Pillar 3a, free assets or pension fund?
Where and how to save wisely
You can save for your retirement in various ways. However, when it comes to saving for retirement, there is a widespread opinion that you should first fill pillar 3a before using other options because of the tax advantages. But that doesn’t go far enough.
In this article, we at findependent explain why and introduce you to two other popular options for making provisions with their advantages and disadvantages in addition to pillar 3a. Find out what is worthwhile, especially from a tax point of view, and how you can optimally combine the various options.
Save taxes with pillar 3a?
Employees have the option of paying into pillar 3a. On the one hand, there is the possibility to save on a pillar 3a account, on the other hand, there are pillar 3a investment solutions where the assets are invested in investments such as shares or bonds and thus capital gains and income such as dividends are achieved.
The good thing about making provisions with pillar 3a is that the payments can be deducted from taxable income. However, the payments are limited to a certain annual amount:
- For people with a pension fund, the maximum Pillar 3a amount in 2023 is CHF 7,056.
- Those without a pension fund can pay a maximum of 20% of their earned income into the 3a pillar each year, but no more than CHF 35,280.
A major disadvantage of pillar 3a is its low flexibility. This is because the credit balance in pillar 3a is generally tied up and can be withdrawn no earlier than five years before reaching the AHV age. Only in the following exceptional cases is a withdrawal possible before that:
- House or flat purchase
- Amortisation of mortgages
In addition, the entire credit balance on a pillar 3a account must be withdrawn at once. The only exception is the early withdrawal for home ownership, where a partial withdrawal is also possible.
In addition to the payments, the income generated by the investments (such as interest or dividends) is also free of income tax. Furthermore, the Pillar 3a assets do not have to be taxed as assets.
However, taxes are then incurred when the Pillar 3a credit balance is withdrawn. Although the tax rate is reduced (approx. 5-10%, depending on the canton and the size of the withdrawal), the entire credit balance must be taxed. This also includes the capital gains that have accumulated over the years. The following therefore applies to Pillar 3a: Taxes are not suspended, only postponed.
Pillar 3a withdrawals after retirement?
In the section above, we talked about the fact that withdrawal from the third pillar is also possible before reaching retirement age in certain cases. There is also a limit when reaching retirement age. Namely, the withdrawal must take place within the next 5 years. However, this is only possible if you continue to be gainfully employed.
Another way to “save taxes” would be to hold several third pillar solutions. But be careful: The maximum total contribution amount remains the same. If you hold several 3rd pillar arrangements, you can also dissolve them in stages and withdraw the money in several moves. Since the endowment benefits are taxed progressively, a gradual payout leads to a tax saving, since you can then only have the total amount paid out.
Until when do I have to pay into pillar 3a?
Generally speaking, you can start paying into pillar 3a as soon as you have an income that is subject to AHV contributions. Therefore, it’s better to start looking after your old-age provision too early than too late. If you still want to pay in this year, we recommend that you submit the transfer application to your bank before December 24th. This way, you can avoid forgetting to make your deposit during the Christmas rush. So pay in before the 24th of December 2022 and benefit from the tax deduction.
What is the difference between pillar 3a and pillar 3b?
Pillar 3a is referred to as tied personal pension provision, while pillar 3b represents untied personal pension provision. As the name suggests, the money in Pillar 3a is tied up, i.e. you cannot actually withdraw it before you retire (with exceptions). With Pillar 3b, the money is not tied up and you can withdraw it at any time. We have summarised the most important features for you here:
Assets held with a bank or insurance company
Savings in various forms
Maximum deposit amounts are specified throughout Switzerland
Certain conditions must be met when withdrawing
Withdrawals possible at any time, without giving reasons
Deposits can be deducted from taxes, assets are exempt from wealth tax until they are withdrawn
Credit balance must be taxed annually (wealth tax) and any income is subject to income tax
Taxes must be paid on withdrawal
No taxes are charged on withdrawals
〉 You can find the differences and similarities between findependent and Viac, the best investment app for pillar 3a funds in our opinion, here.
