Swiss Pension System a.k.a. Pillars for dummies and immigrants

Pillar 3

Third Pillar is private pension. It’s been introduced not very long ago.

Relax a little bit, we’re getting close to the end 🙂 Pillar 3 is much more simple than the others.

First of all, it’s all voluntary. Yeah, finally a pension plan which is not compulsory!

There are two families of Pillar 3, named 3a and 3b.

Pillar 3a is the simplest of the two and it works this way: you put your money on your Pillar 3a account whenever you want during the year (you don’t have to do it monthly, you could just do it all at once in December) and you can deduct the amount from the taxable salary up to a certain yearly cap regulated by law. This year (2016) the limit is 6,768 CHF. There’s no way to fill gaps, if you don’t contribute this year or contribute less than the cap there’s no way for you to contribute more next year. You can’t either fill gaps due to moving to Switzerland after a certain age.

You can fund how many Pillar 3a accounts you want, like 10 for example (not very smart though). The important thing is that if your total contribution is more than the yearly cap you can only deduct such cap at tax time. So, it doesn’t make sense to contribute more. Without tax benefits, a not locked CHF is always better than a locked one.

Plus, I just discovered (page 5 of the AXA Pillar 3 doc, tax advantage) that the tax deduction can’t be greater than a fixed amount regulated – again – by law. You can get no more than 2000 CHF tax reduction. Extra Pillar 3a contributions after the 2000 CHF equivalent deduction are taxed at an unspecified-but-lower tax rate.

Example: contributing 7000 CHF into Pillar 3a. Top tax bracket 33.33%. Out of the 7,000 CHF, 232 (7,000 – 6,768) can’t be deducted from taxable income (bad decision to go above the cap). 6,000 CHF out of the other 6,768can be fully deducted from taxable income, since 33.33% of 6K is 2K. The remaining 768 CHF are taxed at the reduced rate.

Depending on the reduced tax rate above the 2,000 it may be worth or not to go beyond a certain Pillar 3a contribution. Anyway, due to other deductions it’s very complex to anticipate what’s the tax bracket where this money would fall. And the break-even tax bracket to make the whole 6,768 CHF fully deducted is 29.55% (29.55% of 6,768 is 2000), a relatively high one in Switzerland.

When can I withdraw from my Pillar 3a accounts? Pillar 3a withdrawing conditions are essentially identical to Pillar 2 ones. Reaching retirement age, leaving Switzerland, buying a house, starting a company.

You can’t get annuities from a Pillar 3a account though. Plus, when withdrawing from an account, you have to withdraw it all. A suggested approach is to open a new Pillar 3a account once you reach a certain amount. Say 20K CHF. It means open a new one every 3 years of full contribution.

Another important difference is that, unlike Pilar 2, there’s no 3 years lock on your Pillar 3a contributions. If you’re leaving the country tomorrow and you do a Pillar 3a contribution today that’s great. You save taxes and get your money back soon.

What can I do with Pillar 3a money? Good news here: you can invest your Pillar 3a, but with several limitations (it’s not like having a brokerage account). First, you need to stick with investment options offered by the bank/insurance/institution where you’re opening your Pillar 3a account. They may propose a simple saving account (with interest rates of 0.0000…) or they may offer you some funds.

Pillar 3a funds are usually very bad compared against funds you invest with your after tax money.

  • They tend to have high fees, especially when it comes to the total expense ratio (TER).
  • They’re usually actively managed funds, no index funds.
  • They invest into Swiss stocks, so not much diversification in terms of both companies and currencies.
  • They are limited by law in term of risk, so they can’t contain more than X% of stocks or other non currencies assets. Which sounds ridiculous: You’re (normally) getting this money back in 30 years, you want to be more aggressive and invest in stocks!

Anyway, if you want to invest in Pillar 3a for the long term, you’d better do it with funds instead of saving accounts or life insurances.

How to open a Pillar 3a account?

Here the big mess begins. You’ll find everywhere offers for Pillar 3a. Each bank has something to tell you. Each insurance company has something to offer to you. Be extremely careful, there’s a lot of scam.

Rule of thumb: avoid insurances. They offer life insurances as “Pillar 3a investments”. I was offered one where if I survived I wouldn’t have back the whole amount I contributed! Stick with a bank. Pick either a saving account or a low fees investment solution. If you don’t know what to do, stick with the good guys, i.e. Postfinance.

What about Pillar 3b?

This is called “Flexible pension” plan. I know very little and have zero personal experience with 3b. I could go hunting for information but I can’t add more than what you can find in the internet.

Want to know more about Pillar 3?

  • Here‘s a nice detailed doc on Pillar 3 by AXA. Be careful, they’re an insurance company and in the doc they try to sell you their products on top of an otherwise good explanation of Pillar 3.
  • Here‘s the UBS Pillar 3 page, with offers for both 3a and 3b. Again, that’s not a recommendation, just resources good for comparison since UBS is usually too expensive.
  • Here‘s the ch.ch page on Pillar 3.
  • Here‘s a list of Pillar 3a funds, with stocks percentage and current year performance.
  • Here‘s the Pillar 3a tutorial by nugget on MP forum.
  • Here‘s a MP post about “Swisscanto LLP 3 Index 45 R”, claiming it’s the best Pillar 3a fund around.

Let’s go to the final page: conclusions 🙂

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