What is the 3rd pillar?
Before defining the 3rd pillar, let’s take a look at the various components of the Swiss pension system.
1. The 3rd-pillar principle: the first pillar, state pension provision
The first pillar guarantees a minimum standard of living. It’s a state-organized pay-as-you-go system, with working people paying for beneficiaries. It is a compulsory provident scheme, based on the Old Age and Survivors’ Insurance (AVS), the Disability Insurance (AI) and the Allowances for Loss of Earnings (APG). In practical terms, contributions are paid in equal shares by the employer and employee, by direct deduction from wages.
2. The Swiss pension system: the second pillar, occupational benefits
In theory, the second pillar guarantees the same standard of living as the first pillar. It is a funded system: each person saves and contributes for future benefits. This is an occupational pension plan, which is also compulsory if you earn a salary of at least CHF 21,510 (2021), and is based on the Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans (BVG) and the Swiss Federal Law on Accident Insurance (UVG). In practical terms, contributions are paid at least equally by the employer and employee, by direct deduction from salary.
3. The Swiss pension system: the third pillar, individual pension provision
The 3rd pillar corresponds to the individual’s choice to build up additional income for retirement in Switzerland. It is also a capitalization system. It is a private pension plan, which is not compulsory but encouraged by tax reductions (cantonal, communal and federal taxes). In practical terms, you can save up to a maximum of CHF 6,883 in 2021, subject to certain restrictions. This is the linked 3rd pillar (3a).
There is also a supplementary savings option known as the 3rd pillar (3b), which is a free pension plan open to everyone, whether or not they are gainfully employed. Some cantons, such as Geneva and Fribourg, also offer tax advantages (cantonal and communal taxes).
Why open a 3rd pillar?
1. A comfortable financial situation for retirement
The 1st pillar allows you to receive a retirement pension, the maximum of which is common to all, while the 2nd pillar is a capitalization system that depends on the pension fund to which you are affiliated and the plans defined by your employer.
Thanks to the first two pillars, the Swiss system covers around 60% of the final salary for a person reaching retirement age. According to a Credit Suisse study, this figure will fall to 45% by 2025. The third pillar was therefore created to enable those who wish to take advantage of it to receive higher benefits (pension or capital) when they retire.
2. The benefits of the 3rd pillar in preparing for retirement
A third pillar allows you to invest your disposable savings and make them grow, according to different insurance cover and/or investment profiles. Last but not least, as we have seen, it allows you to reduce your taxes according to the amount paid in.
The specifics of the 3th pillar
1. Who can open a 3rd pillar account?
To open a 3rd pillar 3a account, you must :
- Swiss resident
- Gainful employment taxed in Switzerland with AHV income
- Must be at least 18 years old
For Pillar 3b, any adult can open a 3rd pillar if he or she is a Swiss resident.
2. Pillar 3a and pillar 3b
> Linked 3rd pillar (3a)
As its name suggests, the 3rd pillar is linked to retirement, meaning that savings deposited in the account cannot be withdrawn until 5 years before the legal retirement age at the earliest, except under certain conditions:
- if the insured leaves Switzerland permanently
- if the insured wishes to invest his savings in a property purchase
- if the insured becomes self-employed OR remains self-employed but sets up a completely different business
The linked 3rd pillar is attractive from a tax point of view, as you can reduce your tax bill each year.
A self-employed person can deduct up to 20% of his or her net operating income, up to a maximum of CHF 34,416 per year. For salaried employees, the maximum amount is CHF 6,883.
Cross-border workers are also concerned, subject to certain conditions.
Please note: if the self-employed person is affiliated to a voluntary 2nd pillar, he will only be able to pay into his 3rd pillar (a) the same amount as if he were an employee, i.e. CHF 6,883 per year.
> Free 3rd pillar (3b)
The unrestricted 3rd pillar (3b) offers greater flexibility than the restricted 3rd pillar. Payments are unrestricted and the policyholder can withdraw savings at any time for no particular reason.
Tax deductions, on the other hand, are governed by cantonal laws, and the free 3rd pillar is usually less tax-efficient than the linked 3rd pillar.
Note that the unrestricted 3rd pillar is always taken out with an insurance company. It therefore always includes death and disability insurance.
When should you open a 3rd pillar?
As soon as possible! The purpose of this third pillar is to accumulate money for retirement. The younger you start, the more money you’ll have, thanks to compound interest. As we’ve seen, the compulsory pension system doesn’t allow you to meet all your needs, so it’s in your interest to build up your own savings. Even if a young worker doesn’t necessarily see retirement as a priority, he or she would benefit enormously from taking an interest in it right from the start of his or her career. What’s more, as life expectancy increases, so does the capital needed to maintain a “comfortable” lifestyle. In short, the earlier you open a 3rd pillar, the more you contribute over time, the greater your capital will be.
Taking out a third-pillar pension offers many advantages, and can prove highly beneficial when it comes to retirement. However, there are a number of factors to consider before taking the plunge.
Don’t hesitate to contact our experts in this field to get the best advice.
Our Argos Group specialists will be happy to arrange a no-obligation meeting to analyze your situation.
