Pillar 3 - the pension plan that saves you tax

People are living longer and longer, which also means that many are still active in retirement. That you need less money to live on after retiring than during your working life is a great fallacy. It is often exactly the other way round - plenty of free time also means more spending. Switzerland's three-pillar pension system is one of the country's core values. It guarantees social security and stability. That in turn means freedom - and who would not want to be free in old age too?

Switzerland's pension system is made up of three pillars: state, occupational and private provision. The first pillar - OASI (old-age, survivors' and invalidity insurance) - secures subsistence. Occupational provision (OPA) is intended to maintain your accustomed standard of living, although the accustomed standard of living is an elastic and highly individual notion. Rising life expectancy and falling returns on the financial markets are increasing the pressure on retirement provision. The benefits from the second pillar are not getting better, quite the contrary. Interest rates keep falling. It is therefore worth looking closely and informing yourself. While the first two "pillars" are compulsory, the third pillar is voluntary - but no less important, on the contrary. Something that is often forgotten as well: the third pillar brings advantages not only from retirement age. It also lets you save up to CHF 2,500 in tax every year right now. These particular tax advantages apply only to restricted 3a provision, which does not mean that pillar 3b has no advantages of its own.

Many people opt for the classic option - a pension account with a bank. There the money saved earns interest as it would in an ordinary savings account, often at a somewhat better rate than on an ordinary savings account, known as a preferential rate. Banks can adjust their rate for 3a accounts at their own discretion at any time. 

Your money should grow. So it is worth taking smaller risks, provided your financial situation allows it. With securities investments at a bank (shares, bonds) you share in the positive and negative movements on the stock markets, but you also bear the risk of any price losses. Incidentally: the risk can usually be adjusted very easily to suit your individual preferences.

When the policy is taken out, the interest rate is fixed for the entire term of the policy and as a rule remains the same until it expires. The rate is guaranteed, but very low in the current interest environment. With insurers it is above all the second part of the return that pays off - the share in the surplus. You participate in the earnings of the insurance business. When there are few claims the surpluses rise and you benefit.

With a fund-linked policy your 3a savings are invested in funds to a certain extent or, if you wish, entirely. Depending on the risk you want to take, part of your money is invested in equities. The higher the equity proportion, the higher the possible price gain. The risk exists here too, as it does at a bank. There are, however, insurers that guarantee a sum you receive when the policy expires - regardless of how prices developed during the term. In most cases this guarantee is not particularly attractive, but - compared with securities investments at a bank - it is a shade safer. Some insurers offer the option of gradually reducing the equity proportion over the years or of locking in gains from time to time. Insurers keep launching new products that offer you many different possibilities.

Some insurers offer a special kind of annuity. The retirement annuity supplements the monthly entitlements from the first and second pillars - from the point in time you determine. This annuity makes it possible, for example, to plan early retirement well. You receive the agreed amount for life or for a fixed period. You can either make a single payment and receive the monthly payments from it, or defer the annuity and start saving at a younger age in order to benefit in old age from the provision you have built up privately.

Limited withdrawal options

In Switzerland you may hold any number of 3a accounts or insurance policies; only the total amount you may pay in each year is capped, at CHF 6,883 per year (as at 2021).

By combining a bank account with an insurance policy you can benefit from all the advantages. You enjoy a degree of flexibility as regards regular payments while at the same time covering important risks.

Another major advantage is certainly staggering the payout if you hold several accounts or policies. Simply draw them in different tax periods and benefit from a considerable tax saving.

As varied as people's wishes, circumstances and financial means are, so individual is the right 3a solution for you. Find out exactly where you stand, be realistic and think long term.

Combining return potential and security

Anyone opting for the classic bank solution will have to reckon with a very low interest rate. Insurers usually offer a somewhat better rate, which often does not make a great deal of difference. For that reason a fund-linked solution - whether with a bank or an insurer - is the more interesting option. You can determine the risk of price losses yourself. In principle: the more equities, the greater the risk. So if security comes first for you, you should opt for a product with a small proportion of equities. To have a chance of a decent return, however, equities are a must. Anyone who can afford it financially and is willing to accept risk can raise the equity proportion and thus has far greater chances of an attractive return. At the same time they accept losing a lot of money should prices fall. It depends entirely on your needs, your financial means and your age. If your financial means are very limited, a high-risk investment is not a good idea unless you are still very young.

