Tip no. 1: Pay into pillar 3a as early as possible in the year in order to obtain the maximum interest benefit. The payments you make can be fully deducted from your income tax – as an employee up to an amount of CHF 6883 (“small pillar 3a”), as a self-employed person without a pension fund up to a ceiling of CHF 34,416 (“large pillar 3a”). These ceilings are adjusted every two years by the Federal Council.

Tip No. 2: It pays to start saving early, especially if you combine your strategy with pension funds. In theory, young workers can make contributions to Pillar 3a from 1 January following their 17th birthday. This is when the obligation to contribute to the OASI begins, and an income subject to the OASI is the requirement for making payments into Pillar 3a. However, with an apprentice’s salary, the effect of tax savings is only a very modest sum. However, from the age of 30 at the latest, it makes sense to start accumulating Pillar 3a in order to benefit from as long a time horizon as possible.

Tip No. 3: Payments into Pillar 3a are just as attractive for people with a low income as for those with a high income. In percentage terms, those with low incomes can reduce their taxes more than those with high incomes. On the other hand, for high earners the tax savings are higher in absolute figures.

Tip No. 4: Paying into Pillar 3a is all the more advantageous the higher the income tax rate in the canton of residence. Therefore, make use of Pillar 3a especially in cantons with a high tax burden, e.g. Basel-Stadt, Bern, Jura, Geneva, etc.

Tip No. 5: If your partner is also gainfully employed, pay both contributions into pillar 3a. This way you can claim twice the maximum amount allowed. Pillar 3a is particularly suitable if your partner works part-time. For example, if you work 50% of the time, you will not normally receive half of your pension from the pension fund, but only a quarter. This is due to the so-called coordination deduction. The gap can be closed with pillar 3a.

Tip No. 6: If your partner works part time and is not subject to the pension fund, he/she can only pay 20% of his/her net salary into pillar 3a. 

Tip No. 7: Self-employed people with a high income ideally take out a “large pillar 3a” for tax reasons. This means that they do not have to join a pension fund and instead pay up to 20 per cent of their earned income, i.e. a maximum of CHF 34,416 per year, into pillar 3a. With a higher income it is fiscally advisable to join a pension fund combined with a “small” pillar 3a (maximum CHF 6883).

Tip No. 8: Foreigners or cross-border commuters living abroad can also pay into Pillar 3a if they work in Switzerland.

Too much or too little?

Tip No. 9: It is not worth paying too much into the 3rd pillar. If you pay too much into pillar 3a, the tax administration will ask you to have the excess amount paid out by your pension fund. The tax authority can check this at the next tax assessment based on a statement of account. Amounts that have not been repaid do not benefit from tax advantages: assets and income are taxable.

Tip No. 10: Conversely, payments missed during the year are no longer recoverable. If you have enough capital available to make a payment into pillar 3a or the pension fund, choose the former. This is because the purchase of the pension fund can be postponed.

Are pillar 3a assets safe?

Tip no. 11: Don’t worry about the security of your pillar 3a assets! In the event of a bank’s insolvency, depositor protection covers CHF 100,000 of pension capital per client (adding up the 3a and vested benefit accounts). Pension funds are even more secure. This is because they are not affected by the bank’s insolvency, because as separate assets they do not form part of the bankruptcy estate.

Tip No. 12: with a time horizon of one to three years, a 3a account with a bank is the best solution. You benefit from the preferential interest rate, which is higher than that of a savings account plus tax savings. 

What is the equity share of a pension fund?

Tip No. 13: The legislator generally allows a 50% equity share in pillar 3a. However, savers with a sufficiently high risk tolerance can choose a higher equity component of up to 100%.  These pillar 3a solutions are suitable for savers with an investment horizon of at least ten years. This gives you the opportunity to increase your return opportunities. Ask your relationship manager to help you choose the right pension fund for your time horizon and risk capacity.

Tip No. 14: It is often recommended to reduce the equity component to zero one to three years before retirement and move the capital from the pension funds to a 3a account. But at that point in time, the average remaining life expectancy is still around two decades, and considering this long time horizon, the equity portion need not be reduced. The risk profile does not change; the capital is only shifted from pillar 3a to private assets. A reduction in the equity ratio is only appropriate if the capital is used in a different way, e.g. repaying the mortgage.

Tip No. 15: Invest in pension funds by making regular payments of as much as possible in equal amounts. This means that you automatically buy more units in a crisis situation when prices fall and the stock market situation is favourable, and you buy fewer units if prices and stock market risks rise. To make the most of the cost average effekt

What is the situation regarding fees and commissions?

Tip No. 16: Watch out for commissions on pension funds. Avoid financial products that charge custody and transaction fees and have a total expense ratio (TER) of more than 1.5%. VIAC, for example, offers products with a TER of 0.45%. If you are interested in this solution, do not hesitate to contact me to get a small discount on VIAC products!

Tip No. 17: A so-called mixed life insurance for pillar 3a is only advisable from a duration of 10 to 20 years. This product, also known as “savings insurance”, combines savings and risk protection in an à la carte “all-inclusive” package. The longer the term, the lower the high underwriting costs. The first three annual premiums are used to finance the various costs. If you cancel your policy in the first three years, the surrender value is zero or very low.

Bank or insurance?

Tip No. 18: if you are looking for the highest possible return, insurance saving is not for you. You can share the savings with a bank and the risk with an insurance company.

Tip No. 19: Combining savings and risk with an insurance company often saves on risk.

Tip No. 20: The bank is free to decide how much and when to pay out, whereas with an insurance company the amount of the premium is fixed in the contract for the entire duration.

