Following the review of state and occupational pension schemes, this article considers the mechanisms and options of private pension schemes. Its content is primarily aimed at Swiss residents, including a comparison of the French free pension model, but a quick overview will allow all readers to compare the situation and solutions in their own jurisdiction.
Free pension options and limitations
The imperative of private pension provision (3rd pillar)
If you rely solely on the pension benefits of the 1st and 2nd pillars in Switzerland, you will only receive around 60% of your last income when you retire. Private pension provision will therefore help you to maintain your usual standard of living after retirement and to close any gaps in your pension provision.
Tied and untied private pensions
A distinction can be made between Pillar 3a and Pillar 3b in private pension provision:
- Pillar 3a – The tied personal pension provision is open to both employed and self-employed persons: Payments are tax-deductible up to a certain limit. This is a form of tied pension provision, which means that the assets are only available under certain conditions.
- Pillar 3b – The free (or “untied”) individual pension provision is open to everyone: There is no limit to how much you can pay in. However, Pillar 3b has fewer tax advantages than Pillar 3a.
Any employed person can pay into a Pillar 3a retirement savings account at a bank or insurance company. However, these Pillar 3a contributions may not exceed a maximum annual amount and the amount paid in is tax-deductible. This amount is particularly limited (CHF 6,883) for people who are already affiliated to a pension fund (generally employees). Persons who are not members of a pension fund (generally self-employed persons) can make higher contributions (up to 20% of annual income but not exceeding CHF 34,416). These low limits, especially for those already affiliated to pension funds, make Pillar 3a a valuable but largely insufficient supplement.
Early withdrawal of Pillar 3a assets is only possible in special circumstances: to buy or build a home for own use, to become self-employed, to leave Switzerland permanently or to change to self-employment. The accumulated pension capital must be fully withdrawn at the beginning of retirement (at the earliest five years before the normal retirement age). If you continue to work, you can continue to contribute and/or delay the withdrawal for a maximum of five years.
In contrast to Pillar 3a (tied pension provision), Pillar 3b is a free pension provision. This means that it is not tied to retirement and can be used as a medium- or long-term savings target.
Pillar 3b gives you more freedom and there is no ceiling. However, payments are not tax-deductible. This means that you do not enjoy the same direct tax benefits as with Pillar 3a and the pension assets must be declared as assets.
Pillar 3b therefore includes all assets saved on a voluntary basis. These can be shares, real estate or even collectors’ items. You can take out an individual pension plan via pillar 3b with both banks and insurance companies, but we recommend that you do not take out any non-transparent offers. We recommend that you focus on property and equity investments on an individual basis. As there are no special rules for Pillar 3b savings, you should avoid expensive bank and insurance offers. These offers are not very attractive and a do-it-yourself pension plan will generally give better results than more expensive 3b solutions from banks. So build your own 3b pillar without ready-made solutions from the industry such as managed funds or life insurance.
A little comparison with France
For comparison, the French PEA (Plan d’Epargne en Actions) benefits from certain tax advantages for French residents up to EUR 150,000: the income and capital gains realized on this account are, under certain conditions (such as a sufficiently long holding period), taxed at a low level. An investment level above the legal limits does not usually make sense, as the investments available are generally more expensive than their open market equivalents and their choice is more limited. However, any person domiciled in France should invest in the framework of a comprehensive pension plan, taking into account their individual tax situation.
Tips on the 3rd pillar
- If you are still working, you can continue to contribute to the 3rd pillar: for men until the age of 70, for women until the age of 69. If you continue to work, you can therefore take advantage of this exception.
- Withdrawals from the 3rd pillar are treated much more favorably for tax purposes and are separated from other income. The beneficiary must pay a lump-sum tax corresponding to the amount that would normally be paid in one year on such income: the scale is certainly more favorable but the taxation is progressive. As a 3a account is paid in one go, one can open different 3a accounts and pay money into them in order to reduce the tax burden due to the progression, when withdrawing. Nevertheless, it can be expensive to withdraw, it can take a long time and some lenders (such as investment foundations) do not offer any flexibility when repaying mortgages. Therefore, form packages of CHF 40,000 to 60,000 for more flexibility.
- Pillar 3a funds are not subject to income or wealth tax, as tax is only due when the money is withdrawn. The income generated is also free of income tax and withholding tax. Despite the limited amounts for employees, it is worth taking advantage of these tax-free amounts. You can contact your pension fund or your bank if you wish to withdraw them for a property purchase. Otherwise, the benefits are paid out exclusively in the form of capital in the case of bank foundations, while in the case of insurance companies they can also be paid out as annuities.
- You can also use a (relatively low-cost) Pillar 3a application to invest in the markets. In principle, the legislator allows a maximum of 50% of risky assets in Pillar 3a. However, investors with a “sufficiently high risk tolerance” can choose a higher share of equity. Viac, Frankly and Finpension currently offer the best rates. As these are continuously decreasing, it is difficult to estimate who will offer the best deal in the future. You can therefore wait and use the 3a pillar to amortize your property or start with one of these providers, even if you have to change partners in a few months. The CEO Zurich Cantonal Bank, on which Frankly depends, has recently warned that its product range is unlikely to be the cheapest on the market. Although this is likely to change in the near future, our preference would currently be for the pioneer Viac and the cheapest provider Finpension.