Retirement provision is an important basic building block for financial security in old age. According to a recent study by Generali Versicherung, for example, 43% of Swiss women do not provide for old age. Men are also affected – albeit to a lesser extent. But without appropriate provision, there is a gap in provision: Salaries fall away, which is only compensated for to a fraction by the pension fund. As a result, the accustomed standard of living can often no longer be maintained. How can you make provisions for your old age – and even save taxes at the same time? And how can you take advantage of current developments in the money and capital markets?
In this article, we answer key questions about Pillar 3a with regard to taxation, payouts, investment forms and other basic knowledge.
The most important at a glance
- The Swiss pension system is based on 3 pillars. The aim of these pillars is to provide financial security – whether for an emergency situation or for retirement.
- Pillar 3a is the so-called “tied pension” and falls under private pension provision. Classically, these investments used to be made in savings accounts. However, the interest rates on these accounts have fallen sharply in recent years: most providers now offer an interest rate of 0.1% or less, with a maximum of 0.5%.
- A comparison of the different providers is therefore definitely worthwhile. However, it is not only the interest rate that you should look at. Other factors such as the risk of an investment or hidden costs must also be taken into account.
(Video in german language)
Pillar 3a in the 3 Pillars Principle
The pension system in Switzerland is divided into 3 pillars. The first pillar comprises – in a very simplified form – the state pension scheme, which is expressed, for example, in the form of survivors’ insurance and disability insurance. The second pillar essentially comprises the occupational pension plan, which, in addition to the pension fund, also includes various health and accident insurances. The third pillar is private pension provision. It is voluntary and can be adapted to individual needs.
This third pillar is subdivided once again into pillar 3a (so-called “tied pension“) and pillar 3b (free pension). The big difference lies in the tax incentives and the tied use. Payments into pillar 3a are capped in terms of amount, but can be deducted from taxable income and are tied to retirement provision. Payments into pillar 3b are not tax-deductible, but can be used more flexibly and are not capped in terms of amount. You can determine the payout point of pillar 3b yourself and do not need to worry about downstream taxation.
Maximum amount Pillar 3a
What is the maximum amount that can be paid into pillar 3a?
As already mentioned, pillar 3a is linked to retirement provision. Since the annual contributions can be deducted from taxable income, the possible deposit is limited to a certain amount. This is set anew each year by the tax authorities. In addition, the possible payment depends on whether you are an employee and therefore affiliated with a pension fund or whether you are self-employed and do not belong to such an institution.
The maximum amount for salaried employees is currently CHF 6‘883. Self-employed employees can pay up to 20% of their net income into a pension plan. However, there is also a maximum ceiling here: the limit is 34‘416 Swiss francs. The sums mentioned refer to the year 2021. For the year 2022, the tax office has already announced that the upper limits will remain the same.
Taxing of Pillar 3a
How is pillar 3a taxed?
Payments into a 3a retirement savings contract can be reported in the annual tax return. These reduce the taxable income. But how much can you actually save in taxes? It is not possible to make a blanket statement about this – the tax savings depend on various factors. In particular, your place of residence, marital status, and income have a significant influence on tax savings. To give you an opportunity for comparison, we will assume that an employee has made the maximum possible contribution of CHF 6‘883. He had a taxable annual income of 75‘000 francs.
As a married person in Appenzell, this employee comes to a saving of just over 1‘050 francs, while as a married person in Geneva he can expect to save over 2‘100 francs. The difference becomes even more pronounced when income rises to 100‘000 francs: The married employee in Zug receives 853 francs back from the taxman, while the single person from Sion receives a scant 2‘500 francs.
However, when the credit is paid out, the full amount is subject to taxation. Here, too, it depends on the location of the contract holder. For the calculation, the total amount of the contract is converted into a theoretical annuity. This is then taxed. The pension conversion rate used to calculate this pension varies from canton to canton.
Payout Pillar 3a
When is the Pillar 3a paid out?
Pillar 3a payouts can be divided into ordinary and extraordinary payouts. The most common cause is the ordinary payout. In this case, the saved capital is paid out to the contract holder at the specified time. This is possible at the earliest five years before and at the latest five years after retirement age. For women, this means that withdrawal is possible at the earliest at the age of 59 and at the latest at the age of 69; for men, the period is shifted back by one year to 60 and 70 years respectively.