What is the difference to Pillar 3a?
findependent belongs to the private investment solutions in the area of free assets, i.e. outside the pension fund or pillar 3a. Those who invest their money in free assets are completely free with regard to the amount and can also withdraw it at any time. Thanks to this flexibility, you can withdraw your money before you retire, for example, and use it for a longer trip.
However, payments into investment solutions cannot be deducted from taxable income and the investment sum must be taxed as assets and the returns as income.
Investing in free assets also has a major tax advantage over pillar 3a and pension funds. Private individuals do not have to pay tax on capital gains from their investments. Such capital gains arise when investments are sold at a higher price than the original purchase price, i.e. when the value of the investments increases.
Especially in the case of equity investments, the majority of the return does not accrue as income but as capital gains, since the companies do not distribute a large part of their profits as dividends but reinvest them in the company and thus increase the value of the company or the share. The higher the proportion of shares in the investment solution, the higher the tax-free capital gain.
Here is a direct comparison between investing in free assets and investing in pillar 3a: What is taxable and when?
Investing in free assets
Investing in pillar 3a
Taxable on an ongoing basis
Taxable on an ongoing basis
Taxable on withdrawal, at reduced tax rate
With our yield calculator you can get a tailor-made picture and see how your savings will develop.
Is it worth buying into the pension fund?
With some pension funds it is possible to make additional voluntary contributions (so-called “pension fund purchase”). The advantage of this is that these payments may be deducted from taxable income. The disadvantages, on the other hand, are that the money is tied up in the pension fund and that the pension fund capital earns a significantly lower return than if you invest it yourself for the long term. The main reason for this is the large redistribution from those paying into the pension fund to those drawing from it, in order to be able to finance the current pensions, which are too high.
Accordingly, buying into the pension fund is worthwhile above all in the years before retirement – approximately from the age of 55. At this age, the salary and thus the tax savings are usually the greatest and the assets are only tied up in the pension fund for a relatively short time.
However, whether a purchase is really worthwhile depends very much on the specific pension fund and should therefore be examined carefully in each individual case.
From what income should I pay into the pension fund?
All employees with an annual income of over CHF 21,510 pay into the pension fund. For self-employed persons, occupational pension provision is voluntary.
Employees and employers finance the contributions for the 2nd pillar jointly.
A few final tips
- As already mentioned, you should only consider buying into the pension fund at around the age of 55.
- Payments into pillar 3a are particularly worthwhile if you do not simply pay your money into an account, but also invest it. So choose an investment account for your pillar 3a.
- While pillar 3a investment accounts from banks are usually relatively expensive, the digital alternatives from Viac, Frankly & co. are a lot cheaper and therefore much more worthwhile. Click here for a comparison of findependent and Viac.
- From a balance of around CHF 50,000, it makes sense to have several accounts for pillar 3a so that you can withdraw your money in stages and thus save taxes. Multiple accounts also generally mean more flexibility in withdrawals.
- In addition to the high degree of flexibility, investing in free assets is particularly attractive because of the tax-free capital gains. You should therefore not wait until you have exhausted the maximum amount in your Pillar 3a before investing in free assets, but use both options as good complements to each other.
- From a tax point of view, it is better to hold a higher proportion of shares in your free assets than in your pillar 3a, rather than the other way round. Of course, it also makes sense to have the same proportion of shares in both.
- In particular, those who invest with a high share of equities benefit from building up their assets over the long term outside of Pillar 3a. This is why, for example, when buying a house or becoming self-employed, you should consider taking the money out of pillar 3a rather than out of the private investment solution. In this way, you combine the advantage of tax savings when paying into Pillar 3a with the advantage of tax-free capital gains in your free assets.
Note: At the moment, neither all pages nor the complete onboarding are available in English. However, we are working intensively to change this. Thank you for your understanding.