Pillar 3b Insider Tips - the Investment Strategy for a Carefree Retirement

Switzerland’s old-age pension system comprises three pillars. The first pillar is the state pension, the second pillar is the occupational pension and the third pillar is the private pension. Each pillar fulfills its own specific purpose. As a state pension, the first pillar ensures basic provision in old age and is mandatory for all citizens. The occupational pension scheme supplements the state pension scheme and offers additional benefits.

Private old-age provision, as the third pillar of old-age provision, offers maximum flexibility. This applies in particular to the free pension plan 3b. It can be structured freely in terms of contributions and form of investment. The high adaptability of the investment instruments of pillar 3b and the legal framework conditions allow you flexibility even in the timing of the payout. This means a payout with tax advantages for maintaining your standard of living in old age and being able to have a say in the timing of the withdrawal.

Below you will find important details, background information and tips on Pillar 3B.

The most important facts at a glance

• Pillar 3b is part of Switzerland’s 3-pillar system and is considered a private pension pla n.
• Compared to pillar 3a, the free pension 3b is not tied to retirement. It can also be taken out for medium to long-term savings goals or for further asset accumulation. It is therefore also referred to as free or untied pension provision.
• In pillar 3b, there is no maximum amount in terms of contributions. However, unlike in pillar 3a, contributions are generally not deductible from taxable income. Premiums for a 3b life insurance policy fall only under the capped general deduction for insurance premiums; payments into a 3b account or securities portfolio are not deductible at all. The assets are also subject to wealth tax.

Definition: What is Pillar 3b?

The importance of the free pension 3b within the 3-pillar principle of the Swiss pension system. To classify the free pension 3b, here is first the condensed pillar 3b explanation:

Free pension 3b, also known as pillar 3b, is an umbrella term for all types of savings that fall outside of the state (pillar 1), occupational (pillar 2), and tied private pension (pillar 3a) and thus help achieve one’s retirement goals.

What is the function of pillar 3b within the three pillars?

Pillars one and two are the mandatory pillars, which are regulated by law and must be used by all citizens. The third pillar is the voluntary pillar and can be chosen by everyone. Here, a distinction is made between the tied pension pillar 3a and the free pension pillar 3b.

In practice, there are also differences in the payment:

• The withdrawal from the first pillar is basically a monthly pension payment (AHV pension).
• Within pillar two, lump-sum payments are also possible as an alternative to pension payments.
• The payout from pillar 3b is usually in the form of a lump-sum settlement.

The differences in private pension provision: comparison of pillars 3a and 3b

The third pillar covers the entire area of private pension provision.

In the table below, you can see the main differences between the two areas of private pension provision:

Preferred forms of investment in Pillar 3b

There are several different insurance and bank solutions for closing gaps in retirement savings in pillar 3b. While insurance solutions are mainly used to cover risks (e.g. disability or death), bank solutions are more suitable for saving for retirement.

There are several reasons for this: Investors have access to their funds at a bank at any time. Also, in contrast to an insurance solution, they can be very flexible in determining the amount and intervals of their personal savings contribution, skip it or cancel it.

Main forms of investment in personal pension plans 3b:

Insurance products

Life insurance was originally conceived as protection for the family against disability or death. But in the form of endowment insurance, it is also a financial product for individual retirement planning.

If you want to improve your chances of return, but do not want to take on too much risk, choose a unit-linked life insurance policy. In this case, the savings are invested in specific securities funds.

Retirement account

The retirement savings account has higher interest rates than a savings account. However, the current interest rate is still lower than the inflation rate. Account management is usually free of charge. Unlike in tied pillar 3a, however, the interest on a 3b pension account counts as taxable income and the balance is subject to wealth tax.

Structured pension solutions

In addition to the pension account, there are also so-called structured pension solutions. In this form, the retirement capital is invested in various financial products and paid out to the investor at the end of a fixed term, including interest.

Securities Savings

With securities savings, you invest your capital in securities. These can be shares, bonds or other securities. You thus participate in companies and have access to the return opportunities of the capital market, but you also bear the risk of loss. You retain control over your investment focus.

Reading tip: The Evolution of the Correlation Between Stocks and Bonds

Investment funds

Broad diversification reduces single-security risk; it does not rule out losses. Broadly diversified investment funds spread capital across many securities, whereas investing in a single security concentrates the risk in one holding. With fund shares, it is possible to invest broadly for as little as a few hundred francs.

In this context, ETF savings plans have also become more popular due to their low costs.

How investment forms differ

Forms of investment differ in volatility, availability and minimum holding period. A higher return opportunity is generally associated with a higher risk.

In addition, there is the ongoing monitoring of the investment: in wealth management, determining the risk profile and reviewing the investment strategy are recurring tasks; with pure custody they do not arise.

Free pension 3b: the advantages

Pillars 3a and 3b are important for maintaining your standard of living in retirement. You should not rely exclusively on the benefits of the 1st and 2nd pillars, as these only cover up to about 70 percent of your last income in retirement.

Some other advantages of the free pension 3b:

• Any person living in Switzerland can pay into investment products of the free pension 3b.
• You alone determine how the capital is used.
• You are free to designate a beneficiary.
• You are free to choose the date of payment.
• There are no annual maximum amounts with regard to the payments.
• A capital insurance policy that serves pension purposes is paid out exempt from income tax under the statutory conditions.

Provider and conclusion of investment instruments of the free pension plan 3b

With Pillar 3b, you have a choice of providers between banks and insurance companies. The free pension 3b can be opened both in the form of an insurance solution and as a pure cash investment.

Differences between providers and solutions

The search for a tailored retirement plan is often difficult. The 3b offer is extensive, and providers differ in flexibility, cost structure, and whether the solution is insurance-based or a pure investment account.

Because pillar 3b capital does not necessarily serve retirement provision, the comparison also depends on the individual savings goal.

Different ways to pay in depending on the investment product

You have various options as to how you can pay in. Do you intend to pay in constant amounts periodically (e.g., monthly)? Perhaps you have made an inheritance or have a larger amount available and would like to invest this capital once?

Frequently asked questions (FAQ)

What happens in case of death?

Within the scope of the legal possibilities, you can determine a beneficiary yourself. In the event of inheritance, the capital is then paid out to the beneficiary.

How can I dissolve Pillar 3b?

In the free Pillar 3b pension plan, you can freely dispose of your money; there are no legal requirements regarding availability. The relevant contractual conditions are decisive. However, you should take into account the different tax conditions in order to decide whether a payout before retirement makes sense.

What must be stated in the tax return with regard to the free pension 3b?

Since Pillar 3b assets count as assets, free retirement savings 3b must be reported on the tax return.

Are there advantages to Pillar 3b compared to a free investment?

The payout from a private capital insurance policy with a surrender value is, in principle, exempt from income tax for the recipient (DBG Art. 24 let. b). For single-premium policies, only the income component is taxable on survival or surrender, and only if the policy does not serve pension purposes. It counts as serving pension purposes if the contract runs for at least five years, was concluded before the age of 66 and the payout is made once age 60 has been reached (DBG Art. 20 para. 1 let. a). For annuity payments from pillar 3b life-annuity insurance, since 2025 an interest-rate-dependent income share has been taxed on guaranteed benefits (previously a flat 40 percent), and surplus benefits are taxable at 70 percent.