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

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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. This allows you to secure yourself in old age so that you can live carefree. 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 plan.
• 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, there is a maximum amount.
• In pillar 3b, there is no maximum amount in terms of contributions. However, the contributions cannot be deducted from taxes and the assets are 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. Due to demographic developments, it will become increasingly important for people to pay into the appropriate investment instruments in good time. In this situation, it is the salvation of prosperity.

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

Criterion	Pillar 3a	Pillar 3b
Objective	long-term private provision for retirement	individual provision and closing of personal pension gaps, other personal savings goals can also be in focus
Group of persons	all persons living in Switzerland who are subject to AHV contributions	for all persons living in Switzerland
Tax framework	Contributions can be tax-deductible within the limits of the maximum amounts Interest and earnings within the term are tax-exempt Capital payment at reduced tax rate Retirement pensions are subject to 100 percent income tax	tax deductible only within the framework of lump sums for insurance premiums Retirement pensions taxed at 40 percent tax-free lump-sum payment under certain conditions (minimum term of five years, payment after age 60 and contract taken out before age 66)
Withdrawal / payment	as an annuity no earlier than five years before reaching normal retirement age early withdrawal possible for home financing, emigration or new self-employment	no legal restrictions, specific contract conditions apply
Investment forms	Life insurance, pension policies, pension accounts with bank foundations, pension funds, securities	Life insurance, investment funds, securities, value collections and many other investment instruments
Inheritance	In the event of death, the succession is prescribed by law	Inheritance can be freely chosen, provided that statutory compulsory shares are taken into account
Pledging	Exclusively for financing owner-occupied residential property	Always possible, provided accepted as liquid cover

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 and the interest is tax-free.

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 future-oriented companies and benefit from maximum potential returns while retaining control over your investment focus.

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

Investment funds

It is advisable to spread your investments as broadly as possible in order to avoid cluster risks. Therefore, investment funds are more advantageous for this purpose than investing in individual securities. With fund shares, you can build up your portfolio 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.

Individual needs should be the focus

The choice of the right form of investment depends not only on the amount invested, but also on the personal investment strategy. It should be noted that a higher return opportunity is always associated with a higher risk. In view of this, it is essential that the decision to invest takes into account your risk tolerance and risk capacity as well as your investment horizon.

Expert advice can be very useful both in determining your risk profile and in deriving and reviewing your investment strategy. After all, asset management is a complex field in which not many people know their way around.

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.
• The entire capital, including income, is tax-free upon payout if you comply with the legal 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.

Independent financial advice

The search for a tailored retirement plan is often difficult. The 3b offer is extensive and your choice should fit your life situation.

Which risk factor you take into account is up to you. Nevertheless, it is advisable to obtain precise information in advance and analyze your own needs. In this way, you can determine whether a low-risk or high-risk investment fits better into your concept.

In order to work out the right investment strategy for you, it may also make sense to engage the services of an independent financial advisor. After all, the capital from pillar 3b is not necessarily to be used for retirement provision. Therefore, holistic investment advice is the optimal solution in many cases.

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?

Endowment life insurance and single-premium policies that are periodically funded are tax-exempt, provided certain requirements are met. And pension payments from Pillar 3b are taxed at only 40 percent.

In the case of retirement accounts, the higher interest rate could have a noticeable effect in the future, provided that interest rates are expected to rise further.