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The third pillar
The primary objective of the Swiss pension system is to offer its beneficiaries financial security throughout their adult life.
Many people believe that the pension system is only there to guarantee income at retirement. This is indeed one of its central objectives, but by no means its only one.
Within the Swiss pension system each pillar contributes cumulatively to our financial security.
How does the third pillar contribute to our financial security?
The third pillar contributes to our financial security in eight ways:
How does it work ?
The third pillar is the pillar controlled by you, the private person, so it is known as the individual pension scheme. Unlike the first and second pillars, the third pillar is optional. More specifically, it is optional for those who know that they can live with only 50 to 65% of their last salary at retirement. The percentage is much lower for those who have contributed very little (or not at all) to a second pillar.
In order to open a pillar 3 “A” scheme, it is necessary to contribute to the second pillar. This means being employed and earning at least 21’330.- (in 2020) per year from the same employer. The self-employed have the right to pay 20% of their income (maximum 34’128.-) into a pillar 3 “A” scheme, even if they are not affiliated to a second pillar pension fund. For those who start working after 21, who work for several employers or who do not work, the third pillar scheme becomes possible thanks to pillar 3 “B”.
What is the difference between a pillar 3 "A" and "B" scheme?
The third pillar is divided into two categories, the 3 “A” and the 3 “B” schemes. The 3A scheme is commonly referred as “liée” in French (which means “linked to”), because it is “linked” to the official age of retirement. The 3B scheme is commonly referred to as “libre” in French (which means free), because the client is free to choose the term date of the plan.
Pillar 3A
The Federal Government recognizes the pillar 3”A” to be an integral part of the Swiss three-pillar pension system. This status means that it benefits from significant tax advantages throughout the country.
To justify these advantages, the following criteria must be met:
Savings invested in a Pillar 3A plan can only be withdrawn or used at their cash surrender value for the following reasons:
The cash surrender value of the policy can also be pledged to secure the purchase of a property.
Pillar 3B
The benefits of the pillar 3B scheme are often unknown to the general public. Unlike the 3A scheme, the 3B offers a lot of flexibility. It also offers tax advantages in several situations:
To benefit from these advantages, the only obligation is to declare the cash surrender value of your 3B scheme on your tax declaration every year.
The flexibility of a pillar 3B scheme
A 3B scheme has virtually no constraints, it offers the following liberties:
Like the second pillar, the benefits of the third pillar are calculated on an individual capitalization or funded plan model, so it is clearly preferable to save as much as possible from an early age. To achieve this a careful personal budget must be defined.
To optimize your pillar 3 scheme, it is sufficient to allocate between 5 and 7.5% of your monthly income to your savings plan. The below example demonstrates that this strategy can provide us with a third pillar lump sum of over CHF 500’000.- at the term of the plan.
Average income from 21 to 25 : 36’000.- brut
Annual savings (5% of 36’000) :
1’800 (36’000 *5%)
Savings over 5 years (21 to 25 ) :
9’000 (1’800 *5)
Compound interest & return (2,8%) over 5 years:
785
Total savings over the period :
9’785.-
Tax saving over the period :
1’440.-
Average income from 26 to 30 : 72’000.- brut
Annual savings (7.5% of 72’000) :
5’400 (72’000 *7.5%)
Savings over 5 years (26 to 30) :
27’000 (5’400 *5)
Compound interest & return (2,8%) over 5 years:
4’118
Total savings over the period :
31’118
Tax saving over the period :
7’720.-
Average income from 31 to 35 : 91’015.- brut
Annual savings (7.5% of 91’015) :
6’826 (91’015 * 7.5%)
Savings over 5 years (31 to 35) :
34’130 (6’826 *5)
Compound interest & return (2,8%) over 5 years:
10’347
Total savings over the period :
44’477
Tax saving over the period :
10’780.-
Average income from 36 to 65 : Over 91’015
Annual savings – maximum authorized :
6’826
Savings over 29 years (36 to 65 ans) :
197’954(6’826 *29)
Compound interest & return (2,8%) over 5 years:
219’771
Total savings over the period :
417’725
Tax saving over the period (brut salary of 100k):
43’300.-
TOTAL SAVINGS :
CHF 268’084.-
TOTAL COMPOUND INTEREST :
CHF 235’021.-
TOTAL CAPITAL :
CHF 503’105
TAX ON THE CAPTIAL AT END OF CONTRACT :
(CHF 25’155.-)
TOTAL TAX SAVING OVER LIFE OF PLAN :
CHF 38’085.-
This example demonstrates that significant amounts are at stake when a pillar 3A scheme is well planned. The tax saving, shown in blue, should also be taken into consideration when calculating the final return on a third pillar savings plan.
