Pensions

Pillar 3a: bank or insurance company?

ANALYSIS
|
Banks and insurance companies offer good retirement planning solutions.

Would you be better off going to a bank or an insurance company for your third-pillar solution? Those planning for their retirement will find good solutions in both systems, and bank accounts and insurance policies are equally effective when it comes to saving tax. It is very important to make the right decision if you plan major changes, however, such as buying your own home, becoming self-employed or leaving Switzerland.

Bank account or insurance: the advantages and disadvantages at a glance

Where bank accounts and insurance policies are equally effective

Both banks and insurance companies offer many third-pillar products. One thing they all have in common is that they are equally good as a means of saving tax.

Tax savings: full potential with both

Anyone who works in Switzerland can deduct contributions to their pension provision from their income, up to a statutory maximum limit. If the word “entitled” makes it sound like a privilege, that is because it is. Every franc that you invest in your private pension can be deducted from your income, meaning that you do not pay any income tax on this money. The government wants you to save privately, and rewards you for doing so.

With the help of the third pillar, most employees in Switzerland can save over 1,000 francs per year in income tax, depending on their salary and the tax rates at their place of residence. How much could you save? Here’s an easy way to find out.

Returns: same options with both

Your money should also grow in the third pillar. For that reason, the choice between a bank and an insurance company is not the only one you have to make; you must also decide how the provider is going to grow your capital. The two options here are an interest-bearing investment or an investment in securities, such as equities. In addition to profit distributions from dividends, securities also offer a chance of price gains, albeit alongside the risk of price losses.

Both types of providers offer the same possibilities for generating returns on the markets, but the finer details of the solutions they construct for doing this can differ markedly.

Interest-bearing investments at banks and insurance companies

Regardless of how imaginatively your bank names its pillar 3a account, it is basically an interest account. With an account of this kind, you deposit your money, and interest is paid on it like on a savings account, usually at a somewhat better rate than is offered for savings accounts at the same bank. The interest rate changes, however; the bank can adjust it at its own discretion and will do so regularly.

Insurance companies generally make somewhat longer commitments when it comes to interest rates. Many of them offer a guaranteed interest rate. Unfortunately, however, these guaranteed interest rates are usually extremely low, especially in the current environment of low interest rates. What is most interesting with insurance companies, therefore, is the second part of the interest payment, known as the “surplus participation”. This is not guaranteed, however. The insurance company reports each year on how well its investments have performed. It does so according to clear rules and only retrospectively.

So where are interest-bearing investments more profitable – at banks or insurance companies?

The banks’ current interest rates are easy to compare. If you want, you can do so right away by clicking here.

Securities should always be in investment funds

How well investments in securities will perform is even harder to predict. Both systems use investment funds with a securities component that includes equities. Funds like this give you the chance to generate higher returns, but you also have to accept the risk of possible price losses. Whether you opt for a bank or an insurance company, the return will depend on the performance of the stock markets.

The higher the equity component, the higher the possible price gains. The risk of price losses increases in equal measure, however. Until a few years ago, a maximum of 50 per cent equities was permitted in all third-pillar accounts and policies. You can agree this equity component at all banks and insurance companies. Lately, a few companies from both third-pillar systems have begun offering equity weightings of up to 75 per cent.

The method for generating returns and their amount are therefore the same in both systems. Tax can be saved equally effectively with banks and insurance companies. If you pay the same amount into both until you retire, you will get the same amount back. So where are the differences?

Bank account or insurance: these are the differences

During the period in which you accumulate your savings, bank solutions are fully flexible. Insurance policies, by contrast, require discipline, but in return they offer risk protection in addition to pure capital investment.

Insurance compels discipline

If you take out a third-pillar policy with an insurance company, you have to pay in regularly. As a result, you are compelled to save. For many people, this is a psychological advantage – it forces them to contribute towards their retirement planning every single month. (Some insurance policies offer something called a premium exemption. This permits you, as an exception, to stop making payments when times are hard – for instance if you become unemployed.)

Banks offer flexibility

From gaps of several years in your payments to not paying in the full maximum amount in one year, banks let you choose how much you want to invest in your third-pillar pension provision. Whether this is an advantage or a disadvantage for you personally is something you have to decide for yourself.

You can change the investment method from time to time in both systems: for instance from an interest-bearing investment to an investment fund and back again. With banks, such changes can usually be made quickly (albeit not as quickly as with online trading). In the case of some insurance policies, a change of investment method means switching to a different policy and complying with the associated waiting periods.

Banks more suitable for short-term investments

Short-term investments? Hang on, aren’t we talking about retirement planning here? Aren’t all pillar 3a savings basically long-term investments? Essentially, yes, but in addition to private retirement planning, the law also grants favourable tax treatment to other objectives. The capital you pay into your pillar 3a account can also be withdrawn early – as, incidentally, can the assets in your pension fund. Early withdrawals are possible if you emigrate from Switzerland, become self-employed or buy your own home.

Anyone dreaming of taking one of these big steps is therefore better off with a bank. Banks pay out the full capital at all times, even in the event of an early withdrawal.

Early termination of insurance policies, on the other hand, can have unpleasant consequences. Many insurance companies only refund the surrender value, which for many years is actually less than the amount you paid in. This is because the insurers finance the sales commission and the premiums for your insurance cover first.

Insurance against major risks

Insurance policies score highly in terms of risk protection. In the event of incapacity for work or death, they pay the full benefits. This cover is important for everyone who already owns a home as, if the worst comes to the worst, they can use the insurance benefits to cover their mortgage payments. In this way, the insured person’s partner and children can remain living in the home even if the main earner is sidelined. Self-employed people without pension funds often need additional protection, too – perhaps not for themselves but for their family.

Risk insurance is often cheaper in a third-pillar package than when bought individually. It definitely pays off making a comparison, however.

Bank first, insurance later

“Savings and insurance should be kept separate. You save money with a bank, and you get insurance from an insurance company.” Statements to this effect are common, but in fact they are incorrect. 

If you are young and still have big dreams such as buying your own home, becoming self-employed or leaving Switzerland, then you need flexibility. The best place to find this in the third pillar is with a bank. If you are already self-employed, you may not have any risk protection from your pension fund. If you have bought your own home, you need more risk protection than a tenant. So if you have already taken one of these big steps, insurance policies are often better suited as a pillar-three solution.

When it comes to the actual purpose of pillar 3a – retirement planning – banks and insurance companies are equally suitable. The decision is then a question of personal preferences. And of meticulous comparisons of individual providers from both systems.