Pillar 3a: what you need to know
Learn everything you need to know about the pillar 3a. From optimizing with investment products to withdrawing your 3a account - we offer you in-depth knowledge and helpful tips.
The swiss three pillar principle explained simply The swiss three pillar principle
The three pillar system plays a central role in Swiss pension provision. Your future retirement pension is based on the three pillar principle, and it aims to ensure the security and quality of your life in retirement.
Your pension provision is based on Switzerland's three pillar system and aims to ensure the security and quality of life in retirement.
The overview of the Swiss three-pillar pension system
Pension provision in Switzerland consists of state and occupational pension provision (compulsory) and private pension provision (voluntary). Either your employer or you as a private individual pay into these three pillars. We will now explain exactly how the 3 pillars differ:
Pillar 1 – state pension provision
Pillar 1 – state pension provision
To financially secure your subsistence needs, the first pillar includes various types of compulsory insurance, above all the AHV (Old Age and Survivors’ Insurance). This is Switzerland’s mandatory state pension insurance. It is available for all persons resident or employed in Switzerland. These contributions are not saved up but are paid out directly to the pensioners (pay-as-you-go system). This means that you will also receive a monthly pension from the first pillar, which is financed by those still in employment, no later than when you retire. The amount of pensions is controlled by law and depends on the contributions paid in.
Pillar 2 – occupational pension provision
Pillar 2 – occupational pension provision
Occupational pension provision from the credit balance of pension funds (BVG) and accident insurance (UVG) aims to secure people’s standard of living in an appropriate manner – whether in the event of an accident or after retirement. Employed persons are therefore affiliated to the second pillar of the Swiss social security system on a compulsory or voluntary basis.
Pillar 3 – private provision
Pillar 3 – private provision
Pillar 3 private provision is an important add-on that secures people’s individual standard of living in the future. The 3rd pillar is divided into the pillar 3a (tied pension provision) and pillar 3b (unrestricted pension provision). Pillar 3a helps employed people to build up their own retirement assets and ensure their personal retirement provision. At the same time, pillar 3a savers benefit from considerable tax advantages. Pension contributions paid can be deducted from taxable income.
Saving in a pillar 3a securities solution offers higher long-term return opportunities than with conventional 3a account solutions.
The difference between pillar 3a and 3b:
The difference between pillar 3a and 3b:
Pillar 3a assets are tied, pillar 3b assets are not. This means that the money paid into the pillar 3a may be withdrawn no earlier than 5 years before reaching the statutory retirement age or for other specific reasons. Since you may withdraw the assets from your pillar 3b at any time, it is considered more flexible than the pillar 3a.
If you want to save on taxes, the pillar 3a is a good choice. This is because you can deduct the full amount paid into your pillar 3a each year (up to the maximum amount) from your taxable income, which reduces your tax burden over a number of years. In addition, your pillar 3a is not subject to wealth tax or withholding tax during the term, and is taxed separately from your other income when it is paid out, as well as taxed at a reduced rate. By contrast, you may pay as much in contributions as you like into your pillar 3b, but you must declare them in your tax return each year and pay tax on them accordingly.
Whether the pillar 3a or pillar 3b is suitable for you depends, among other things, on your retirement planning and your life goals. The pillar 3b is often a good idea as a supplement if you have already fully utilised the benefits of the pillar 3a or if you will need the assets in the near future, for example for a round-the-world trip.
The pension gap– Why is pillar 3a so important.
In Switzerland, we can plan for retirement within the framework of the 3-pillar system. If you don’t plan ahead, you risk facing financial difficulties in your old age. These financial difficulties usually arise when a person’s pension income from the 1st and 2nd pillars proves to be inadequate. This results in a so-called pension gap.
The diagram below shows the extent to which the pension from the 1st and 2nd pillars varies depending on a person’s annual income, and therefore how the pension gap is created. The pensions from the 1st and 2nd pillar cover just 60% of a retired person’s needs on average. You can easily cover the remaining 40% (pension gap) with the right retirement planning – for example with the pillar 3a.
Calculation example
Hans is single, 64 years old and about to retire. His monthly salary until he retires is CHF 7,500 (net). He has been employed for 44 years, has no gaps in his 1st pillar contributions, and thanks to the mandatory pension scheme he has regularly contributed to his 2nd pillar. He does not have any savings or a 3rd pillar.
What do you think, can Hans maintain his current standard of living with his pension from the 1st and 2nd pillars?
Answer
Answer
Hans’ pension from the 1st pillar (AHV) amounts to CHF 2,450 and his pension from the 2nd pillar (pension fund) amounts to roughly CHF 2,100.
Total: CHF 4,550
This means that Hans can only finance around 60% (of CHF 7,500) of his standard of living. If he had paid into his pillar 3a over a number of years, he could possibly reduce or even close this pension gap.
If you would like to know how much your pillar 3a assets could be by the time you retire, calculate them now with the frankly pension calculator.
