The truth about 3b pillar accounts
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In this blog, I talk a lot about the third pillar. The third pillar is a great part of the retirement system allowing you to invest money for your old age and benefit from tax benefits.
I have also talked about the 3a life insurance trap. But I have not yet discussed an obscure part of the retirement system: the so-called pillar 3b.
So, in this article, we discuss all there is to know about the 3b pillar and how you should mostly avoid it (in its advertised form).
Pillar 3b
Unlike the third pillar (3a), the 3b pillar is poorly defined and not well-understood. The reason is simple: pillar 3b is anything that does not belong to the other three pillars.
This means a savings account is part of the so-called pillar 3b. If you have a broker account, it is also part of the 3b pillar, and any other investments are part of the 3b.
So, when you have exhausted the limits of the first three pillars, your free investments are part of your pillar 3b. So, pillar 3b is not even linked to retirement!
Since it is a free investment, there are no limits or rules in the 3b pillar. You can invest as much or as little as you want and use the products you want.
The 3b pillar is as simple as that in theory. And again, in theory, there is nothing wrong with pillar 3b. And I wish we could finish this article there. But, unfortunately, we need to talk about 3b life insurance.
Life Insurance 3b
When people talk about the pillar 3b or 3b in short, they often talk about life insurance 3b. And, if you search for pillar 3b on the internet, you will find that insurance companies are the top results. This is unfortunate!
I have already talked about life insurance 3a and how bad they were. These products profit insurance companies only, not you. Your 3a money is always better with another product.
So, why do insurance companies advertise 3b life insurance? Simply because a yearly contribution limit limits the 3a life insurance. Currently, it is 7056 CHF (in 2024). So, insurance companies also offer 3b life insurance products to increase their reach.
Also, these products are frequently talked about because they are tax-deductible in some cases.
3b Tax Deductions
In most cases, you cannot deduct what you invest outside of the three pillars. But there is, unfortunately, an exception. I say, unfortunately, because this exception makes it more complicated and is generally not even worthwhile.
Only two cantons have tax deductions for the 3b: Fribourg and Geneva.
- In Fribourg, you can deduct 750 CHF for a single person and 1500 CHF for a married couple per year.
- In Geneva, a single person can deduct 2196 CHF (or 4434 if self-employed), and a married couple can deduct 3294 CHF (can vary if one or two are self-employed. On top of that, married couples can deduct 898 CHF per year per child (different deductions if self-employed).
In general, any tax deduction is interesting. And if you could deduce the money invested in a broker account, it would be a great tax deduction. However, this deduction is only possible for 3b life insurance.
If we take the example of Fribourg, the maximum deduction would be 1500 CHF. A marginal tax rate of 40% would give us 600 CHF savings per year. But this means locking money in a bad product. Your money is much better in any investment account than in 3b life insurance. Your money is even better in a bank account than in 3b life insurance.
And there is another thing that we should mention. Some financial advisors will tell you that there is another tax advantage with 3b life insurance. In some cases (hold for five years and withdraw after 60 years old), you will not get any taxes when you receive the life insurance payment.
But this is a dumb comparison. If you put this money in your broker account, you will not pay any taxes when you withdraw money since capital gains are not taxed in Switzerland. So, this is just a pointless marketing argument.
What is wrong with 3b life insurance?
Just like 3a life insurance, 3b life insurance comprises bad products. It is probably not impossible to make a good 3b life insurance product, but I have never encountered one.
The first thing that is wrong with these life insurance products is that they are sold to people who do not need life insurance. Financial advisors in Switzerland will try to sell life insurance for any reason. Having kids, a house, or a spouse is enough to justify life insurance. But the immense majority of people do not need life insurance.
Why are they sold so aggressively? Simply because financial advisors make large commissions on these products. This only is a good reason to be very careful with financial advisors.
Another thing is that these products are expensive. People put money into these products thinking that all their money will work for them. However, a significant part of what people pay into life insurance will pay the risk part of the life insurance and will not go to their savings. You can expect between 10% and 20% of the contributions will go to this part and be lost.
On top of that, the money is also not fee-free. This can highly vary, but you can expect anything from 0.50% to 2.00% fee on the invested part.
The advisors will often talk about the great returns of life insurance 3b. And they will make great projections with high returns and try to show how much money you can get. However, these are only projections. In practice, 3b life insurance (or 3a life insurance) returns are generally significantly lower than other investment products.