Choose independent advice

In most cases the banker will want to sell you their bank product and the insurance adviser their insurance product. That is why independent advice is of great importance. In principle a combination of bank and insurance is ideal. Depending on the goals you pursue in life, it can be advantageous to set the savings contribution higher with the insurer. If a home of your own is on your wish list, for example, you benefit from considerable tax advantages and can cover important risks such as death or incapacity for work through the insurer.

Choosing 3b as a supplement or an alternative

Anyone who wants to save more than the statutory maximum amount for 3a provision can additionally opt for a 3b insurance solution. It is also called "unrestricted provision" - and for good reason. You are freer in many respects than with restricted provision, but there is also one decisive disadvantage.

Advantages:

• Anyone living in Switzerland can pay into a pillar 3b
• Free use of the money, no restrictions
• Free choice of beneficiaries
• Time of payout freely selectable
• No annual maximum amount

Disadvantages:

• Not tax-deductible

Pillar 3b is particularly interesting for people who are not in employment, because it makes saving through the third pillar possible, albeit with far less attractive tax advantages. Unrestricted provision does offer certain opportunities to save tax: periodically financed capital-forming life insurance policies and single premiums, for example, are tax-exempt if certain conditions are met. Unlike old-age pensions paid out from pillar 3a capital, which are taxed at 100%, pension payments from unrestricted 3b provision are taxed at only 40%.

Homemakers who are not in employment often fall back on unrestricted provision, because it is the only way for them to take out a third pillar. A pillar 3b also keeps you independent, for example in the event of a divorce.

Start saving for old age while you are young

Yes, absolutely! If you start saving for the third pillar at a young age, small amounts can achieve a great deal. Planning early pays off and you can look forward to a far more carefree third stage of life - even if it is still a long way off. Over a term of 15 to 20 years you can consider fund-linked products with a high proportion of equities. The long term reduces the risk enormously, because over the long run shares rarely end up in the red. The prerequisite is, of course, that you save regularly. An insurance policy provides the discipline, because it obliges you to pay in a certain amount.

Give insurance a chance

For many people the word "insurance" is a dirty word. They associate it with pushy insurance agents who speak only jargon and want to offload their products. That is understandable, especially as most insurance agents work on commission. Retirement provision involves a lot of money that you do not want to entrust to an institution you do not trust. Banks have always enjoyed a high standing among the public. That is why many people opt for a 3a solution with a bank, which is also a good decision. Look past the poor image of insurers and combine your bank solution with an insurance solution, because the advantages outweigh the drawbacks. What many people do not know either: security with an insurer is often greater than with a bank, because through the Insurance Supervision Act the Financial Market Supervisory Authority (FINMA) imposes stricter rules on insurers. Insurers are also usually reinsured and thus transfer the risks to another insurer. When deciding, simply bear in mind that banks can go bankrupt too. Get independent advice and make the decision that is right for you.

Saving tax when buying a house

Anyone contributing less than one third in equity when buying a house has to take out a second mortgage. This then has to be repaid within 15 years, and in any case before retirement. When repaying the second mortgage there is the option of amortising indirectly. The mortgage holder pays the annual amortisation instalment into a pension account or a pension policy. This reduces income tax. The second mortgage, however, remains unchanged throughout the term. You therefore do not reduce your debt, which means: no reduction of the loan-to-value ratio and no reduction in mortgage interest. This gives rise to decisive advantages: the tax deductions are higher, because the mortgage debt does not decrease. Thanks to this additional security (3a capital), customers receive attractive interest terms despite a high mortgage. Indirect amortisation gives you greater financial freedom. You pay into your pillar 3a, thereby indirectly reducing your mortgage debt, and benefit from tax advantages. People with limited financial means in particular should prefer indirect amortisation. Ultimately you have to decide for yourself what matters more to you: a lower mortgage and lower mortgage interest with direct amortisation, or growing pension capital and higher tax deductions with indirect amortisation.