Private pension provision: pillar 3a and 3b

The Swiss pension system rests on three pillars. The first (AVS/AI, the state old-age and disability insurance) guarantees the subsistence minimum, the second (LPP, the occupational pension fund) covers the accustomed standard of living, but together they rarely suffice to keep income unchanged after retirement. The third pillar, private pension provision, bridges this gap and is the only one over which you have full freedom of action. It comes in two very different forms: pillar 3a, restricted and tax-privileged, and pillar 3b, unrestricted. Understanding the difference is the first step to using them well.

Pillar 3a: restricted pension provision

The 3a is tied pension provision (gebundene Vorsorge). It is designed for those earning income from gainful activity subject to AVS and offers an immediate tax advantage: contributions are deductible from taxable income up to an annual maximum set by law.

The two contribution ceilings are differentiated:

• a maximum amount for employees affiliated to a pension fund (second pillar);
• a higher amount, equal to a percentage of net income up to a cap, for the self-employed without a second pillar.

The exact amounts are updated periodically by the federal authorities: before contributing it is worth checking the ceiling in force for the year. The capital accumulated in the 3a is not subject to wealth tax during the saving phase, and returns are not taxed as income as long as they remain in the account.

The restriction and early withdrawals

In exchange for the tax advantage, the capital is tied up: as a rule it can only be withdrawn close to retirement age (within a few years of it). The law does, however, provide for cases of early withdrawal:

• purchase of an owner-occupied home (residential property);
• starting self-employment or changing its type;
• definitive departure abroad;
• full buy-in into the second pillar;
• receipt of a full disability pension.

At the time of withdrawal the capital is taxed separately from other income, at a reduced rate. To ease the progression it is often worth opening several 3a accounts and staggering their withdrawal over different years.

Pillar 3b: unrestricted pension provision

The 3b is unrestricted pension provision: it comprises all forms of saving and insurance that are not tied, with no contribution ceilings and no withdrawal restriction. The trade-off is that, at federal level, it does not enjoy the deduction reserved for the 3a (some cantons allow limited deductions for insurance premiums).

Its strength is flexibility: you can access the capital whenever you wish and put it towards goals other than retirement. The 3b includes, among other things:

• unrestricted saving and investments (accounts, securities, funds);
• life insurance, whether endowment or risk policies;
• policies combining pension provision with cover in the event of death or disability.

The 3b capital is generally subject to wealth tax and its income may be taxable under the ordinary rules, depending on the instrument. It is the right tool for those who have already maxed out the 3a or are looking for tailored solutions, including for estate-planning purposes.

3a or 3b: how to choose

It is not an either/or, it is a logical sequence:

1. first the 3a, up to the maximum deductible: the immediate tax saving is a certain return that no unrestricted investment guarantees;
2. then the 3b, for the portion of saving that exceeds the 3a ceiling or for goals requiring liquidity and flexibility.

The self-employed without a pension fund have a much larger 3a allowance and should exploit it before looking to the 3b.

The third pillar in overall planning

The 3a is not just a savings product: it is an annual tax-optimisation lever and a tool for financing one’s own home. The 3b, for its part, lends itself to estate-planning designs, since it allows beneficiaries to be designated and capital to be passed on according to one’s own logic. Both should be placed within the overall picture of one’s assets, together with the second pillar, real estate and investments.

How we work at SIH ONE

We analyse your pension and tax situation, calculate your 3a deduction allowance, assess the staggering of withdrawals and integrate the third pillar into asset and estate planning, without selling products but with an advisory approach.

Do you want to build an efficient third pillar and reduce your tax burden every year? Discover the services of our private division and set your pension provision on solid foundations.