Tax benefits with the third pillar "A"
It is in the State’s best interest that the three pillar system works. Everyone who cannot maintain their standard of living at retirement is entitled to “prestations complémentaires” (PC) or “additional benefits”, and other assistance for the worst off. This assistance can cost the State billions. This explains why significant tax benefits are offered to those who contribute to a pillar 3 “A” plan.
The three pillar system was conceived at a time when interest rates were closer to 5% than 0% today. Historically low interest rates are putting a lot of pressure on our retirement system. This means that the first and second pillar annuities are more likely to fall rather than increase in the years to come.
For these reasons the State offers an average tax benefit of Frs 350.- per Frs 1’000.- (35%) for those that invest in a third pillar “A” scheme. The amounts differ per income and per Canton, but the below example from the Canton of Geneva demonstrates that the tax saving is proportionally larger for high incomes.
| Taxable income : | 50’000 | 90’000 | 140’000 | 180’000 | >220’000 |
| Tax benefit* : | 27% | 35% | 39% | 41% | 46% |
| * For an investment of CHF 300.- per month, for a single person, without children, in the Canton of Geneva | |||||
It is important to note that tax benefits are not only granted for the amounts invested in the pillar 3A savings schemes. Life insurance and loss of income insurance plans can also be included in a 3A scheme; the related yearly premiums also benefit from tax benefits.
What insurance products can be subscribed to under a third pillar scheme?
The insurance products that can be subscribed to under a third pillar scheme are:
These contracts offer fixed benefits in the event of death and can be subscribed to on one or two heads. Loss of income benefits can be added to Swiss term life insurance contracts.
These contracts include a clause for the release of premium payments in the event of disability and can provide a guaranteed amount at the term of the contract. The amounts invested will also be distributed to the legal beneficiaries if the policy holder passes away before the term of the contract.
These contracts include a fixed death benefit if the policy holder passes away before the term of the contract and a savings plan. To optimize returns, the savings plan can be linked to an investment fund or to the insurance surplus of the issuing company for those who prefer to avoid exposure to the stock market.
These contracts offer an annuity if the beneficiary is no longer able to generate sufficient income to support themselves following an accident or serious illness. The annuity completes the first and second pillar benefits.
Which risk / reward ratio to choose for a third pillar savings scheme?
The choice of a risk / reward ratio is personal and depends on each individual situation. The following criteria can often be taken into consideration to help make a choice:
– the length of the savings plan:
Statistically the equity market has always increased over every fifteen year period. This means that if the length of your savings plan exceeds 15 years, be open to take a little more risk. This might mean investing at least part of your savings in an investment fund, and not just in a low yielding savings account.
– your personality and your convictions:
If you are an anxious person when it comes to money management or your convictions push you to avoid speculation on the equity market, opt for a savings account solution or a third pillar contract linked to the insurance surplus of the issuing company.
– your financial situation:
If you have significant financial assets, since the third pillar investment is limited to 6’826.- per year, it would be to your advantage to opt for a savings plan linked to the equity market. Even if the fund does not perform as well as expected, the tax savings will compensate for any downside.
The choices are:
Considering today’s low interest rates, there are few alternatives to the equity market for those who want their money to work for them. Insurance companies offer an alternative through their surplus. Surplus is generated through a positive change in interest rates, effective cost management, improvements in the mortality rate and actuarial or prudent underwriting practices. In short, a well-managed insurance company generates high surpluses. These surpluses are distributed to the beneficiaries each year, generating a positive return on the investment plan without being dependent on the equity market.
Investing in a scheme that limits its participation in the equity market to 25%. The balance is invested in bonds.
Investing in a scheme that limits its participation in the equity market to 50%. The balance is invested in bonds.
Investing in a scheme that does not limit its participation in the equity market.
The third pillar is far more complex and important than many people realize. Choices and decisions should be made taking into account our first and second pillar benefits. How should risk be managed? How should taxes be optimized? Should I combine the 3A and 3B scheme or just take one of them? What are the advantages and disadvantages of subscribing to a third pillar scheme with a bank rather than with an insurance company? How is my money protected if the bank or insurance company goes bankrupt? To help you answer these questions and optimize your personal situation, our specialists are at your disposal.
* The assessment is free and gives you an overview of your first, second and third pillar benefits in the event of retirement and loss of income in the event of illness or accident. It also gives you the amounts that are available if you wish to become a homeowner, start your own business or if you are going to leave Switzerland.