Everything you need to know about Pillar 3a. Simply explained.
State retirement provision and employee benefits insurance are usually not enough to maintain the standard of living you have become accustomed to when you retire. That makes it vital to put money into a private pension – that is, Pillar 3a. This article explains what the third pillar is, how it works, and how you can benefit from tax savings – all in simple terms.
What is tied pension provision?
Pillar 3a is a voluntary system of private pension provision and helps to secure a person's standard of living after they retire. Only individuals with an income subject to AHV contributions are allowed to contribute to Pillar 3a. It is generally not possible to access the accrued funds before retirement. For that reason, Pillar 3a is also referred to as "tied pension provision."
Why is Pillar 3a important?
The government-funded Old Age and Survivors' Insurance (AHV), also known as the first pillar, and the employer-funded employee benefits insurance, referred to as the second pillar, cover at best around 60% of a person's last salary prior to retirement. That means it will be impossible for most people to maintain their accustomed standard of living when they retire unless they have private pension provision. Pillar 3a fills this pension gap, enabling individuals to build up additional pension assets so they can be financially secure in retirement.
Providing for retirement and saving on taxes – how does Pillar 3a work?
Contribution and payout
The annual total that employed individuals are allowed to pay into Pillar 3a and deduct from their taxable income is limited to a maximum amount. For 2022, the cap is set at CHF 6,883 for gainfully employed persons with a pension fund. For employed persons without a pension fund, the rule is 20% of their net earned income, up to a maximum of CHF 34,416.
No wealth taxes are collected on the savings deposits for the entire time pension provision is being made. Interest and returns generated during the term are also not taxed. The exact amount in tax savings varies depending on the canton and municipality.
When the time comes for payment of benefits, there is one simple rule: The higher the benefits paid out during a tax period, the more the beneficiary pays in taxes. However, the retirement assets are taxed at a reduced rate, separate from the rest of a person's income. In many cantons, it is advisable to open multiple Pillar 3a accounts to save even more in taxes.
Advantages of multiple Pillar 3a accounts
A person who wishes to withdraw funds for retirement from a Pillar 3a account is only allowed to withdraw all the assets in one go. Partial withdrawals are not permitted. For that reason, many people decide to open more than one Pillar 3a pension account. That enables you to stagger the payment of your Pillar 3a capital over time, starting five years before the AHV retirement age. You can then benefit from a lower tax rate and a more flexible withdrawal of assets.
Because of the progressive taxation system in Switzerland, married couples especially should not withdraw their lump-sum payments from Pillar 3a in the same year. Otherwise, the amounts will be added together. The same goes for individuals taking a lump-sum payment from their second pillar accounts.
Here as well, cantons may differ in how they handle those situations. There are currently some cantons that always apply the same tax rate to all pension assets regardless of the amount withdrawn from Pillar 3a. It is therefore advisable to inquire about your personal situation at your local tax office. Those who benefit the most from private pension provision are those who begin contributing as early as possible. That way, they take advantage of compound interest, significantly increasing the amount paid out in the end.
Retroactive contributions to Pillar 3a – outlook
Tax advantages for the current year can only be realized if Pillar 3a contributions are made before December 31. In the past, retroactive contributions for missed years were not allowed. The Federal Assembly has now approved a motion intended to allow individuals to make retroactive contributions for years they missed. For example, women who were on maternity leave or individuals who were just starting their careers and did not have Pillar 3a will have the opportunity to close their pension gaps. The proposal includes the following provisions:
- Only individuals with an income subject to AHV contributions are allowed to make retroactive contributions. One exception to that rule is maternity leave.
- It is possible to purchase Pillar 3a pension benefits every five years.
- The total benefits purchased are limited to the Pillar 3a maximum amount applicable to employed persons without a pension fund (CHF 34,416 in 2022).
- Any advance withdrawals for purchasing residential property are deducted from the amount of benefits purchased.
Right now, it remains unclear precisely when this change in legislation will take effect.
The two types of Pillar 3a provision
There are two different ways to make Pillar 3a investments and accrue pension assets in line with your individual needs. Regardless of whether you use a Pillar 3a account or a Pillar 3a securities account to save for retirement, the tax benefits remain the same.
Pillar 3a account
By opening a Pillar 3a account and making regular contributions, you are providing for your old age and will have greater financial security once you retire. You benefit from interest, multiple tax benefits, and free account management. Pillar 3a accounts involve hardly any risks, making them particularly suitable for people who are highly concerned about security.
Pillar 3a securities account
A Pillar 3a securities account allows you to invest in different securities solutions. That offers the potential for more attractive returns over the long term. Investments in a Pillar 3a securities account can be tailored to an individual risk profile and desired time horizon.
Over the past few years, holders of 3a securities solutions have achieved significantly better returns than holders of 3a savings accounts. Thanks to their long, risk-reducing investment time horizons, younger people in particular could benefit from higher potential returns.
Examples of Pillar 3a tax savings
A single man from Zurich with a taxable income of CHF 120,000 should expect to pay CHF 23,448 in taxes (2021 City of Zurich tax rate) without Pillar 3a contributions. If he contributes the maximum amount of CHF 6,883 for 2022 to Pillar 3a, his tax burden will be CHF 21,261. In other words, he saves CHF 2,187.
A married couple from Lucerne with a taxable income of CHF 160,000 pays CHF 31,766 in taxes (2021 City of Lucerne tax rate) without Pillar 3a contributions. If both spouses contribute the maximum amount of CHF 6,883 for 2022 into Pillar 3a, their tax burden will be CHF 27,059. In other words, they save CHF 4,707.
When can the assets be withdrawn from Pillar 3a?
Although pension capital is intended for the time after a person retires, many withdraw a portion of their retirement assets before then. The only way to access Pillar 3a funds is under certain conditions:
- You are buying a residential property for your own use.
- You are paying off a mortgage on a residential property you use yourself.
- You become self-employed.
- You are already self-employed and are changing sector.
- You are emigrating and leaving Switzerland permanently.
- You purchase benefits from a pension fund.
- You begin drawing a full disability pension.
Under normal circumstances, you can withdraw the assets in your Pillar 3a account once your reach AHV retirement age. Assets can also be withdrawn up to five years earlier.
If you have reached AHV retirement age but are still working, you can postpone withdrawing assets for up to five years while continuing to make contributions. If you have multiple pension accounts, you can benefit from additional flexibility – depending on which canton you live in.
Plan for the future with private pension provision
It is important to assess Pillar 3a as part of your overall pension situation. That means also taking AHV, your pension fund, other assets, and all obligations into account. This is generally a complex undertaking best done with advice from a specialist who also knows the situation in the respective canton.