How Big Are the Actual Tax Savings in Your Region Thanks to Pillar 3a?
The amount you can save in taxes with a tied pension provision varies from region to region. In their new study on private retirement provision, Credit Suisse's economists detail the regional differences of the various tax burdens.
How much can you save in taxes over the years with Pillar 3a? To determine that, the taxes lowered through annual contributions and the amount in taxes due upon making a lump-sum withdrawal need to be offset against each other. As shown in the example below, the bottom line is that the tax benefits in Western Switzerland and Ticino are above average. Yet, those regions are precisely where people contribute less than in German-speaking Switzerland.
The lowest potential tax savings are found in Central Switzerland. Nevertheless, the tax benefit offered there significantly increases the total return achieved with Pillar 3a savings, and contributing to a plan is in many cases worthwhile. In times of low interest rates, the tax effect comes into play even more. In addition, even in the current low-interest phase, the returns on a tied pension provision account are higher than on a normal savings account and may be increased even further with securities solutions.
Save on Taxes by Contributing to Private Pension Provision
How much you can save on taxes by contributing to a tied pension provision account depends on your individual marginal tax rate. That means the amount by which your tax burden is lowered when your taxable income is reduced by the amount you pay into a Pillar 3a plan. Due to the tax progression, the marginal tax rate generally increases in line with the taxable income. Because of the regional differences in taxation of income, you can save more in cantons with a higher tax burden. That is the reason why taxes are reduced by a larger amount in Western Switzerland and Ticino than in the cantons of Central Switzerland, where tax rates are more attractive.
Taxation of Lump-Sum Withdrawals: It Pays to Stagger
As soon as you have your accrued capital paid out, it will be taxed at a lower rate separately from your other income. All the lump-sum payouts received from your pension provisions (Pillar 3a, pension fund, vested benefits account) in a calendar year are taxed together. Withdrawals made by partners in a marriage or registered partnership are also counted together.
Once more, there are regional differences, which can be several thousand Swiss francs from one municipality to another. In the attractive area of Wollerau (Canton of Schwyz), for instance, you can expect to pay taxes of CHF 7,903 on retirement capital of CHF 200,000. In various municipalities in the Canton of Vaud, however, the amount owed in taxes would be as much as CHF 20,000, or a whopping 10% of the capital saved up. The differences become clear when you do the math for a lump-sum withdrawal of CHF 100,000: In Wollerau, the taxes would be CHF 1,938, but in Herisau (Canton of Appenzell Ausserrhoden), they would be almost four times as high, at CHF 7,875.
As on the federal level, lump-sum payouts are also subject to progression in most cantons. Because higher payments are taxed at a proportionately higher rate, you can noticeably reduce your taxes if you stagger your withdrawals over several years. Since the balance in an individual Pillar 3a savings account can be paid out only in full, it pays to maintain multiple pension accounts.