What You Need to Know About the 3rd Pillar
What exactly is the 3rd pillar? What is the maximum amount gainful employees can pay in for 2020? Where and how can people voluntarily save up retirement capital? And starting when and under what conditions are you allowed to withdraw money from the private pension provision? Those are the most important facts for the 3rd pillar.
Swiss retirement provisioning is based on a three-pillar principle. It consists of the 1st pillar (AHV, state retirement provision), the 2nd pillar (BVG, employee benefits insurance), and the 3rd pillar (voluntary private pension provision). The 1st and 2nd pillars are not usually enough to maintain the standard of living you are accustomed to after you retire. This is because pensions cover just around 60% of your most recent gainful employment income. Therefore, it is worthwhile to invest in the 3rd pillar early and build up pension assets. At the same time, you can save on taxes year after year and benefit from additional advantages.
Pillars 3a and 3b
The 3rd pillar complements the benefits of the first and second pillar. As with the private pension provision, the 3rd pillar helps to close any pension gaps so that you can enjoy life after retirement.
Tied pension provision: The tied portion of the private pension provision is in the 3rd pillar. You generally cannot access this money before retirement. Deposits made to the 3rd pillar can be deducted from your taxable income up to a certain maximum amount. In addition, during the term, there are no withholding or wealth taxes. And as for the payout, the retirement capital is taxed at a reduced rate and separately from your other income. Only people with income subject to AHV contributions benefit from Pillar 3a.
Flexible pension provision: For Pillar 3b, the flexible portion of the private pension provision is a part of wealth creation and risk cover. For example, these include savings in savings accounts, investments in securities, and life insurance. These generally cannot be deducted from taxable income.
Pillar 3a account
Anyone who opens a Pillar 3a account and makes regular payments into it has more financial security in retirement and can look forward to a worry-free life after retirement. With a Pillar 3a account, you enjoy multiple tax benefits and free account management. You also take hardly any risks with a pension account. That's why it is especially suitable for account holders looking for security.
Pillar 3a securities account
A Pillar 3a securities account invests in different securities solutions. This allows you to benefit from return opportunities with long-term appeal and the same tax benefits of a pension account. A Pillar 3a securities account can be tailored to your risk profile and desired time horizon. This makes it possible to compensate fluctuations in the equity markets over the longer run. Apart from the flat fee, there are also generally no other safekeeping fees, issuing, or redemption commissions for pension securities accounts.
Pillar 3a Maximum Amounts
The following maximum amounts are valid for 2020: Gainfully employed persons that are members of a pension fund may deposit a maximum of CHF 6,828 . For persons in gainful employment without a pension fund, the maximum amount is 20% of the net earned income from gainful employment, with the maximum set at CHF 34,128.
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.
- Annual savings deposits can be fully deducted from your taxable income – up to the legal maximum.
- You pay no wealth, income, or withholding tax throughout the entire term of the savings plan.
- On payout, the capital is taxed at a reduced rate separately from the rest of your income.
Example 1: A single, Protestant-reformed man from Zurich with a taxable income of CHF 120,000 can expect taxes of CHF 23,448 if he does not contribute to the 3rd pillar (Tax rates for 2019, City of Zurich). If he deposits the 2020 maximum amount for Pillar 3a of CHF 6,826, the tax burden will amount to CHF 21,261, and he will save CHF 2,187.
Example 2: A married, Protestant-reformed couple from Lucerne with a taxable income of CHF 160,000 pays CHF 31,766 in taxes if neither spouse contributes to the 3rd pillar (Tax rates for 2019, City of Lucerne). If both of them deposit the maximum amount of CHF 6,826 into the 3rd pillar, the tax burden will amount to CHF 27,093, saving them CHF 4,673.
Gainfully employed people can generally open multiple Pillar 3a accounts for their private pension provision. Because partial withdrawals from the 3rd pillar are not possible at the time of retirement, staggering the pension capital withdrawals over different years is recommended. This allows for significant tax savings. Married couples in particular should not take out lump-sum Pillar 3a payments the same year since they will otherwise be counted collectively (tax progression). Situations in the cantons may vary. Clarifying your personal situation with the responsible tax office is recommended. Those who start depositing as soon as possible will benefit the most from the private pension provision. The compound interest effect then comes into play, which noticeably increases the amount paid out in the end.
Case 1: Although pension capital is meant to be for after retirement, many people already receive part of their retirement savings in advance. You can have your Pillar 3a assets paid out early under certain conditions:
- If you buy residential property for your own use
- If you are repaying a mortgage on owner-occupied residential property
- If you become self-employed
- If you change industry while self-employed
- If you permanently leave Switzerland (emigration)
- If you purchase additional benefits in a pension fund
- If you receive a full disability pension
Case 2: In normal cases, your Pillar 3a assets are paid out when you reach the AHV retirement age. It is also possible five years prior to reaching the retirement age at the earliest.
Case 3: If you have reached the AHV retirement age and are continuing to work, you can postpone the withdrawal up to five years and continue to contribute. If several pension accounts are available, you benefit from additional flexibility – depending on the canton you live in.