In Sweden, like many other western countries, each working person has an individual pension fund. This is vastly different from some other countries like Vietnam, where the pension fund is shared, not only between every working person, but also between other purposes (maternity leaves, sick leaves…) . Like many other things in Sweden, the pension fund is transparent to you, and you can manage part of it, to some level. If you do things “correctly”, then it might make a sizable impact on your pension you you retire
A three parts pension scheme
Pension fund in Sweden consists of 3 parts. If you have been in Sweden for more than 1 year, you can always check https://www.minpension.se/ to see how much money you have in your pension fund (your information is only “added” in your first November here)
General pension (Swedish: Allmän pension)
Every working person in Sweden will receive this pension, as contributed by their employer. Every year, 18.5% of your pensionable income, up to a limit, is contributed to this part of your pension. The limit is set as 7.5 PBA – Price Base Amount. This is adjusted by Swedish government every year, and in 2019, 1 PBA = 64.400 SEK, meaning your upper limit this year is 483.000SEK. If you are making more than that in your pensionable income (good for you!), then your public pension contribution is still capped at 89.355 SEK.
The public pension actually has 2 parts of itself:
The income pension (Inkomstpension)
which is 16% of your pensionable income. You can see this, (i.e. how much money do you have), but you can’t manage it. The state will invest the money the way it sees fit, however you can guess that the money is invested in some low risk, low return bonds.
The premium pension (premiepension)
which is 2.5% of your pensionable income. You can actually manage this at https://www.pensionsmyndigheten.se/
By default, your premium pension is put into AP7 Såfa, which is actually a very good fund. It has very low fee (only 0.06 – 0.1%/year), and good return rate. It is also an adaptive fund, which means it will invest more in bonds (which is “safer”, but returns less than stocks) as you age. When you are less than 55 years old, 100% is your money is put into shares, and that will reduce as you age, at 65 (your expected retirement age), it’s 67% stocks and 33% bonds, at 75, it’s 33% stocks and 67% bonds
Pensionsmyndigheten is great, because not only you can manage your fund here, but also it has a wide range of funds for you to choose, at a superbly discounted fee. The discount is small on index funds (which already have cheap management fees by themselves), usually at 0.16%/year compared to 0.2%/year originally, but it is very significant for actively managed funds.
Most of them are discounted for more than 1%. For example: Skandia Time Global has a management fee of 1.4% year, and on top of that, you have to pay transaction fee (Transaktionskostnad) of 0.25%, in total your fee is 1.65%/year. At Pensionsmyndigheten you only pay 0.39%. Which means you get 1.26% gain per year for free! As the biggest fund manager in Sweden, they have the leverage to negotiate with other fund managers to cut down the fees, and that is really good for you.
You can leave your money as-is, I think the default choice is very decent. But you are free to make your bet to potentially make more money.
The only bad thing about Pensionsmyndigheten is that you can’t put more money to their fund, even if you want to. That low fee is just so great.
Occupational pension (Tjänstepension)
Most, but not all, employers in Sweden give their employees the occupational pension. In case your employer doesn’t – like mine – then you will likely have to pay it yourself.
Most of the companies follow ITP scheme, which is in short:
- ITP1, for people who were born in 1979 and after, which is
- 4.5% of your salary, up to 7.5 PBA/year, so basically 40.250SEK/month in 2019.
- 30% of your salary part that is higher than 7.5 PBA/year.
- ITP 2, for people who were born in 1978 and before
- 10% of your pensionable income, up to 7.5 PBA
- 65% of your pensionable income, from 7.5 to 20 PBA
- 32.5% of your pensionable income, from 20 to 30 PBA
The numbers are updated here https://www.collectum.se/sv/Privat/ITP/ITP-1-och-ITP-2/
So if your salary is higher than 40.250SEK, your occupational insurance increases very fast.
If you get less than, or equal to, 40.250SEK/month, then your total pension contribution is 23% of your pensionable income.
If you are get, for example, 50.000SEK/month, then your total pension contribution is as follow:
9250 SEK from general pension
1811.25 + 2925 SEK from occupational pension
Total: 13986.25 SEK = 27.9725%
So if you are a high income person, this part can be very significant in your pension fund, and by default you don’t have a good choice as with premium pension, so you should pay close attention to it.
Just like premium pension, you can of course manage this pension, even to a bigger extend, as you can choose the provider yourself. In many cases, however, the choices of provider can be limited, depending on your employer contract. Notable providers in the market are:
- Most banks, including big fours (SEB, Swedbank, Nordea & Handelsbanken) and smaller ones (Skandia, Länsförsäkringar)…
- Söderberg & Partners
As always, it’s best to talk with your company HR and/or your fund manager to see which options do you have. I’d always recommend to choose the one which lowest fees (less than 0.3%/year) and the biggest fund portfolio. Note that the provider might have a more limited fund portfolio for pension, so make sure to check that.
With occupational pension you have too choices, or actually three:
- Funds (Fondförsäkring)
- Traditional insurance (Traditionell försäkring)
- A mix between those two.
When I started paying my occupational pension, I went with Traditional insurance because I am clueless about other options. In the end, I moved my pension into funds. Why? Lower cost with higher return.
Skandia Traditionell försäkring: 0.55% management fee, with an average 8.4% return/year in the last 4 years (2014-2018), down to 5% from May 1st 2019.
An US index fund: 0.2% management fee, with an average 18%/year in the last 5 years.
It’s not even close! Assuming I put 5000 SEK/month into my occupational pension (which is not the actually number), and the traditional insurance return is 5.3%/year, while the index fund return is 9.5%/year – both after fees, after 30 years:
- Traditional Insurance gives me 4.419.370 SEK
- Us index fund gives me 10.245.650 SEK
The choice was easy!
What if you don’t know what funds to invest? Nordnet for example, provides about 1400 funds in their portfolio. Which to choose? A general recommendation is to invest your money into an index fund – a type of fund that follow an index, like Standard & Poor 500, passively. The common characteristics of index funds are they are very low cost (commonly 0.2%/year fee), they yield market return, which is, in most of the cases, very good. The average return for S&P 500 index since its inception has been about 9.7%/year.
A well known advice is to have a three parts portfolio: an US index fund (follow S&P 500 index), a global market index fund, and a total market bond fund. It’s up to you, your age, your risk tolerance … to decide how many percent you want to invest in each. If you ask me, then I’d would say invest into an US index fund (most banks have this fund), and forget about it. If you are older, then you might want to put part of your money into bonds, and if you are younger, you might want to bet by putting more money into actively managed funds – which might have higher return than index funds, but with higher fee. In long term, index funds should still be a majority of your investment portfolio. Avoid funds with high fees. Avoid paying for people to adjust funds for you – the less they take, the more you make.
This is your own pension contribution. However since 1/1/2016 this is no longer a “tax deductible” contribution, so there are very few people are still contributing to this part. I personally don’t, so I will skip writing about it.