And when you consider the fees, the low returns, and the risk, part, life insurance products are abysmal investment products.
Conclusion
For me, the conclusion is clear: ignore the pillar 3b term and avoid 3b life insurance like poison. Most people discussing the 3b pillar are insurance companies and financial advisors. And these people very rarely have your best interest at heart.
These people have made it so that most people misuse the term 3b. Instead of meaning anything outside the three pillars, it has come to mean life insurance.
It is unfortunate that many people are sold 3b life insurance. This is the case for many expats coming to Switzerland that are recommended these bad products.
Two things are essential to mention, though. First, there is nothing wrong with investing your money outside of the 3a. I recommend people start investing early. Then, there is nothing wrong with life insurance itself. If you need life insurance (most people do not), you can take a life insurance policy. But avoid 3a and 3b life insurance. Instead, take a simple term life insurance.
What about you? What do you think about the 3b pillar?
Recommended reading
- More articles about Retire in Switzerland
- More articles about Retirement
- What is a 1e pension plan (pillar 1e)?
- Vested benefits accounts: All you need to know!
- Disaster File – A Simple Way to Prepare for Your Death
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Thank you for the clear, detailed summary and the fair warning against 3b life insurance. I fell into the 3b trap a few years ago and just cancelled my plan. I plan to put the money I managed to recover into a broker account, but I wanted to find out if there are any tax implications from withdrawing the money (Geneva-based). I have not been able to find clear information about that anywhere, so any insight will be appreciated.
Sorry to hear your fell into this trap but well done for getting out. There is no tax implications that I am aware, the withdrawal should be tax-free.
A financial advisor is trying to see me a 3b pillar. The two argument he has, are:
1. it is protected by the government in terms that government is controlling the companies that are providing 3b pillars and how securely they invest those assets
2. safety of the top of the market insurance companies
He also mentioned that 3b is only provided by insurance companies, not banks and other platforms.
What do u think about that?
Hi Polina
3b is indeed provided only by insurance companies. As for his arguments:
1) It is true, but all financial entities in Switzerland are regulated.
2) It is not wrong, but it not safer than any other financial entity.
And he forgot to mention:
1) He is going to get a big fat commission on selling your this policy
2) The returns are going to be much lower than if you were to invest that money
3) There are only two cantons with some tax benefits
4) The fees are much higher than any decent broker
Hi, thanks for this article, which confirmed what I suspected regarding a lot of the Pillar 3B products out there. How does one go about defining or establishing a 3B account? I’m looking to invest mainly in the market.
Hi Rebecca
It depends on what you mean by 3b in your case. If you mean a 3b life insurance and want to invest, then don’t! If you mean anything outside the third pillars (the general definition of 3b), then you can either use a Robo-advisor or a broker to invest yourself. The 4 Investing Levels: Control vs Fees
Very useful article, Baptist.
I’m being “advised” to invest in a Pillar 3b life insurance by an “independent financial” advisor and this article helped be more thoughtful in my decision making.
He presented me with a couple of options (AXA, SwissLife, etc) and while the management fee doesn’t seem to be significant (0.45% pa) the performance of the index the fund are tied to are roughly 5% and 10% for moderate and optimistic scenarios respectively.
By now it’s clear to me that besides locking myself for the next 20y, putting that money in a broker in a low cost ETF would yield me the same or even more. But there is one argument this “advisor” is pushing that I still do not have a elements to decide whether is sensible or just again, another scam.
He is saying that those Pillar 3b is the best (only?) way if I want to buy a property (pledging).
I might not have 100% understood it but the point is that he is pushing his Pillar 3b advise due to the fact that I wish to buy a property.
How do they relate? Even in the case of buying a property, all your advises remain the same?
Many thanks!
Hi bapt
Thanks for sharing the “advice” you receive.
The advice is basically bullshit. A 3b is not the best way to buy a property and you can pledge a 3a without issues. A 3b life insurance is basically making your entire financial situation worse. The only one that is going to profit from the 3b is the advisor because he will get a nice commission.
It is true that in some cases, banks will ask for a life insurance to increase the security of the loan. But in these cases, they will generally use a 3a life insurance and that is only in some corner cases where people are properly overleveraged already.