Updated: May 18, 2021
If you’ve read my previous article about the gender pension gap, you’ll remember that the median pensions for Swiss women is around CHF1221 paid out from the Swiss 1st and 2nd pillars. Clearly, for most women, this would not be enough in order to maintain their current lifestyle. For certain, for me personally, this measly amount is definitely not enough. Even though I am in the process of reducing my expenses such as my rent, this amount would not be enough.
Being recently divorced and having had to give up a large portion of my 2nd pillar to my ex, this figure of CHF1221 scares me even more. Luckily, I’ve been able to pay into my 3rd pillar regularly over the years, as a means to increase my retirement pension as well as investing into other investments such as ETF through Selma and Yova.
With this gender pension gap being a threat to me (and other women), I wanted to dive deeper into the advantages and disadvantages of paying into a 3rd pillar as part of my investment strategy and as a path to massive passive income.
Let’s recap – The Swiss Retirement System
The 3rd pillar (Pillar 3a) is part of the private pension system in Switzerland. The Swiss pension system is comprised of three pillars:
· 1st pillar – mandatory state benefits (AHV) to cover basic needs following retirement.
· 2nd pillar – mandatory occupational benefits (pension fund or BVG) to provide all employed individuals and intended to provide a ‘comfortable’ income after retirement. Occupational pensions are funded by employer and employee contributions for employed individuals, and voluntarily self-funded by self-employed individuals.
· 3rd pillar (a and b) – private and voluntary provisions intended to maintain the lifestyle you desire post-retirement. These pensions are funded by an individual’s voluntary contributions. This is where you can take advantage of making decisions now that can improve or maintain your future retirement life.
3a pillar: Tied pensions. Long-term plans. Capital locked into the retirement plan. Annual contributions are restricted, and the yearly maximums differ depending on whether you have a Pillar 2 occupational benefits plan or not. You can find yearly maximums here.
3b pillar: Flexible pensions. Does not have a prescribed or mandatory term and the capital is available at any time. All assets invested or saved voluntarily are counted towards the 3b pillar, including stocks, securities, properties and anything of value such as artworks. Life insurance can also serve as security towards post-retirement.
3a or 3b – What’s the difference?
There are some significant differences between the two 3rd pillars. Below you’ll find a quick overview of these differences.
3a – annual contribution is restricted by Swiss law and whether you have a 2nd pillar which depends on whether you are employed or self-employed. You can find the current yearly maximum here.
3b – no restrictions due to Swiss law apply.
3a – Payments are tax-deductible (up to an annual tax advantage of CHF2000) and the money available at retirement is taxed at a special rate (instead of as income).
3b – No tax advantages (although for certain assets, there are no capital gains taxes – check with your tax accountant for further details).
3a – money invested in a 3a pillar is available as early as five years before retirement and under certain circumstances such as buying a house or leaving Switzerland.
3b – money invested in a 3b pillar are available to you at any time.
Alright – what kinds of investments can I make with the 3rd pillar?
Both banks and insurance companies offer 3a pillar pension products.
For 3a, there are:
· Interest-bearing 3a account - the interest on your account balance is slightly higher than on a savings account.
· Fixed-interest 3a savings policy - part of the premium is used for risk protection and the remainder earns a fixed rate of interest and is used for retirement savings.
· Unit-linked 3a policy - The savings portion of the premium is invested in funds – the amount paid out at the end of the term depends mainly on the performance of the funds. There are also policies that guarantee a minimum payout when they mature.
· 3a risk insurance - This policy covers the risk of disability and death. It is not a savings policy, so the premiums are comparatively low. However, for myself, I’m not interested in insurance in any case as a way to diversify my investments.
Although funds in a 3a pillar accounts cannot easily be withdrawn (unless under circumstances) prior to retirement, they do offer certain tax advantages if you pay into them each year.
In addition, the earlier one starts with investing into a 3a account, the more one benefits. However, if you miss the yearly amount to be deposited, you cannot make it up in subsequent years. This is important because not only can you claim the tax benefit only during the year you make a deposit, but also during the entire period until you withdraw, as you do not have to pay any wealth tax on your retirement assets. Since you do not need to declare your retirement assets in your tax return, the income is also tax-free. This takes full advantage of the compound effect
For 3b, you can invest in:
a savings account
Although investments into 3b pillars provide no tax deductions every year like 3a, the biggest advantage is its liquidity. While you cannot deduct the deposits from your taxes and the surrender value is taxed as an asset during the term, at payout the entire amount is tax free, including all earnings and gains.
So, what is the best strategy?
The answer is, it depends. As you know, this is all my opinion and I am not giving advice. I can only show you what I think is good for my goals and portfolio.
Hence, since I have already paid into a couple of 3a pillar accounts many moons ago, I’ve decided to move these unit-linked policies to Selma, in order to save on fees and increase possible returns. In addition, I opted for a unit-linked account/policy originally which invests into stocks instead of an insurance policy to remain somewhat flexible – an insurance policy would not allow me to make staggered withdrawals (nor does it seem to generate much of a return). I have also opened an additional 3a pillar account in order to claim the yearly tax advantage.
At the moment, for me, I will continue paying the maximum amounts into my 3a pillar accounts with Selma, as well as continuing to contributing into my other investment accounts (3b pillars for my case). Although I am aware that my 3a accounts may not grow as fast as my investment accounts, I am keen on claiming the tax benefits now and during retirement.
According to finpension.com, setting up a few different 3a pillar accounts may be indeed advantageous. When you draw retirement assets, you pay a reduced tax, which is progressive, similar to the income tax. This implies that the tax is not only higher in Swiss francs and centimes for higher amounts, but also in percentage terms since all lump-sum benefits from the 2nd and 3rd pillar are added together in the same year.
Because I’ve learned more about the Swiss 3rd pillar system, I’ve come to realize that my current bank charged my way too much for “hosting” my 3a pillars. Although these accounts have made a good return, the fees being charged are still significant. Hence, be sure you know what fees your bank or provider charges you and compare accordingly. If you do find that your bank charges you too many fees, luckily, you can transfer your 3rd pillar to a more reasonably priced provider.
Since I invested into a 3rd pillar scheme some time ago, I knew that after my divorce I needed to take a closer look to see what the Swiss pillar system actually does. Once I did some research on this topic, I was actually quite glad that I had the foresight to invest into 3rd pillar. Given the pittance of a pension amount given to women at retirement in Switzerland, I felt that this was a step in the right direction. Claiming the tax advantages through multiple accounts, transferring to a cheaper provider while coupling this strategy with using a robo-advisor will prove fortuitous going forward for me.
What about you? Are you invested in any 3rd pillar accounts?
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