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

• Voluntary pension contributions in Switzerland
• Purchasing pension fund benefits (2nd pillar)
• Reasons to purchase pension provisions
• Paying into Pillar 3a
• Staggering lump-sum withdrawal from Pillar 3a

Voluntary provision is popular in Switzerland

Switzerland has an aging population and benefits from Old Age and Survivors' Insurance (AHV), and from pension funds in particular, are coming under ever-increasing pressure. For this reason, Swiss residents pay a great deal of additional money towards voluntary pension contributions each year. They have two options for this.

• Employee benefits insurance: They can make voluntary contributions in their second pillar. This is considered purchasing pension benefits.
• Private pension provision: They can make voluntary payments to Pillar 3a.

Both the pension fund and Pillar 3a are referred to as "tied pension provision." Tied pension provision means that the funds are generally paid only once retirement has been reached. Early payout is permitted only under certain conditions. Although the two variants exhibit similarities, there are also certain differences that need to be borne in mind. The question of whether payments into the 2nd pillar or Pillar 3a make more sense depends on various factors and must be reviewed on a case-by-case basis.
 

Tax benefits thanks to voluntary provision

Paying voluntarily into the 2nd pillar or Pillar 3a helps to avoid financial shortfalls after retirement and has attractive tax benefits.  Amounts paid into the second pillar or Pillar 3a during the year are tax-deductible in full in an individual's tax return. It is therefore usually worth spreading the payments over several years. Tax is only payable when you draw down the money and moreover withdrawals are taxed at a reduced rate.

Following the introduction of the AHV 21 reform on January 1, 2024, all pension funds will have to allow persons who continue in gainful employment to purchase pension benefits for up to five years after they reach the reference age. However, if a person is already drawing or has drawn retirement benefits from another pension fund, the maximum purchase amount is reduced in proportion to the retirement benefits already drawn and must be reported via a form to the pension fund when the purchase is made.

Greater freedom to buy into pension funds

There are big differences between the amounts that can be paid into the the second and third pillars. Employees who are members of a pension fund can pay in a maximum of CHF 7056 into Pillar 3a in 2023. For those who are self-employed and are not affiliated with a pension fund, the limit  is 20% of net employment income up to a maximum of CHF 35 280. These limits are set by the Swiss Federal Council every year. However, if you have no money available for payments into the Pillar 3a in a particular year, you have lost your chance. You cannot compensate for missed payments. A motion making it possible to make up for missed payments at a later point in time was recently passed by the Federal Assembly. It is still unclear whether and when this would be possible.

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. Most employees can pay significantly more into the second pillar than Pillar 3a.

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 purchase additional pension benefits if you belong to a pension fund that is on a healthy footing (funding ratio of 100% or more).

In terms of taxes, additional payments are worthwhile in the years you earn the most. This is often the case in the last ten years of work before retirement. You should also note that any tax deductions made will be reversed retroactively if you make a lump-sum withdrawal in the three-year period following the purchase of benefits. If are not planning on making a lump-sum withdrawal, you can purchase benefits until you retire.

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 132,300. Pension funds do offer another advantage, however. They are legally required to guarantee a minimum interest rate, which is set each year by the Swiss Federal Council. The rate for 2024 is 1.25%, which 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.

With a Pillar 3a account, 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 using a Pillar 3a securities account to invest your money in one or more securities-linked solutions. These offerings provide better return opportunities over the long term. This allows you to participate in any rise in financial markets and gives you the chance of higher returns.

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. By contrast, the retirement savings in Pillar 3a can already be drawn five years before reaching the reference 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.