Voluntary Pension Provision: Is It Better to Pay into the Second or Third Pillar?
If you want to improve your retirement provision, you normally have two options: paying into the second pillar (employee benefits insurance in accordance with BVG) or paying into the third pillar (private pension provision). Both options have advantages and disadvantages. Your personal situation will determine which one makes most sense.
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. That is why Swiss residents voluntarily pay a lot of extra money toward their retirement provision every year: four billion into their pension funds (second pillar), and as much as six billion into Pillar 3a accounts. There are various factors that determine which option makes the most sense.
Making voluntary payments into the second or third pillar can eliminate financial bottlenecks after retirement and is beneficial in tax terms. The total amount that you pay into the second or third pillar in any one calendar year can be deducted in full from your income on your tax return. In addition, the interest income is not taxable, provided that the money remains part of pension provision. Even the assets you accrue do not have to be declared on your tax return. Taxes are not incurred on second and third pillar assets until they are withdrawn.
Third Pillar Is Available as an Account or Saving with Securities
If you pay into Pillar 3a, your money is put into a pension account. Unlike a normal savings account, this offers a preferential interest rate. You also have the option of investing your money in one or more securities solutions; the main difference between these is the proportion of equities they hold. This allows you to benefit from financial market gains and gives you the chance of higher returns.
In the second pillar, you cannot usually choose the form of investment yourself; the investment strategy is determined by the Board of Trustees of the pension fund. The exception is what are referred to as "1e" pension plans, which are offered by some pension funds for those whose annual income is CHF 127,980 or more. Pension funds offer a different advantage: They are legally obliged to guarantee a minimum interest rate. The interest rate is set each year by the Federal Council and the figure for 2018 is 1%. That is more than most banks offer on their Pillar 3a accounts. In other words, the pension fund assets still increase, even in the event of falling markets. But that only applies to the mandatory part of the pension fund assets; pension funds can set their own interest rates on the extra-mandatory part.
Second Pillar Offers More Options for Paying In
Both the pension fund and Pillar 3a are referred to as "tied pension provision." Once the money has been paid in, you no longer have free access to it. With a few rare exceptions – such as buying a house or apartment – you cannot withdraw it until after you retire.
In terms of the annual payments you make, there are big differences between the second and the third pillars. If you do not have money available to pay into the third pillar in a particular year, then the opportunity is gone and you cannot make up the missed payment. This restriction does not apply to the second pillar: You can buy into the pension fund whenever you want, up to your individual buy-in limit. And you can also miss a year.
Larger Amounts Can Be Paid into the Second Pillar at Frequent Intervals
Employees who are members of a pension fund can pay up to a maximum of CHF 6,826 into Pillar 3a in 2019. This maximum amount is set each year by the Federal Council. The maximum amount of money that you can pay into your pension fund depends on a range of factors, such as your age, your salary, and your level of accrued pension fund assets. You can find this individual buy-in limit on your pension fund statement. In most cases, employees can pay significantly more money into the second pillar than into the third pillar. For tax reasons, it is usually more worthwhile to spread purchases over several years.
Third Pillar Provides Additional Insurance Benefits
Holding your tied pension provision (Pillar 3a) in the form of an insurance policy gives you the option of obtaining additional protection in the event of death or disability. This type of insurance makes sense if the risks are not already covered by other policies. However, wanting to have insurance protection does not automatically mean that the third pillar is the better solution, as there are pension funds that automatically increase the benefits in the event of death or disability if voluntary payments are made. If you are insured with this kind of pension fund, then you receive a kind of "free insurance," compared with Pillar 3a.
In the event of death, payments into Pillar 3a are paid out in accordance with the statutory order of beneficiaries. That is not always the case with the second pillar.
Voluntary Payments into the Second Pillar and Pillar 3a
|Aspect||Pillar 3a||Second Pillar|
|Save on taxes||Yes||Yes|
|Maximum amount for 2019||CHF 6,826 with pension fund
CHF 34,128 without pension fund
|Depends on a range of factors (individual buy-in limit as stated on your pension fund statement).
Usually significantly higher than for Pillar 3a
|Investment form||Pension account or portfolio with securities||Retirement capital; for 1e pension plans, portfolio with securities|
|Interest rate||Preferential interest rate on the 3a account||Guaranteed minimum interest rate on the mandatory part (currently 1%)|
|Insurance||Possible, depending on the provider||Possible, depending on the pension fund|
|Withdrawal||Withdrawal as capital; for life annuity
insurance as a pension
|As capital or as a pension|
|Withdrawal before the normal retirement age||Five years before reaching AHV age||Depending on the pension fund's regulations, aged 58 at the earliest|
|Staggered withdrawal||Yes, if there are several accounts||Yes (depending on the pension fund's regulations)|
|Withdrawal after the normal retirement age||Yes, if employment continues to the age of 69 (women) and
70 (men). Until this time, you can continue to make tax-privileged payments into the third pillar.
|Yes, if provision is made in the pension fund's regulations|
|Death||Payment in accordance with the order of beneficiaries||Payment in accordance with the order of beneficiaries,
if provision is made in the pension fund's regulations
Third Pillar Offers More Opportunities to Withdraw Money
On retirement, the pension funds must pay out at least 25% of the mandatory retirement assets as capital, if requested. Some pension funds actually go beyond the statutory provisions and pay out up to 100% of the assets as capital. In other words, the second pillar offers the option of withdrawing the savings as a one-off payment or as a monthly pension, or as a combination of the two, taking part as capital and the rest as a pension.
With Pillar 3a, the money can only be withdrawn as a pension in the case of life annuity insurance policies. Pillar 3a offers a different advantage, in that you can choose to withdraw the retirement savings up to five years before retirement. If you reach the age of 65 and wish to continue working, you can postpone the payout until up to five years after retirement. Regardless of when you choose to withdraw your assets, from a tax perspective, it makes sense to distribute the withdrawals over several years, rather than taking the entire amount as a one-off payout. Pillar 3a is more flexible than the second pillar in this regard. As you need several accounts to take advantage of this benefit, it is worth setting up more than one third pillar pension account. For details on the arrangement that applies in your canton, please consult the relevant tax office.