All you need to know about The Third Pillar to retire in Switzerland

Mr. The Poor Swiss | Updated: | Retirement, Financial Independence, Investing, Switzerland
The Third Pillar of Retirement in Switzerland

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We already talked about the first and second pillars. We now have to cover the most important of the three pillars: The Third Pillar.

The third pillar is the only one that is not mandatory. Everybody is free to choose to invest in the third pillar or not. It is simpler than the second pillar. But there are many more choices that you can make. You can optimize a lot of things for your third pillar.

I believe it is essential to optimize the investment of the third pillar as much as possible. Once you retire, your second pillar should still be larger than your third pillar. But there is not a lot of things you can do with your second pillar.

In this article, you will find all the details you need to invest in a third pillar. And also, what you can do to optimize your use of this third pillar.

Types of third pillars

The third pillar is your private pension. This time, there is no complicated name associated with it. It is known everywhere as the third pillar. There is just a slight twist. There are two different third pillars:

  • Pillar 3a (restricted pension): Locked and tax-advantaged.
  • Pillar 3b (unrestricted pension): Not locked but much fewer tax-advantages.

In this article, I will mainly talk about the first one, Pillar 3a. For information about the 3b, you can read the Section Pillar 3b. Otherwise, when I talk about the third pillar, I will be talking about Pillar 3a.

Pillar 3a

Even when we focus on Pillar 3a, there are still two ways to invest in a third pillar.

You can invest either in the form of a bank account or as insurance. We are going to cover both of them in detail in the next two sections.

In both cases, contributions to your third pillar are tax-advantaged. Each year, you can deduct up to 6883 CHF (as of 2021) from your salary. The exact amount removed from your taxes will depend on your income. You can generally save 2000 CHF per year in taxes by contributing the maximum to your third pillar.

The amount of the deduction can vary each year. If you want to keep informed about the maximum contribution, you should consult the official Swiss third pillar website.

Remember that you have to deposit the money by the last day of the year to get a tax reduction. I would recommend investing early in your third pillar.

Since there are no tax benefits of doing so, you should never put more than 6883 CHF per year into your third pillar. It is not interesting to lock money without advantages. Most third pillars will actually prevent you from doing so. There are better alternatives if you do not have tax-advantages. You will receive a certificate with your contributions at the end of each year. You can use this to fill your taxes.

Unfortunately, not everybody can open a third pillar account. Indeed, you need to have a salary and pay for the first and second pillars. If you do not satisfy both requirements, you cannot open a third pillar account. This means that if you only have one income in your couple, you will only have one third pillar account.

How much you will get in retirement will depend on whether you have a third pillar in a bank or with an insurance company.

1. The third pillar in a bank

The simplest third pillar is a bank account.

It is a regular bank account, except that it is locked. You cannot withdraw anything until you retired. You can directly deposit money into this locked account. Pretty much every bank has one or several third pillar accounts. The only thing that is different between these accounts is the (small) interest. It is generally higher than the interest on your savings account. But today, it is ridiculously low.

More interestingly, you can also deposit this money in Third Pillar funds. For instance, my previous bank (PostFinance) has three different retirement funds. One with 25% stocks, one with 45% stocks, and one with 75% stocks.

Since you are investing this money in the long-term, it is better to invest it in stocks rather than let it grow very slowly with current interest rates.

Normally, you will withdraw the money at retirement age. But, you can also withdraw the money at most five years before retirement age. And if you continue working, you can also withdraw at most five years after retirement age. You cannot do a partial withdraw. You have to withdraw the entire amount.

How to choose a third pillar account?

Which third pillar account should I choose?

You should pay attention to the following points when you search for a third pillar account:

  • Interests. If you are not using a retirement fund, you should worry about the account’s interest rate. Be aware that currently, it is pretty bad. The best interest rate I have found is 0.75%. But most banks offer much lower interest on the third pillar.
  • Choice of funds. If you plan to invest in a fund, you should check the funds proposed by the bank. Some banks have a large panel, while some others have a poor choice.
  • Allocation to stocks. You do not have a lot of choice in what the retirement fund will be investing in. But you can decide how much investment in stock you want. You can be very high based on the provider you choose. The highest investment in stocks is 99% (with Finpension 3a). Be careful with your asset allocation before you choose your fund.
  • Total Expense Ratio (TER). When you are comparing third pillar funds, you should pay attention to the TER of the fund. This is the total amount of fees that you are going to pay for your money. The TER is removed from your money each year. The fees are generally high on these funds. The lowest fee I know of is 0.44% (with Finpension 3a). Even the lowest fee is still high, in my opinion.
  • Diversification. Another critical point is to see how the stocks (and bonds) are invested in the fund. Many of the retirement funds are only investing in Swiss stocks and Swiss bonds. But some of them are more diversified. For instance, Finpension 3a offers one fund with 60% world stocks.

