Voluntary pension provision buy into pension fund or pillar 3a
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Voluntary pension contributions: Should you pay into the second pillar or Pillar 3a? 

Those who want to ensure financial security in retirement can take advantage of two voluntary provision options with tax benefits: buying into a pension fund or paying into Pillar 3a. The pros and cons of each option to enable you to make the right decision in your own situation. 

Voluntary provision is popular in Switzerland

Switzerland has an aging population and benefits from Old Age and Survivors' Insurance, and from pension funds in particular, are coming under ever-increasing pressure. Consequently the Swiss additionally make large voluntary contributions to the second pillar, the occupational pension fund under the BVG, or the third pillar, their private pension, every year.

Both occupational pension funds and Pillar 3a are referred to as "tied pension provision." But there are significant differences to be aware of when deciding which option to take. There are various factors that determine which option makes the most sense, and each person has to look at their own situation individually.

Greater freedom to buy into pension funds

There are big differences between the amounts that can be paid into the second and third pillars annually. Employees who are members of a pension fund can pay in a maximum of CHF 6,826 into Pillar 3a in 2020. The limit for the self-employed who are not members of a pension fund is 20% of net employment income up to a maximum of CHF 34,128. These limits are set by the Swiss Federal Council every year. However, if you have no money available for payments into the third pillar in a particular year, you have lost your chance. You cannot catch up past missed payments.

This restriction does not apply to the second pillar: In accordance with the provisions set out in your pension fund's regulations, you can pay in up to your individual limit and skip a year if you want to. The maximum amount you can pay into the second pillar depends on a variety of factors such as your age, salary and your retirement savings in the pension fund. The individual buy-in limit is normally stated on your pension fund statement. In most cases, employees can pay significantly more into the second pillar than the third pillar.

When purchasing pension benefits is worthwhile

A voluntary purchase of pension benefits is financially very attractive. Anyone investing elsewhere would have to earn a return of around 10% to generate the same capital after 10 years.

However, a voluntary payment is only possible and worthwhile if three conditions are met:

  • Only those who have a pension gap or a coverage shortfall, for example due to changing jobs or a spell abroad, are permitted to pay in.
  • Those who have withdrawn part of their retirement capital to buy a residential property first have to repay this advance withdrawal before they are allowed to make voluntary purchases again.
  • It only makes sense to make additional payments to pension funds that are on a healthy footing (coverage ratio of 100% or more).

Additional payments are usually most worthwhile if they are carried out 3 to 10 years before retirement. Voluntary purchases in the second pillar usually have the greatest tax benefits during this timeframe. The earlier you pay in, the more the tax benefits are watered down. Moreover, no lump-sum withdrawals are permitted within three years of buying in.

Purchasing pension benefits and investing in securities: a comparison

The table below shows how attractive buying pension benefits can be compared to conventional investments

Purchase

Total purchases in the pension fund

CHF 400,000

 

 

Value of purchases at retirement

 

CHF 431,105

 

Tax savings on pension fund purchases

CHF 146,560

 

 

Value of tax savings at retirement

 

 

 

(Investments in securities)

 

+ CHF 175,064

 

Tax on withdrawal

 

-CHF 56,387

 

Subtotal

 

CHF 549,782

Securities investment

Total investments in securities

CHF 400,000

 

 

Value of securities at retirement

 

-CHF 477,618

Result

Benefit of purchases in the pension fund

 

CHF 72,164

 

Corresponds to a return of

 

18.04%

Underlying assumptions: Swiss married couple, aged 50, Protestant, resident in Thalwil
Income: CHF 350,000 (= taxable income), savings rate: CHF 50,000
Disposable assets: Securities portfolio of CHF 1 million, balanced investment strategy
Pension fund: Retirement assets of CHF 800,000, coverage shortfall of CHF 400,000, planning to retire at age 62

Pillar 3a offers more flexible investment opportunities than the second pillar

There is usually no freedom to choose the type of investment oneself in the second pillar – the investment strategy is determined by the Board of Trustees of the pension fund. An exception to this is 1e plans, which some pension funds offer to members with an annual income of over CHF 127,980. Pension funds do offer another advantage, however. They are obliged by law to guarantee a minimum interest rate, which is fixed by the Swiss Federal Council annually. In 2020 this interest rate is 1%. That is more than most banks offer on their Pillar 3a accounts. It only applies to the mandatory portion of the pension fund assets, however, and pension funds can set their own interest rates on the extra-mandatory portion.

In Pillar 3a the money you pay in sits in a pension account. This pays a preferential interest rate compared to a regular savings account. You also have the option of investing your money in one or more securities-linked solutions. These offerings provide better return opportunities in periods of low interest rates. This allows you to participate in any rise in financial markets and gives you the chance of higher returns.

Purchase of pension benefits and contributions to Pillar 3a compared

Issue

Pillar 3a

Pillar 2

Save tax-efficiently

Yes

Yes

Maximum amount in 2020

CHF 6,826 with pension fund

CHF 34,128 without pension fund

Individual purchase limit in pension fund statement, usually much higher than for Pillar 3a.

Form of investment

Pension account or securities portfolio

Retirement capital; securities portfolio in 1e plans

Interest rate

Preferential interest rate on 3a account

Guaranteed minimum interest rate on mandatory portion (currently 1%)

Insurance

Possible, depending on provider

Possible, depending on pension fund

Withdrawal

Withdrawal as a lump-sum; in life annuity insurance as a pension

Lump-sum payment or pension, N.B. pension fund regulations sometimes restrict lump-sum withdrawals

Withdrawal before normal retirement age

Five years before reaching AHV retirement age

At age 58 at earliest depending on pension fund regulations

Staggered withdrawal

Yes, if the policyholder has several accounts

Yes, if the pension fund regulations allow for partial retirement

Withdrawal after the normal retirement age

Yes, up to age 69 (women) and 70 (men) if still working. You can continue to make tax-privileged payments into the third pillar until this date.

Yes, if still working and this is provided for in the pension fund regulations

Death

Paid out in accordance with the order of beneficiaries

Paid out in accordance with the order of beneficiaries, if provided for in the pension fund regulations

Pillar 3a allows staggered lump-sum withdrawal

There are also differences when it comes to paying out retirement assets. Pension funds must pay out at least 25% of the mandatory retirement assets as a lump sum at retirement on request. Most pension funds will now even pay out up to 100% of the retirement assets as a lump sum. The second pillar therefore offers the opportunity to draw down the retirement savings as a one-off payment or a monthly pension – or to choose a mixture of the two.

In Pillar 3a, the money can only be drawn down as a pension in the case of life annuity insurance policies. On the other hand, however, the retirement savings in Pillar 3a can be drawn down five years before reaching normal retirement age. And those who continue working beyond normal retirement age can delay drawdown for up to 5 years. Moreover, if one holds several 3a accounts, the withdrawals can be spread over several years.

Do you have any questions on voluntary pension provision?

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