THE THREE PILLARS – THE THIRD PILLAR, YOUR PERSONAL FINANCIAL SECURITY – 3A & 3B PILLAR BENEFITS – ADVANTAGES
The Swiss retirement system is pragmatically structured to provide families with a framework to build and maintain financial security. This is achieved through a coordinated effort between three parties: the State, the employer, the individual. Each of these parties is represented by a pillar, the system has therefore become known as the three-pillar retirement scheme.
1. THE THREE PILLARS
Each pillar is independent of the other, but offers cumulative benefits.
- The State first pillar is designed to cover our basic needs at retirement (or in the event of loss of income).
- The employer second pillar is designed to maintain our standard of living at retirement (or in the event of loss of income).
- The individual third pillar is designed to improve our standard of living at retirement (or in the event of loss of loss of income).
Pillar 1 and Pillar 2 contributions, which are respectively managed by the State and the employer, have very little flexibility. They are primarily used to finance retirement annuities, disability and death benefits.
Pillar 3 contributions, which are managed by the private individual, offer flexible savings plans with generous tax benefits. This is what makes them so attractive and why the vast majority of all Swiss tax payers contribute to these saving plans. On average the State gives you back CHF 1 for every 3 you invest in one of these plans, an excellent guarantied return for any investment.
2. THE THIRD PILLAR, YOUR PERSONAL FINANCIAL SECURITY
Upon retirement, the accumulated benefits of the first and second pillars only provide between 50 to 65% of the last salary received.
The exact % depends on multiple factors :
- the number of years the person has been employed in Switzerland
- their salary (the higher the salary the lower the % covered by the first and second pillar)
- if they have children
- if they are self-employed
- their marital status
- the rules and regulations of their pillar two pension fund
The 50 to 65% of the last salary received calculation only works for those that contribute fully to the Swiss first and second pillar plans. This means:
For the first pillar:
– 44 annuities with an average salary of roughly CHF 86’000.- per year
For the second pillar:
– 40 annuities with an average salary of roughly CHF 86’000.- per year
For those with low salaries, those that do not contribute enough annuities and those that earn more than CHF 140’000.- per year their pension can be equivalent to as little as 20% of their last salary if enough factors are cumulated.
How does it work?
The third pillar is the pillar controlled by you, the private person, so it is known as the individual pension scheme.
The third pillar is divided into two categories, the 3 “A” and the 3 “B” schemes. The 3A scheme is commonly referred as “liée” in French (which means “linked to”), because it is “linked” to the official age of retirement. The 3B scheme is commonly referred to as “libre” in French (which means free), because the client is free to choose the term date of the plan.
In order to open a pillar 3 “A” scheme, it is necessary to contribute to the second pillar. This means being employed and earning at least 21’510.- (in 2022) per year from the same employer. To limit the tax advantage and not favor the wealthy, the annual savings plan is capped at CHF 6’883.-. The self-employed have the right to pay 20% of their income (maximum 34’416.-) into a pillar 3 “A” scheme, even if they are not affiliated to a second pillar pension fund. For those who work for several employers or who do not work, the third pillar scheme becomes possible thanks to pillar 3 “B”.
3. 3A & 3B PILLAR BENEFITS
8 personal goals that I can finance with my pillar 3A or 3B savings
3A PERSONNAL GOALS
Purchasing a property or amortizing my mortgage
Creating my company
financing my move abroad
Guaranteeing a comfortable retirement
3B PERSONNAL GOALS
Financing the trip of my dreams
Financing my further education or the education of my children
Continuing to fund my savings account even if I leave Switzerland
Protecting my family with a loss of income or life insurance contract
The Federal Government recognizes the pillar 3”A” to be an integral part of the Swiss three-pillar pension system. This status means that it benefits from significant tax advantages throughout the country. To justify these advantages, the following criteria must be met:
– because the tax benefit is granted on income tax, a 3A plan can only be subscribed to by people who receive an income and declare that income to the Swiss tax authorities.
– the scheme must be subscribed to until the official retirement age (64 for women and 65 for men). It can be withdrawn up to 5 years earlier on request.
– if the scheme includes a life insurance contract, the spouse and children must be the beneficiaries of the contract, followed by the parents of the policyholder.
– to limit the tax advantage and not favor the wealthy, the annual investment is capped at CHF 6’883.-. This amount increases every two years to compensate inflation.
Savings invested in a Pillar 3A plan can only be withdrawn or used at their cash surrender value for the following reasons:
– to finance a pillar two buy-back plan
– to transfer the capital to another third pillar contract
– for the purchase of a property or for a renovation which increases its value
– to amortize an existing mortgage
– to create a business
– permanent departure from Switzerland
– in the event of disability
The cash surrender value of the policy can also be pledged to secure the purchase of a property.
The benefits of the pillar 3B scheme are often unknown to the general public. Unlike the 3A scheme, the 3B offers a lot of flexibility. It also offers tax advantages in several situations. 3B plans can only be subscribed to through an insurance policy. Consult Charles for details.
– some cantons (including Geneva and Fribourg) offer a tax deduction for the duration of the contract. Check with your local tax authority.
– A 3B plan benefits from tax exemption at its term, unlike a 3A plan.
– If you have a lump sum to invest for at least 10 years, you can invest in a 3B lump sum scheme. If its term is beyond your 60th birthday, the capital gain will be exempt from tax. The higher the lump sum, the better the tax deal.
To benefit from these advantages, the only obligation is to declare the cash surrender value of your 3B scheme on your tax declaration every year.
A 3B scheme has virtually no constraints, it offers the following liberties:
– anyone can subscribe, including children and those that are not employed
– the amount is not limited, whether it be a lump sum or an annual contribution
– the length of the scheme is open, there is no imposed term date
– the life insurance beneficiary clause is open
– the funds can be withdrawn at any time and for any reason at their cash surrender value
4. THE ADVANTAGES OF SUBSCRIBING TO A THIRD PILLAR SAVINGS PLAN THROUGH AN INSURANCE COMPANY
- the plan can be combined with a life insurance policy
- for those that want to optimize returns, but want to avoid the equity market, an insurance savings plan can generate additional revenue by linking their plan to the insurance surplus of the issuing company
- the plan can also be linked to a large variety of investment funds
- the plan can be combined with a premium waiver in the event of earning incapacity
- the plan can be combined with a loss of income policy
- all insurance savings plans have a cash surrender value. This enables one to pledge the contract for a loan or a mortgage
- some plans offer flexibility to the policy holder if they need to increase or decrease the annuity
- some plans enable the holder to change a 3A policy into a 3B policy (or vise-versa) if their personal or professional tax situation changes
- plans worth over CHF 100k are better protected through an insurance company than through a bank
The third pillar is far more complex and important than many people realize. Choices and decisions should be made considering the first and second pillar benefits. How should risk be managed? How should taxes be optimized? Should a 3A and 3B scheme be combined? What are the advantages and disadvantages of subscribing to a third pillar scheme with a bank rather than with an insurance company? How is my money protected if the bank or insurance company goes bankrupt? To help you answer these questions and optimize your personal situation give Charles a call.