You should do your research well and think about what you want from your third pillar. And do not worry if you already have a third pillar account. You can have as many as you want.

Best Third Pillar!
Finpension 3a

Finpension 3a is the best third pillar in Switzerland.

Use the FEYKV5 code to get a chance to win 6883 CHF in your third pillar*!

*(if you deposit 1000 CHF in the first 12 months)

Unfortunately, there are many bad third pillars in Switzerland. So, it is important to choose the best third pillar account for your needs. Currently, for most people, the best third pillar is Finpension 3a.

2. The third pillar with an insurance

The other option is to have a third pillar in the form of life insurance.

You will pay a certain amount each month that will go into your insurance. Once you reach retirement age, you get a certain amount of money plus some interests. The amount of money that you will get at the end is guaranteed. But, the interests you will get are not guaranteed. And the interests are not great.

If you are unable to pay any more (if you are disabled, for instance), it is still guaranteed. This is only the case for some stated reasons in your contract. You cannot stop paying simply because you want to. If you die before the terms of the contract, your spouse will get the guaranteed amount.

If you break the contract or stop paying, you will lose a lot of the money you invested. The amount your life insurance is worth will increase faster and faster over time. In the first two years, it will not even be worth anything. If you think you may break the contract or stop paying, never contracts life insurance!

A lot of people will tell you not to use this kind of insurance. And a lot of insurance people will tell you that everyone should have one.

Should I take Life Insurance Third Pillar?

Again, it depends on your situation. There are advantages and disadvantages.

First, you will not get back the entire amount you paid, contrary to a third pillar bank account. However, this amount is guaranteed. If your third pillar in a bank has done poorly because of a bear market, you can end up losing money.

With third pillar insurance, you will get at least the guaranteed amount. The interests will vary, of course. And generally, they are quite optimistic about the interests they are predicting. You should only care about the guaranteed amount. All the rest is a bonus.

Most importantly, it is life insurance. If you are not in a couple and do not plan to be, you probably will not need life insurance. It may still be useful for the case when you are incapacitated, but much less interesting. If you are in a couple and your spouse does not work, you do not have much savings.

It is a great way to ensure the quality of life of your partner. If you are both working with good salaries and you have good savings, you do not need such life insurance. A problem with life insurance is that you do not choose how much you put each month. The amount is fixed once on the contract. It is yet another bill to pay every month.

Personally, I do have a life insurance third pillar. I did it because in case I am incapacitated, it will still fill up. Also, my wife does not have a  salary at the moment, and if I die, it will be much easier with the life insurance money. However, I did not do much research for this, so it may not be so great. I would not do it again.

How to choose third pillar insurance?

Again, I do not know which life insurance is the best one. Here are some things you should pay attention to when you research life insurance:

  • The amount per month: You should pay an amount per month that you are comfortable with. You will pay for this for many years. This will set the guaranteed amount in the end. I would not recommend more than 300 CHF. You should keep some to invest in a third pillar bank account.
  • The guaranteed amount in the end: The most important number is how much you will get in the end. The insurance guy will try to make you look at projections. I would advise you to care mostly about the guaranteed amount. Nobody can predict returns over 30 years or more. You should consider the interests as a bonus.
  • The investment of your funds: Each insurance will invest your money differently. They will probably propose you different asset allocation or investing strategies. You should pick the one you are the most comfortable with.

You should do your research well. Do not make any rash decisions.

Third pillar and inheritance

In the case of death, the rules are slightly different, based on which third pillar you have.

For the third pillar in a bank, the shares will be divided according to inheritance law. Generally, this will be divided between your spouse, your children, other dependent persons. If you do not have children or a spouse, this could be divided among your brothers, sisters, and parents.

If you want to change this, you can also write a will. Just be aware that there are strong limits in Switzerland regarding what you can and cannot do with inheritance. For instance, you cannot disinherit your children or your spouse.

For the third pillar insurance, inheritance is based on the policyholder. Generally, you need to indicate on your policy who is going to be the beneficiary. For most people, it will be your spouse.

Once again, inheritance law can play a role here. For instance, under some conditions, your heirs can claim some of this money even if they are not mentioned in the policy.

Optimize your third pillar

There are a few things you can do to use the third pillar in the most optimized way.

