Pillar 3a: Can you really save on tax?

Reto Kleiner, people always say you can save on tax with a Pillar 3a insurance policy. Is this true?

Reto Kleiner: Yes, you can deduct a certain amount from your tax. To be specific, if you are an employee you can pay up to a maximum of 6,768 francs into Pillar 3a per year. This amount can then be deducted from your taxable income in full.

What about if you are self-employed?

Self-employed people who are not members of a Pillar 2 scheme are allowed to pay 20% of their earnings, or a maximum of 33,840 francs into a Pillar 3a product. They too can deduct this amount from their taxable income.

But when I retire and the Pillar 3 savings are liquidated, I will still have to pay tax on the capital I have accumulated. Isn't this more a case of postponing payment of tax rather than actually saving tax?

Capital payouts from "restricted" pension provision, which is what Pillar 3a is, are taxed separately by the Federal government, namely by way of an annual tax. Tax is also charged by the cantons, municipalities and churches. However, this is not a case of postponing payment of tax: the tax you save before the payout will have been – and always will be – more than the tax you pay on the payout you receive. How much more will depend primarily on your tax base and on where you live. Precise tax calculations can be performed with the Helvetia tax calculator or by a financial advisor.

Pillar 3 is for private pension provision and is voluntary. Why should you nevertheless take out this type of pension provision?

Without Pillar 3, your retirement provision will be resting on shakier foundations. It will be supported by "just" two pillars: your basic AHV pension provision and your occupational pension scheme. The AHV pays a relatively modest pension. And because people's life expectancy is steadily increasing, the benefits provided by occupational pension funds need to be paid for longer and longer. This is one of the reasons why retirement pensions will tend to be smaller in the future. Anyone wishing to maintain their accustomed standard of living after the active earning phase of their life is over therefore absolutely needs to go for Pillar 3 provision. What's more, in terms of its risk/return ratio, Pillar 3a is one of the most attractive investments available.

You can also close gaps in pension provision. However, you can't touch the money until you retire, which many see as a disadvantage.

You don’t necessarily have to wait until you retire to be able to withdraw 3a cash. It can, for example, be used to buy or build residential property for the owner's own use or to repay a mortgage. Other options are available if you take early retirement – the 3a cash can also be paid out five years before you reach your regular AHV retirement age. Or on taking up self-employment – to name just a few cases.

What is the ideal age to take out a Pillar 3a policy?

You can pay into Pillar 3a as soon as you become an adult and start earning your own income. I generally recommend starting as early as possible. It's worth it because of the compound interest effect, among other considerations. The amount can be small to start with and can be adjusted later as your income grows.

But there are also other ways to save.

Of course. As long as you do so systematically and with a certain security approach, I can't see any problem. But if people don’t save at all they face the risk of poverty in old age. In other words, they will either have to cut their accustomed standard of living after retirement. Or they will be dependent on third parties and will need to be supported by the state or by relatives and acquaintances. According to a study by Pro Senectute, around 12% of retirees in Switzerland need supplementary benefits.

Talking of poverty: those who don’t earn very much can't save very much either – is private pension provision a privilege of the rich?

Basically, it's always a question of your budget – i.e. how much you earn and how much you spend. Of course, a family breadwinner on a fairly low income won't be able to save as much in absolute terms as a family breadwinner on a high income. However, both should set aside the same percentage of their income for saving. In practice we repeatedly come across cases of people living above their financial means – even people on high incomes. In such cases, it's a good idea to take advice on budgeting and go in for budget planning.

You can now have a 3a account either with a bank or with an insurance company. What's the difference?

The legal framework is exactly the same for both types of institutions. Insurance companies offer an additional insurance component. For example, you can include a waiver of premiums feature. That way, if you have an accident, say, and become disabled, the insurance company will continue to pay your premiums until the end of your contract. The savings process is not interrupted and your savings target is guaranteed. Death cover can also be included. If the insured person dies, there will be a direct claim to a death benefit. In other words, the agreed lump-sum death benefit will be paid out to the beneficiary straight away. Even if the beneficiary disclaims their inheritance.

What's the position in the case of a bank-based solution?

With a bank, the rules are slightly different. If you die, your accumulated 3a savings are also paid out to your beneficiary relatively quickly, but legally they form part of your estate. This may have very different consequences for the final amount received by, say, your spouse.

Which solution makes sense in which cases?

The bank-based solution is mainly attractive for people who only wish to pay into a Pillar 3a scheme for a few years. Either because they will soon be leaving Switzerland again, or because within a few years they will be wanting to put the money toward buying a house. The insurance-based solution is more suitable for people with a preference for a long-term, secure investment option. The best thing to do is to arrange for a consultation with a pension specialist. He or she will be able to analyse your family and financial circumstances on an individual basis and will then be able to give you the best idea of which solution you might wish to consider.