Pillar 3a – bank or insurance company?

Tax savings: maximum possible with both banks and insurance companies

Anyone who works in Switzerland is able to deduct payments into a pillar 3a pension scheme from their taxable income. Tax offices accept a maximum of 6,883 Swiss francs per year for gainfully employed people who have a pension fund (figure as at 2021). The maximum deduction for those who do not have a pension fund is 34,416 Swiss francs. You are therefore able to deduct every single franc you pay into your pillar 3a scheme from your taxable income.

The actual tax saving depends on your salary and the tax rate in the place where you live. However, it is fully possible for most employees in Switzerland to save over 1,000 francs per year. How much could you be saving with a pillar 3a scheme?

Savings+interest: variable rates with banks, fixed with insurance companies

The simplest form of pillar 3a financial provision is to put money aside and earn interest on it. If you choose a bank solution, this will be a 3a account, where your savings will earn interest in the same way as a savings account, although the rate is generally a little better. This is known as a preferential rate. Banks can adjust the interest rate on 3a accounts at their own discretion.

If you opt for insurance, the interest rate for the entire term of the life insurance policy is determined when you take it out. As a result, it will generally stay the same until you reach retirement age. Although the interest rate on an insurance policy is guaranteed up to the point you cash it in, in the current interest rate climate it is extremely low.

The more interesting part of an insurance solution is therefore the second element of the return – the profit share. This is a portion of the profits made by the insurance company. If claims are low in the course of the year, the company will make more profit, some of which is shared among policyholders. The level of this profit share may thus vary from year to year.

Securities: same investment opportunities with both

In addition to interest-bearing solutions, both banks and insurance companies offer investment funds. If you decide on this solution, a certain portion of your pillar 3a savings will be invested in equities (shares) and bonds. There are even 3a investment funds with an equity allocation of 100%. The higher the equity component, the higher the possible price gains. The risk of price losses increases in equal measure, however.

In this case, the return on your 3a investment depends on the market risk that you take. This risk is lowest with a simple policy or a 3a account, but can be much higher if you invest in securities.

Consequently, the return is not the main factor when deciding between a bank or an insurance company for your 3a scheme. Both offer securities investments and interest-bearing products. So what the difference between the solutions offered by banks and those offered by insurance companies?

Bank or insurance company? Where they differ

Saving for your retirement with a bank gives you more flexibility over the long term. Each year you decide whether, how much, and with which bank you want to pay into your pillar 3a scheme. You can also switch from a 3a account to a fund solution – and vice-versa – whenever you like.

That's not the case if your savings are in an insurance policy:

• Your options for changing the investment strategy are limited, by moving from one investment fund to another, for example.

• You still have to pay the contractually agreed premium every year. (Some insurance policies allow you to suspend premium payments for a while in exceptional circumstances, for example if you become unemployed and things are difficult financially.)

• In return for these limitations the insurance companies offer risk cover in addition to investing your capital.

Short-term pension strategies are easier with banks

Financial planning usually involves thinking about the long term. You are putting money aside for your retirement, after all. That said, the law provides for cases in which pillar 3a or pension fund assets may be withdrawn in advance. Examples include emigrating from Switzerland, becoming self-employed or buying your own home. Anyone who wants to take a step like this in the short to medium term is better off with a bank, because it will simply pay out all of your capital if you make an early withdrawal.

On the other hand, if you want to get out of an insurance contract early you may be in for a nasty surprise. Many insurance companies only refund the surrender value, which in the first few years is actually less than the amount you paid in. This is because your insurer initially uses your premiums to cover the commission on the policy and the insurance cover. Only then does it begin to accumulate retirement capital on your behalf.

Insurance offers risk cover for lost earnings and death

The deciding factor in taking out a pillar 3a insurance policy is risk cover in case the holder becomes unable to work, or dies. This sort of financial back-up is recommended for people who contribute to the family's income and already own a home, for example.

If things go well, you can use the sum insured to pay off your mortgage when the policy matures. Should you die or become unable to work, the insurance benefits can be a lifeline for your partner and children at a difficult time. Self-employed people who do not belong to a pension fund often depend on the cover afforded by a 3a life insurance policy, but there are also other cases in which life insurance is worth considering. If you choose this solution you should nonetheless be aware of the trade-off that some of your capital will be used to fund risk cover. That means that the capital available to you when you retire will be less than it might otherwise have been.