Save Threefold with the 3rd Pillar
The aim of the voluntary private pension provision is to supplement benefits from the 1st and 2nd pillars for the coverage of individual needs. For example, this can help you maintain your accustomed standard of living after reaching retirement age. With the tied pension provision (Pillar 3a), you can also save a great deal on taxes. But there are a few points to take note of.
Today, most people plan for an active retirement: They meet up at concerts, treat themselves to fine meals, take classes, or travel the world. However, AHV and pension fund annuities are often insufficient for fulfilling all of these wishes during your retirement. This means that the voluntary pension provision with the Pillar 3a is becoming increasingly important. For this reason, the Swiss government supports the independent accumulation of retirement capital with tax incentives.
The tax privilege is simple in principle: Each year, employed persons can pay a specific amount into the Pillar 3a and deduct it from their taxable income. In 2019, the maximum is CHF 6,826 for employed persons with a pension fund. For employed persons without a pension fund, the amount is set at 20% of net earned income up to a maximum of CHF 34,128. This lets you save on income tax, while also benefiting from the fact that 3rd pillar assets are not subject to a wealth tax. Interest and returns generated during the term are also not taxed. Retirement capital will be taxed upon payout, but at a reduced rate.
With the help of forward-looking planning, you can save a great deal on taxes.
Optimize savings potential
You can save taxes in three ways: when paying in, during the term, and by skillfully staggering withdrawals of Pillar 3a assets to reduce the amount to be paid. However, there are several details to take note of:
- Payment into the Pillar 3a is most worthwhile in terms of tax during years with a high income. This is especially important for married dual earners who can deduct the maximum amount twice, since each AHV-paying employed person may only deposit a limited amount into the personal 3rd pillar pension account once annually. As is frequently the case in Switzerland, the amount of taxes saved per deposited CHF varies according to the canton and municipality.
- As a basic rule, the higher the lump-sum withdrawal is during a tax period, the higher it will be taxed. This can be avoided by opening more than one 3rd pillar pension account, which makes it possible to draw the retirement capital on a staggered basis in different years (beginning five years before the AHV retirement age). You can then benefit from a lower tax rate and more flexible withdrawal of assets. But there are exceptions to every rule: There are currently cantons in which the same tax rate is applied for all the pension assets, regardless of the amount.
- Tax advantages for the current year can only be achieved if deposits are made into the Pillar 3a before December 31. In contrast to the pension fund, it is not possible to make retroactive deposits for missed years.
It is important to assess the Pillar 3a as part of the overall pension situation, thus also taking the AHV, the pension fund, other assets, and all obligations into account. This is generally a complex undertaking best done with the advantage of advice from a specialist.