swiss bank account deposits. This alternative has been described by one international financial commentator as the "Swiss insurance account."
What this involves is placing money on deposit in Switzerland in one of the annuity or endowment contracts offered by the Swiss life insurance companies. Because of the excellent interest return available, these contracts have become very popular. They offer the same privacy as Swiss banks, but with the added attraction of being totally exempt from withholding taxes and negative interest limitations as long as the owner is not a resident of Switzerland.
The following comparison shows the rates of returns available in a 4½ percent Swiss bank account and a Swiss "endowment account." In both accounts a male, aged 45, deposits 100,000 Swiss francs at the beginning, with the goal of saving until age 65. Depending upon his country of residence, the results unfold as shown in Table 2.
As we can see, our Mr. 45 does quite well in the endowment account. In addition, with the endowment account he has the option at age 65 to take a life income of SwF 22,567 per year. And besides the attractive maturity value, his family receives immediate protection in the event of his death before age 65—added security in these troubled times.
As mentioned previously, all Swiss insurance companies and brokerage houses are covered by confidentiality laws that make it a crime punishable by fines and imprisonment to reveal anything about any client to anyone.
An annuity is a life income paid by an insurance company. You give the insurance company a sum of money, and they pay you an income for as long as you live. A Swiss franc annuity pays the life income in Swiss francs.
It is becoming more and more clear that at retirement we need an increasing life income. At a 6 percent inflation rate, the value of a fixed life income (such as from bonds and pension or profit-sharing plans) will be reduced by half within 11 years. At a 10 percent inflation rate, it only takes 6½ years for the value to drop 50 percent.
Since Swiss annuities have their payments denominated in Swiss francs, they have provided an increasing life income as the Swiss franc has appreciated in value relative to the world's major currencies. For example, in 1970 an individual purchased a single premium immediate annuity. At his age, his premium gave him an annual life income, when converted to U.S. dollars, of $10,000. Since then, his income has grown as follows:
June 1, 1971—$10,556
June 1, 1972—$11,287
June 1, 1973—$14,118
June 1, 1974—$14,644
June 1, 1975—$17,472
June 1, 1976—$17,814
If we compare this rising life income with the rise in the U.S. cost of living, we can see that the Swiss franc annuity more than preserved purchasing power.
Now there are two new booklets available that explore this subject in great detail, covering some interesting developments in the area. Both are authored by the Swiss financial consultant Jean-Pierre Bernard and published by Librex Publishing (Zurich).
The Swiss Protection—An insured Refuge for Your Future Purchasing Power is the most comprehensive of the two books. In its first chapters it gives a simplified account of economic history up to the present and shows how the Western world has gotten itself into the fiscal problems it has today. The book then goes on to give a complete, yet nontechnical, easy-to-understand description of all the Swiss franc life insurance, endowment, and annuity products available.
How To Hedge Inflation with the New Swiss Franc Contracts is a shorter book. It is solely geared toward endowments and annuities, emphasizing how they can be used to outperform Swiss banks. This booklet is also geared toward Europeans and gives its examples relative to a number of major world currencies. As he does in the other book, Mr. Bernard in this booklet carries the reader through all the steps of the inquiry to the contract acquisition process.
Both books are recommended for anyone interested in the subject of Swiss franc insurance products.
Jürg Lattmann is a graduate of Zurich State College of Economics. Formerly with Geneva Life Insurance Co., he founded Assurex, S.A. in 1975 and has been its president ever since.