Pillar 3a: when and how should I start paying contributions?
The sooner you start planning your retirement, the better. But it’s hard to get started – and there’s a lot of confusion surrounding the subject of pillar 3. Comparis explains what to bear in mind when it comes to pillar 3a and how to optimize your retirement savings.
19.01.2023
iStock / fizkes
1. What is the deadline for paying pillar 3a contributions?
Those who are at the beginning of their professional life rarely think about retirement in a few decades. Nevertheless, it’s worth doing so. Because if you want to have a sufficient financial cushion in old age, you have to think long-term.
Interest accrues for every Swiss franc in pillar 3a. The sooner you start paying contributions, the more you can benefit from the interest. In addition, tax write-offs make saving more profitable.
Theoretically, anyone who earns a pensionable income can pay pillar 3a contributions. From 1 January after reaching the age of 17, all employees must pay state pension (pillar 1) contributions. This means apprentices and students in employment, for example, can pay pillar 3a contributions.
2. Is it worth starting to pay pillar 3a contributions early?
If you start paying 150 francs in pillar 3a contributions every month at the age of 25 – with an average interest rate of 3% – you will have accumulated 138,909 francs in retirement savings by your 65th birthday. This amounts to 72,000 francs in net contributions (12 months × 40 years × 150 francs).
If you start paying in pillar 3a deposits of 200 francs per month at the age of 35, you’ll benefit less from the interest. In this case, you would only accumulate 116,547 francs under the same conditions (interest rate of 3%). This is 22,362 francs less.
The astonishing thing is that the latter individual pays the same amount by the age of 65 as the former, i.e. 72,000 francs (12 months × 30 years × 200 francs). This is known as the compound interest effect.
3. Pension funds are more lucrative
Rates on conventional 3a accounts currently range between 0 and 0.4%. This also minimizes the compound interest effect*.
An alternative is to invest 3a assets in investment funds. All providers of 3a products also offer pension funds.
With pension funds, you also invest in a broadly diversified stock package, among other things. Often, the maximum equity component of such funds is 50%. The remainder is invested in safer bonds with a lower return. Some providers do offer an equity component of up to 80% and thus higher returns, which of course comes with more risk.
If you save for retirement with a pension fund, you are exposed to market risk. In the long run, however, investments in equities have always outperformed other forms of investment. Currently, you can realistically expect returns** of 3% with investment funds in the long term.
4. Pillar 3a is restricted – withdrawal only in exceptional cases
Pillar 3a is restricted. You may not withdraw your savings from your pillar 3a earlier than five years before reaching the default retirement age.
The following five cases are exceptions:
Purchasing a home
Making pillar 2 contributions
Starting a business
If you receive a full disability pension and the disability risk is not covered
Leaving Switzerland for good
When pillar 3a money is withdrawn, the capital disbursement tax also applies at a reduced tax rate. The individual cantons use different methods and fees to compute this tax.
A Comparis analysis shows that even with smaller 3a balances, splitting your money into multiple accounts and staggered drawdowns are worthwhile. Do you want to make up for this loss of return due to the capital disbursement tax? Then it is best to continually reinvest your annual tax savings.
5. Can I save on tax with pillar 3a?
In addition to the long-term interest effects, you also benefit from tax advantages with payments into the third pillar. Contributions can be deducted from your taxable income. This reduces your annual tax burden. Comparis has compiled some tips to keep in mind.
6. What is the maximum amount I can pay per year?
There is a limit to how much you can pay into your pillar 3a account each year – currently 7,056 francs per employed person a year (starting 2023). For self-employed persons without an occupational pension, the amount is limited to 20% of net income, up to a maximum of 35,280 francs.
7. Make up pension shortfalls with pillar 3a
It’s worth dealing with the issue at an early stage. In the long term, pillar 3a has a major influence on your financial situation after retirement or even before, if, for example, you plan to buy a house or apartment with the savings in pillar 3a.
It is clear that the future generation of pensioners will receive significantly fewer benefits from the second pillar (occupational pension). The reasons for this are rising life expectancies, excessive conversion rates and the current negative interest rates of the National Bank. The savings from pillar 3a as a result of voluntary additional savings are therefore becoming increasingly important.
You can use the Comparis pension calculator to estimate your pension shortfall. The pension calculator takes into account your expected income from OASI (pillar 1) and occupational pension benefits and calculates the shortfall needed to maintain your standard of living.
Ideally, the savings in pillar 3a cover retirement savings shortfalls in old age.
Definitions
* Compound interest effect: compound interest means that yearly interest is invested at the same interest rate over and over again along with the starting capital. As a result, your savings grow steadily over time. Due to compound interest – depending on the interest rate – your returns can skyrocket in a relatively short time. This is referred to as the compound interest effect.
** Expected return: the loss or gain that is expected from an investment over a given period of time.
This article was first published on 29.01.2020