Tip No. 21: At a bank, Pillar 3a capital can be transferred from one bank to another at any time to take advantage of performance differences. So compare the conditions of bank savings periodically. With insurance savings, on the other hand, switching to another company causes considerable losses on redemption.

Tip No. 22: Compared with bank savings, insurance savings offer certain advantages in terms of inheritance law. Under insurance law, pillar 3a benefits go directly to the beneficiary by switching from insurance contracts to succession. The beneficiary thus receives the money without having to wait for the outcome of any inheritance dispute, which can take years. This is an advantage in the case of a complex succession involving many heirs with divergent interests. The fact that pillar 3a benefits are transferred from insurance contracts to the estate also proves advantageous in the case of an over-indebted estate. Even if the beneficiary rejects the inheritance, he will still receive the insured sum.

Mortgage and amortisation

Tip No. 23: In these times of low bank interest rates, take advantage of the so-called indirect amortisation with pillar 3a when repaying your mortgage. With this variant, the mortgage is not repaid in instalments directly. Instead, at maturity the debt is offset against the Pillar 3a capital paid in up to that point. Indirect amortisation is tax-privileged because the interest on the debt can be deducted in full from taxable income for the entire term. At the same time, the solution also promotes capital accumulation. If you choose 3a funds with a 40 to 50 per cent equity ratio for amortisation, you are likely to have saved more capital than is needed to repay the mortgage loan when you reach AHV retirement age.

Tip No. 24: In the case of home financing with indirect amortisation, the client should not only look at the mortgage conditions, but also at the bank’s pension funds, which are used for indirect amortisation. Let’s assume that, with a mortgage loan of CHF 500,000, you save 0.2 per cent compared with the competition thanks to the favourable terms. This means 1,000 francs per year. We also assume that the performance of your pension funds is 1% below the market average. With a pension fund capital of CHF 100,000 this “underperformance” cancels out the more advantageous interest.

Tip No. 25: You save costs if you opt for decreasing coverage against the risk of death in your insurance savings or capital allocation. This means that, for example, instead of setting a constant sum insured, let’s say 200,000 francs, for the entire duration of the contract, towards the end of the contract it gradually drops to 50,000 francs. This makes sense, because insurance becomes more and more expensive as the years go by. On the other hand, decreasing cover is also appropriate from the point of view of family circumstances. After all, as the insured person grows older, any mortgage should at least partially pay off and the children will be able to support themselves, so the need for protection is less.

Tip No. 26: During a break in employment due to maternity and, in general, in the event of loss of earnings, you cannot make contributions to pillar 3a. Continue to make contributions when you return to work. However, if you do not plan to return to work for the time being, you can keep your pillar 3a without contributing to it, or opt for an early payout, for example by using the capital to renovate or refurbish your home.

What you need to take into account when withdrawing Pillar 3a capital.

Tip No. 27: Be aware that Pillar 3a is not called ‘tied pension provision’ by accident. Its purpose is to grant access to the saved-up capital only when you reach AHV retirement age (64/65). If you wish, you can postpone the payout for as long as five years after reaching the ordinary AHV retirement age (69/70), provided you continue to work. During this period, you can make contributions to pillar 3a and deduct them from your taxable income. Conversely, the capital can be withdrawn five years before reaching AHV retirement age (59/60) – take advantage of this option!

Tip No. 28: Early withdrawal, i.e. withdrawing the capital even earlier, is only permissible with a few exceptions:

• If you become self-employed.
• Expatriation.
• If you are buying your own home, repaying a mortgage on it or renovating or refurbishing your own home.
• If you are drawing a full disability pension.
• If you finance a pension fund buy-out with pillar 3a capital.

How can the withdrawal of pillar 3a capital be staggered?

Tip No. 29: Pillar 3a capital is taxed when it is paid in. The tax burden increases gradually with the amount of capital withdrawn in a given year. In order to reduce this tax progression, it makes sense to divide the pillar 3a withdrawal into ordinary withdrawals and early withdrawals spread over several years. For example, at the age of 50, you make an advance withdrawal to renovate or restore your home. With a second early withdrawal in your sixties, you reduce your mortgage loan and relieve your household budget as you approach retirement. And in the five years before you reach the AHV retirement age, have the remaining Pillar 3a capital paid in as regular withdrawals in more or less equal tranches.

Tip No. 30: In order to be able to stagger withdrawals, however, it is necessary for the pillar 3a capital to have been divided among several 3a accounts. It is not possible to withdraw only part of the amount deposited in one account. You can open several accounts right from the start (even at the same bank) and distribute the deposits equally. Or you can start by opening one account, to which you make regular deposits, and only open a second account when the balance in the first one reaches, for example, CHF 50,000.

Tip No. 31: When dividing up your withdrawals, also consider your partner’s accounts and your pension fund payments. This is because all pension capital withdrawn in a year is added up. Some cantons even add up withdrawals over three to five years, making it more difficult to spread them out.

Is it worth moving to a tax-advantaged canton?

Tip No. 32: It is often recommended to move to a canton with a better tax regime when withdrawing capital. This is because withdrawn Pillar 3a capital is taxable in the canton where you live at the time of liquidation. However, the tax burden remains low, even in a canton with high taxation, by optimally staggering the retirement capital. This makes it possible to avoid a costly transfer of residence.

I hope these tips can help you.

To write this article, I relied on the Migrosbank article that you can find below (unfortunately not available in English):

33 consigli sul pilastro 3a (parte 5/5)