For your own home: Use Pillar 3a for a residential property
Anyone in Switzerland who is lacking equity capital to purchase their own real estate can use Pillar 3a funds for residential property. Read this article to find out how this is possible and what you need to note for pledging and withdrawing Pillar 3a assets.
Withdrawing or pledging Pillar 3a capital for residential property
Under the promotion of home ownership (WEF), it is possible to use funds from your retirement provision for an owner-occupied home. You must provide at least 20 percent of the purchase price of the property from your own funds. One way to do this is to tap into the tied private pension – Pillar 3a.
Using Pillar 3a capital is possible when financing owner-occupied residential property, renovating or remodeling an owner-occupied home, or when repaying an existing mortgage. Pillar 3a funds can either be withdrawn in advance or pledged for residential property.
Early Pillar 3a withdrawal results in more equity capital
If you make an advance withdrawal from Pillar 3a, the existing capital can be withdrawn in parts or all at once. In contrast to a second pillar (pension fund) withdrawal, there is no minimum amount for an advance withdrawal from Pillar 3a. The amount of the advance withdrawal can be used to cover the required equity capital when taking out a mortgage.
Taxes incurred with a Pillar 3a withdrawal
Upon payout, the capital withdrawn from the third pillar is taxed at a lower rate, separate from the rest of your income. All payouts that are made in the same year are counted as one, and in most cantons, this also includes those of spouses or registered partnerships. There are large regional differences in the taxation of pension capital. In some cantons, the taxes are up to three times as high as in others.
Throughout Switzerland, no repayments are possible after Pillar 3a funds are withdrawn, unlike with a second pillar withdrawal. Each year, you can continue to deposit only the statutory maximum. In 2019, this amount is CHF 6,826. Employed persons who are not members of a pension fund may deposit 20 percent of their net earnings per year up to a maximum of CHF 34,128 (as of 2019). The more money you take out of your private tied pension provision, the smaller the accrued assets will be for when you retire.
Pledging Pillar 3a assets to increase debt capital
With pledging, the third pillar capital is not paid out and is instead pledged to the bank for a mortgage. This pledging allows for additional debt capital. Since the mortgage is larger, more debit interest is thus incurred, which the debtor can deduct for tax purposes.
With pledging, the Pillar 3a funds are not paid out directly and instead remain in the account or the safekeeping account. This means more capital is available in old age. The pledged retirement savings improve affordability for the borrower and are used as collateral for the lending bank. It is not touched unless the pledge is realized, in which case the bank can seize the funds from the pension provision. The realization of the pledge only takes effect if you are no longer able to make the interest payments on the mortgage.
Weigh the risks of using Pillar 3a for residential property
Benefits and risks play a key role when you make an advance withdrawal of or pledge Pillar 3a assets for residential property.
Advance withdrawal of Pillar 3a capital
Pledging Pillar 3a capital
+ More equity capital
+ Lower mortgage
+ Smaller mortgage interest burden
+ More debt capital possible
+ Lower tax burden owing
+ No loss of retirement assets
+ Interest continues to accrue
- Withdrawn capital must be taxed
- Lower tax deductions
- No repayment possible
- Less capital for retirement
- Higher interest burden
- Only possible if affordability is
- Risk of realization of pledge
Source: Credit Suisse
Combining capital from second and third pillar for residential property
Third pillar assets are often used as the first source to pay the equity capital for residential property if other funds are not sufficient or not possible, e.g. savings or gifts. In many cases, pension fund assets are used for residential property if the third pillar capital is not enough.