Swiss Pension/ Pillar 3

• Save money by getting tax deductions now and paying less taxes later upon withdrawal

• Invest your cash into pension funds (stocks, ETFs, bonds) and profit from compound interest and rising valuations

• Beat inflation

Generally speaking, only individuals working in Switzerland can benefit from the Swiss pillar 3 system, with few exceptions.

The first pillar covers the old age- and survivor insurance (AHV/AVS), the invalidity insurance (IV/AI) and the insurance for income loss, maternity/ paternity compensation (Erwerbsersatzordnung, EO). The first pillar enables a minimum existence. Contributions are mandatory for all employed individuals above the age of 16 and living in Switzerland. Monthly contributions are based on the gross salary: 8.7% for AHV, 1.4% for IV and 0.5% for EO, totaling to 10.6% of gross salary (Effective 2022). This amount is split equally between employee and employer so that both pay 5.3%. Functionally, the first pillar is an inter-generational contract, i.e. the current pensions are paid by the current workforce. Cumpolsory contributions stop when the retirement age (women: 64 years, men: 65 years) is reached. Around this age, contributions can be cashed out. Typical payouts range between 1195 - 2390 CHF monthly. Potential contribution gaps can be remargined within 5 years of occurrence. More information on the 1st pillar

The second pillar represents occupational pension (pension plan of your company) and supplements the first pillar. In contrast to the first pillar, it is not an inter-generational contract, but a bank account in your name and is therewith not inflation-adjusted. The Swiss Federal Council (Bundesrat) defines the minimum interest rate for BVG accounts (currently 1%). Contibutions are mandatory for all employees with annual income above 21'510 CHF that are older than 16 and contribute to the first pillar. Others can decide if they want to enroll in a pillar 2 insurance or not. Combined with the first pillar, the second pillar allows the maintenance of a normal standard of living after retirement. The employer pays at least 50% of the contributions to the second pillar, while the employee pays the remainder. Payout of the second pillar typically occurs when retiring, however early withdrawal is possible under certain conditions. That is, if you are leaving Switzerland, becoming self-employed or buying real estate as principal domicile, early payout can be requested. If you did not always contribute to the second pillar during your adult life, you will have contributions gaps, lowering your final payout. In this case you can buy extra contribution years to make up for the outstanding years. These contributions are tax deductible and thus a way to save money. The percent of your coordinated salary that is to be contributed to the second pillar is age dependent (age 25-34: 7%, 35-44: 10%, 45-54: 15%, 55-64/65: 18%).

The third pillar is an option that allows workers in Switzerland to voluntarily save even more money for their retirement, supplementing pillar 1 & 2. There are two subtypes called pillar 3a (for employees, restricted) and pillar 3b (for self-employed, unrestricted).

Pillar 3a pension contracts can be signed with a bank, insurance or pension trust institution in the form of cash or invested pension funds (stocks, bonds). The maximum annual amount that can be invested is 7056 CHF  (Effective 2023). Contributions are fully tax-deductible, however a one time tax applies when withdrawing the money accumulated in the 3rd pillar. Nonetheless, the tax rate applied at pillar 3a withdrawal is typically much lower than the rate of income tax one would otherwise pay. Thus, tax money can be saved and - when investing for the long term via stocks - increasing prices and accumulated dividends can further drive returns. Pillar 3a withdrawal taxes are, just as income tax, canton-specific. You can compute your monthly tax payment using the comparis withholding tax calculator. For example, an unmarried person earning 5000 CHF monthly in Basel-Stadt without religion or children would pay 10% withholding tax. However, the tax paid on a pillar 3a upon withdrawal would only be ~5.33% (year 2022, unmarried, no children, no religion, male, age 65, savings 100'000 CHF). Tax rates can be calculated using the swisstaxcalculator and how much you can save can be calculated via the comparis pillar 3a calculator. Unlike the 2nd pillar, it is currently not possible to buy extra contribution years to fill contribution gaps from previous years in the third pillar.

