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. 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.
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.
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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Dear Baptisite,
Thank for your analysis. I have always kept investments and insurance products separately for the reasons you have mentioned above.
However, for Pillar 3b, do you think at a certain level the math would start to make sense in favor of 3b. For instance, in Geneva max (tax deductible) contribution for a married couple with one child is around is CHF 4261. So, this could entail around CHF 1600 tax benefit. With this kind of tax benefit upfront, do you think that would out weigh the cost implications of getting an insurance product?
Hi SK
I don’t think it would be interesting no. You would have to send 4261 to a bad investment product. In the long term, I feel like it would not turn up really well against simply investing that money in a well diversified ETF.
Some part (up to 20%) is wasted entirely on the risk premium, so this would already take away a large of the “tax savings”.
First of all, many thanks for all the info you share! I learn a lot from it.
Unfortunately I got one of these and I trying to see how I can get out without losing a lot of money :(
There is however one thing that I think you don’t mention..I read that in these products the dividends that get reinvested are not taxed? Whereas if I invest myself through a broker, even if it’s automatically reinvested, I have read in one of your posts that they are taxed anyway?
Do you consider this in your analysis? Still with that benefit, there is not a 3b pillar product that could be good?
Thanks!
Hi helio
Are you talking about a 3b life insurance or a 3a life insurance?
These are different. A 3a life insurance is indeed exempt from wealth tax, but not a 3b life insurance. And dividends are indeed income-tax-free.
The tax advantages for 3b life insurance are very small even in the few cantons that have any advantages for them. For me, the disadvantages far outweigh the tiny advantage. I have yet to see any good product, but it could exist.
Hi Baptiste,
Yes, I am talking about 3b pillars. I understand then that dividends of these ones are not tax free? I confused because I received the letter for the taxes of the 3b pillar and they mention the current value of the investment but they don’t mention the (few) dividends that were reinvested.
In any case, I agree with you that they don’t like this product, I want to get out of it.
Thanks again for all this valuable info!
The dividends are tax free because you don’t receive them, the fund does. But you will pay a wealth tax, so they are still somehow taxed, although at a much lower tax rate than income tax rate. But, yes dividends in a 3b pillar are better than dividends in your broker account.
Hey Baptiste,
generally speaking, 3b looks like a bad idea, but there might be this one case that could be interesting:
I’m reading on various sites that “3b Retirement pensions taxed at 40 percent” (e.g. https://everon.swiss/en/pillar-3b-insider-tips/)
So let’s say you have an amount that you want to consume as an annuity. If you make it a 3b product, the payouts are taxed (supposedly) at 40% vs e.g. you had in invested in ETFs who’s dividend is taxes as income.
On the other, I’m thinking you can emulate this with some non distributing ETF that may appreciate over time and from which you gradually sell the “pension amount you want”, until it runs out.
Thoughts?
PS
I’m really enjoying your articles!
Hi Dimitris
I had never heard about that rule before. However, it’s not much of advantage. For most people except for high income earners, they will pay less than 40% taxes, so they have no interest in having that compared to being taxed as income.
These investments are genearlly so bad that even being tax at 40% compared to 45 or 50% (marginal tax rate for very high income earners) is not an advantage in my head.
The dividends from stocks or bonds should give a better alternative.
40% in this case is not the rate, AFAIU. It’s taxing 40% of that annuity income with whatever is your tax rate. So let’s say you get 100 Fr monthly annuity, 40% of that is 40 Fr., at at tax rate of e.g. 30%, that’s 12 Fr tax (or 12% effective rate).
Interesting, I did not understand it that way. That would make it cheap income as 0.40 tax rate, interesting. Even with that, I don’t think it makes sense, but I have not done the math in this case.
After many researches, I finally found an adequate 3b pillar: the “Rentes genevoises” product (https://rentesgenevoises.ch/produits/taux-variable). It is only available for the people borne in Geneva or residing in Geneva (which is fortunate since only Geneva allows to deduct 3b).