In some cases, however, an advance withdrawal of the capital is possible. For example, if you want to buy or build a property for your own use, you can withdraw the capital from the tied pension plan. Another possible reason is the repayment of a mortgage loan. Also, if you take the step of becoming self-employed, you can use the saved capital for your investments – or if you are already self-employed and take up another activity. There are other permissible reasons for withdrawing pension capital:
- Leaving Switzerland
- Drawing disability pension
- Purchase into a 2nd pillar pension plan
Pillar 3a comparison
Most investments in pillar 3a are still made in savings accounts at banks. A large-scale comparison of 80 banks showed that the average interest rate is just 0.11%. This not only means that the capital hardly increases during the investment period. If you include inflation (i.e. the loss of purchasing power of money), you end up with a negative return. Below is a small selection of banks with interest rates on savings accounts:
- Caisse d’Epargne d’Aubonne société coopérative: 0.5 %
- Burgerliche Ersparniskasse Bern, Genossenschaft: 0.3 %
- Crédit Agricole next bank (Suisse) SA: 0.25 %
- Basellandschaftliche Kantonalbank: 0.15 %
- Bank Cler AG: 0.1 %
- Bank Sparhafen Zürich AG: 0.1 %
- Bernerland Bank AG: 0.05 %
- Credit Suisse AG: 0.05 %
- Zürcher Kantonalbank: 0.05 %
- Alternative Bank Schweiz AG: 0.00 %
Securities funds have become established in recent years as an alternative to interest accounts. These offer a better return in the current market environment but are susceptible to fluctuations. You should therefore find out about the specific offer in advance: How high is the equity component? What fees will be charged? Are these payable once or on an ongoing basis? Even the best market performance can be eaten up by ongoing costs.
Tips and FAQ
What forms of investment are permitted?
Not every form of investment is eligible for tied pension provision. First of all, you have to decide which settlement partner you want to be served by: Insurance or bank? Financial service providers know the conditions behind pillar 3a and can recommend appropriate products to you. If you decide on a bank, you have the choice between an interest account (which, as already mentioned, earns very little interest) or an investment in a securities account. If you prefer a life insurance policy, you can choose between a fixed-interest policy (with the possibility of surpluses) or a unit-linked policy – which basically works in a similar way to the fund custody account at the bank.
Is the risk the same for every investment?
Every investment carries its own risks; there is no such thing as a completely risk-free investment. If you invest the money in a bank or insurance company, there is always the (theoretical) risk of default on the part of the institution. Apart from that, you receive a fixed interest rate, but this does not compensate for inflation by far. In concrete terms, this means that you can buy less of your capital when it is paid out than when it is consumed immediately. Fund-linked investments have the risk of fluctuation because the value of securities is constantly changing. Depending on the fund, there may also be a cluster risk – namely, if most of the capital is invested in a particular sector.
What about taxes?
A state-subsidized investment on 3a investments is exempt from tax in the deposit phase. This means that you can declare the annual payments up to the specified upper limit in your tax return and receive a pro-rata refund of the tax paid. This means you save twice: you provide for your financial security in old age and save taxes at the same time. Of course, you cannot avoid the tax office altogether: the investments are taxed on a deferred basis. This means that taxes are due when the capital is paid out – but at the personal tax rate applicable at that time. Since this rate is generally lower than the tax rate when the capital is paid in, you have to pay less tax overall.
What is the recommended investment period?
In principle, it is always a good idea to make financial provisions for old age – the investment period plays a subordinate role here. However, it is also clear that the longer a contract runs, the more capital is accumulated in the end – and the greater the effect of compound interest. For short terms of less than 5 to 10 years, you should opt for a fixed-interest contract (despite the low-interest rates). This is because it may not be possible to “recoup” a negative development on the money and capital markets within this relatively short period of time – and you effectively lose money.
However, with a term of 10, 20, or even more years, it is worth investing in a unit-linked investment. In this case, interim market slumps are no cause for concern – on the contrary, these developments ensure that you can buy back into the market at a favorable price. Over the long term, investing in securities has always beaten the “classic” investments in terms of performance.
Conclusion & Outlook
The advantages for saving in pillar 3a are obvious: tax advantages as well as long-term asset accumulation for retirement provision form an excellent combination. But in addition to state-subsidized, tied pension provision, there is also free pension provision (pillar 3b). This is an interesting alternative. Although it is not subsidized by the state, it is not capped in terms of amount. A recent evaluation came to the conclusion that fund-based Pillar 3b investments have actually performed better in recent years than comparable Pillar 3a investments. It is therefore, worthwhile to compare here and – if possible – to split the investments between different pillars.
The interest rate trend of recent years is expected to continue in the coming years. It is true that central banks are now moving to increase key interest rates. But in view of the high inflation rates, even a slightly higher savings interest rate will not be able to compensate for the resulting gap. So if you’re aiming for a longer-term investment horizon (i.e., 10 years or more), it pays to invest in a unit-linked retirement plan. In this way, you invest in company assets that also increase in value despite inflation. As a general rule, the longer the contract runs, the higher the equity component may be.