Typically, pillar 3a funds can be withdrawn earliest 5 years before reaching official retirement age (women: 64 years, men: 65 years) and latest 5 years after. Note that late withdrawal is only possible for individuals who continue working despite having reached retirement age. Besides the typical withdrawal scenarios, premature withdrawal is possible in specific cases. These include, purchasing/ renovating/ paying back mortage on your private property, buying missing pillar 2 contribution years, becoming self-employed, emigrating from Sitzerland or receiving a full invalidity pension (More information). If you are married, premature pillar 3a fund withdrawal will require the approval of your partner.

Things are different with the pillar 3b (only for self-employed individuals): Annual contributions are limited to max. 34'416 CHF and tax applies anually, not at withdrawal. Withdrawal is also not subject to conditions. To see more information on pillar 3b please look at ch.ch. In the rest of this article we will focus on pillar 3a solutions.

• If possible, try to reach the maximum pillar 3a contribution amount each year. Otherwise you lose money to taxes. However, do not invest money in the pillar 3a that you will need in the short term.

• Have multiple pillar 3a solutions in parallel and split your contributions equally (e.g. for 3 pillar 3a solutions: 7056 CHF / 3 = 2352 CHF per pillar 3a per year). Doing so does not only help with diversification, but also enables stepwise withdrawal later. That is, with 3 pillars of type 3a you can withdraw one 2 years before retirement, another one 1 year before and the last one the year you retire (partial withdrawal of a single pillar 3a is not possible). This way your total return is less affected by market volatility and a market crash just before your retirement will only affect 1/3 of your savings. In addition, the pillar 3a withdrawal tax increases with increasing pillar 3a fund value. Thus, multiple smaller funds are preferable to minimise withdrawal taxes.

• Choose a pillar 3a that allows you to invest nearly all your contributions into the stock market if you have a long time horizon (high risk, high reward). Otherwise you miss out on potential gains over time and lose some money due to inflation outpacing the low interest rates. However, be aware that money that is needed within the next years should not be invested in the stock market in general.

• Dollar cost average into your third pillars and autoinvest into the stock market. This means you can instruct your pillar 3a provider to automatically invest any money that flows into your account in a previously chosen investment strategy. Doing so, you only have to take care of setting up standing orders once that regularly (e.g. once a month) transfer money from your bank account to each of your pillar 3a solutions. For instance, with 3 pillar 3a solutions you could invest on the 1st, 11th and 22nd of every month, each time 1/3 of your monthly investment target. This way you minimise the effect market drawdowns and volatility have on your portfolio (falling prices let you buy cheaper), you remove psychological biases (finding the "right time" to invest) and you profit from valuations rising over time (average annual return of S&P 500 since inception is ~10%).

• If you are planning to withdraw your pillar 3a funds before retirement you should be careful about choosing an insurance as pillar 3a provider. Premature pillar 3a contract cancellation with insurance companies usually leads to losses due to their contractual terms, risk planning and such. In general, insurances can be associated with higher cost.

• You can move to a canton with lower withdrawal tax before withdrawing your pillar 3a funds to maximise your return. However, you will also need to fulfill the official regulations and live in the chosen canton for a while.

• Carefully examine the commission fees of pillar 3a providers. High fees will substantially diminish your return over time.

In conclusion, a third pillar is a good investment for anyone in Switzerland who can put some money aside each month. Starting early and being consistant can generate striking returns due to compound interest when investing in stocks/ fonds. It is important to have a long time horizon and select a pillar 3a provider which allows nearly 100% allocation of funds into stocks and charges low fees. If you want to play it safer you can reduce the stock fraction and increase the fraction of bonds in your portfolio (e.g. 60% & 40%), however this is likely to lower your return. Below are examples of pillar 3a providers that fulfill the above criteria, i.e. allow you to invest a high fraction of your money into stocks at low fees. With the provided voucher codes, you can save even more money upon registration.