The 3rd pillar forms part of the swiss pension system. It is an optional private pension plan and complements the benefits offered by the 1st and 2nd pillars. It was introduced in 1972 as a supplementary pension capital scheme to the 1st and 2nd pillar pensions.
It appears that the 1st and 2nd pillars represent on average only 60% of the last salary received before retirement or even less if your earn a high income from paid employment.
Once you retire, your income is reduced. This decrease in income can be problematic depending on your expectations or retirement plans. By subscribing to an individual 3rd pillar pension plan, your normal standard of living is guaranteed.
With this in mind and in order to encourage citizens to build up 3rd pillar capital, the government has put in place significant tax benefits, detailed below.
What are the benefits of the 3rd pillar?
The 3rd pillar offers many possibilities according to your objectives, expectations, savings capacity, current or future circumstances, as well as your tax situation.
Build up capital
Build up capital and make dreams like buying a home, starting your own business and being self-employed, reducing your mortgage, financing the work on your main residence or even taking early retirement a reality.
Ensure financial security for your family
Ensure financial security for your family while building up capital for your retirement by taking out a 3rd pillar life insurance policy. By taking this step, you will protect your family from financial worries in the event of death or disability while ensuring you have a pension in the event of disability. At the same time, generate additional income upon retirement and fill the pension gap.
Take advantage of tax deductions
Take advantage of tax deductions from when you make your first contribution, throughout the contribution period and also when withdrawing assets. Contributions are deductible from taxable income, capital and interest are exempt from withholding tax, upon maturity or early withdrawal tax is withheld at a reduced rate.
Thirty-five-year-old Ms Dupont works in Geneva and has had an annual income of CHF 128,000 for the past two years. Aware that her retirement will also depend on her early years in employment, she wishes to anticipate any future ‘gaps’ in pension benefits and join a 3rd pillar pension plan.
- Firstly, she decides to pay CHF 400 per month into a 3rd pillar pension which will allow her to have CHF 152,501 in capital by the age of 64.
- Miss Dupont will benefit from the tax savings granted to her by the government, up to CHF 1,700 per year, or CHF 49,400 until her retirement.
- She realises correctly that: ‘Every time I pay CHF 100 for my future pension, the government pays me CHF 35 to encourage me.’
Given these advantages, Ms Dupont is considering increasing her monthly contribution and, consequently, her tax savings.
Each year the Swiss government sets the maximum contribution giving entitlement to a tax benefit. For 2019 the maximum contribution to a 3a pension allowed is CHF 6,826 per employee.
Each year the Swiss government sets the maximum contribution giving entitlement to a tax benefit. For 2019 the maximum contribution to a 3a pension is 20% of a self-employed individual's annual income and at most CHF 34,128.
The different types of 3rd pillar pensions
The 3rd pillar pension is the wealth you build up during your lifetime or that you ensure in anticipation of your life goals or retirement. The 3rd pillar pension is made available in the form of a bank account or life insurance. Naturally, each of these two solutions offer very different advantages, but you can take full advantage of both by combining them.
3rd pillar bank account
Operates as a bank account that you can put money into or not depending on the options available1. In the event of withdrawals2, the capital built up is taken out.
3a and 3b pillar
There are two types of 3rdpillar: the so-called ‘restricted’ 3a pension, because the money can only be withdrawn under certain conditions and the so-called ‘unrestricted’ 3b pillar because it gives you more freedom in terms of the contractual period and the payment amount, on the other hand you are generally not entitled to a tax deduction.
Cases of withdrawal of 3a pillar assets provided for by law
- normal withdrawal: at the normal retirement age (64 years for women and 65 years for men)
- early retirement: maximum of five years before the ordinary retirement age
- continuation of employment: maximum of five years after the normal retirement age
- leaving Switzerland: departure and permanent move abroad
- self-employed: transition to a self-employed activity
- access to property: for a main residence only
- mortgage reduction: for main residence only
- other events: according to law
2Withdrawals are authorised according to the list of legal exceptions.
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