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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).
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. In 2023, it was 7056 CHF per year. So, insurance companies also offer 3b life insurance products to increase their reach.
Also, these products are often 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.
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.
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?
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