This is a “life insurance” policy per se, but the only amount they would pay in case of death is the accumulated capital (so there is no premium). You only pay fees for the 1st year (about CHF 1’000) and can deduct the max amount from your taxes (CHF 2’232), giving about CHF 600 in taxes reductions, thus getting back the fees paid in less than 2 years.
Since September 2023 you can choose to invest your premiums (40% at 0.65% and 60% invested). Their historical portfolio performance is about 8% per year.
It does look better than what I usually see. One thing you should check out is the fee for the management of the funds. You may get back the fees in a few years, but you should also consider the opportunity (would you invest this money otherwise?) and the possibly hidden fees.
Good article. As mentioned here already: if you want life insurance, get life insurance. Do not get life insurance tied up with investments, usually with high TER. And yeah paramount is asking if you even need it (e.g. family with kids, riskiness of your job).
I have a “Todesfall- and Erwerbsfähigkeitsversicherung” with Mobiliar. Costs me about 900.- a year. It’s ok but probably could live without. Like most insurance stuff, it all feels like a scam.
As you said yourself, it’s important to ask if you need it! So, do you need your life insurance :) If it feels like a scam, it probably is a scam!
Hi there, this is my first ever question/comment after reading and following for so long.
What do you think of the 3B pillar which can be used as a mortgage deposit and substitute the need for Eigenmittel?
Hi ysabelle,
As long as the 3b is linked to a life insurance, I believe it’s a bad product.
Hi Ysabelle,
it’s not worth! Bank will take your police and usually they give a percental value like 70%. This mean that if your ACTUAL police value is 20000, they will consider an anticipation value of 14000.
So where is the advantage instead of using your cash?
The is absolutely not an advantage.
Helvetia has 3b / life insurance (“performance plan” or something similar) that can be invested in Pictet LPP funds (with possible allocation in stocks). As you said, for GE it’s possible to deduct from taxes… but at the end of the day, as someone told, it depends if you really need a life insurance I guess.
Or, if the gain with the deductions, is still worth compared to just adding more money to the classical ETF.
I guess the TER of these funds might be pretty high…
Hi Lorenzo,
Even if you need a life insurance, you would very likely be better off with a single life insurance, not tied to a 3a/3b.
And as you said, I would not be confident that picted, a private bank, provides cheap funds.
In case you need to repay your mortgage annually above the max permitted 3a in the household, then it could make sense to open a 3b. Can help you detax your annual contributions if you live in the cantons which allow it.
Hi MP,
I am not sure this makes sense. I would directly amortize instead of putting money to a 3b.
I believe MP is right, from a tax optimisation point of view. You could detax your 3b and acumullate your amortization, while deducting also a maximum of interest rate. When you reach the maturity of the credit you can amortize fully using the 3b. ( my understanding is this is allowed)
From a tax optimization point of view, it makes sense indeed. However, does it really make sense to put money in a bad product to save on taxes? You are losing money on one side to win money on the other side. This would have to be very carefully weighted.
I do have a 3b life insurance and I do think it’s giving me some decent returns, but only because my employer (insurance company) is contributing significantly to the yearly premium.
Yes, I did check the surrender values and they’re not great. But only taking into account the amount I pay on premiums, it’s reasonable.
So I think your article hits the nail on the head…
Hi Max,
Indeed, if you don’t have to pay the full premium, it may be imore interesting.
But that’s probably the only exception :)
Great article as always. I got stuck in one of these for 2 years. When I saw the poor returns I got out, losing a significant amount of my capital. It never looked back, since I follow the poor Swiss way of investing now!
Same here. After meeting a financial advisor from the Swiss insurance, he sold us 6 financial products as life insurance mixed investments in pillar 3a and 3b.
Slowly my husband and I got out of them, but I quit the last one only 3.5 years later :( losing a lot of money.
Those products should be banned in Switzerland!
Thanks for sharing, Yasi! That’s impressive and very sad! These products are often targeting expats because they do not know the details of the system, so it is easy to sell them things and the financial advisors are often recommeded by companies :(
This is a major issue.
Thanks for sharing Huybster!
Well done for getting out. It’s not great losing the money, but on the long-term, it’s the correct solution!