First, always try to contribute the maximum each year into your third pillar. If you can! Do not get into a bad financial situation just to max out your third pillar. But the best advantage of the third pillar is in the tax advantages. So, maximizing it is interesting.

If you have it in a bank account, consider using a retirement fund. You should consider a fund with an asset allocation that you are comfortable with. You should consider how many years you will invest and how much risk you want to take.

Now, a slight twist. When you withdraw your third pillar, you will pay taxes on the amount. This amount is taxed at several levels, and it depends on which state you are in. For instance, in Geneva, for up to 25’000 CHF, you will pay 250 CHF in taxes (0 CHF for a married couple). For up to 50’000 CHF, you will pay 1’500 CHF (500 CHF for a married couple).

If we take the state I am living in (Fribourg), it is different. There is a 2% tax on the first 40’000 CHF. Then a 3% tax for the next 40’000 CHF and the tax keeps increasing until it reaches a 6% tax. You may have already seen the problem here. The more money you have, taxes get more expensive, and the more money you will pay. And it is quickly getting worse if you withdraw even more.

You can withdraw your third pillar money up to five years before and five after the official retirement age (if you still work). Thus, you can work around these taxes by having several third pillar accounts and only withdrawing one each year.

For Geneva, you should try to have less than 25’000 CHF on each account before the withdrawal. Below 50’000 CHF, the taxes are still fair. So you may keep your accounts below 50’000 as well. But you should not go higher. For Fribourg, you should stay below 40’000 CHF. You have to check the exact taxes for your current state.

Now, there are two tricky things with this. First, there is no way to know how much will be on your third pillar account if you have a retirement fund. The returns will depend on the market. If you think your investment will double before retirement, you should stop contributing at 12’500 CHF. The difference between a 24999 and 25001 will result in 1500 CHF of taxes! This is absolutely insane, in my opinion.

Now comes the second tricky issue. Some states in Switzerland are considering this as tax evasion! For instance, the state of Vaud allows you to have two different accounts. The state of Neuchâtel forbids you to do this. My state (Fribourg) does not currently prevent this. But this may change.

So, you should be careful with this technique. You should check with your state before you try to do this.

Just to be clear, it is never a problem to have several third pillars. The problem arises when you optimize the withdrawals over several years. Thus, I advise you to create several smaller third pillar accounts. But only spread out the withdrawals over several years if your state allows it!

Withdraw before retirement

You can withdraw money from your third pillar before retirement (early withdrawal).

The rules are the same as for early withdrawal for the second pillar. You can withdraw to buy a house, start your own company or leave Switzerland.

There is another case when you can withdraw money from the third pillar. In fact, you can withdraw money from the third pillar to contribute to your second pillar. I am not sure there is a lot of value in doing that. You will not be able to deduct this contribution to the second pillar from your taxes, so that you will not be able to deduct it twice. And generally, the conditions of the third pillar are better than the second pillar. If you use a third pillar invested in stocks, it is better than a second pillar.

Accounting for the Third Pillar

Accounting of the third pillar in your net worth is fairly easy. For a third pillar bank account, you can simply account for it like all your other accounts. It is money you owned. It is just locked until retirement age.

For a life insurance third pillar, it is a bit more complicated. Your insurance should give you a guaranteed amount year by year. Using this, you can extrapolate the monthly values to see how much you currently have. You can have a look at how I accounted for my life insurance in my net worth.

Pillar 3b

The pillar 3b is a bit more obscure and is less known. There are many significant differences between the Pillar 3b and the 3a.

First, you do not have the choice between a bank account and insurance. A pillar 3b is always life insurance. There is no way around it. But, it is much more flexible than a life insurance 3a. You can choose any term. Most insurances have a minimum term of 5 or 10 years. Another interesting thing is that you can do insurance for a couple. This is generally cheaper than two individual insurances.

Some people will tell you that there is no tax-advantage, but that is not true. A pillar 3b has some tax-advantages. First, the capital you will get at the term will not be taxed. That means that the interests accumulated over the years are not taxed. But these interests may not amount to much, unfortunately.

Then, some states have some more advantages. For instance, my state (Fribourg) allows a married couple to deduct up to 1500 CHF each year. Geneva is even better. You can deduct up to 2200 CHF per year. And based on your number of children, you may even be able to deduct more. You should consult your local state to see if you can have advantages.

To choose a life insurance 3b, you can follow the same criterion than for a 3a life insurance. The other thing that you have to choose is the term of the insurance.

FAQ

What is the third pillar in Switzerland?

The third pillar is a private pension system in Switzerland. Every people with a salary in Switzerland can contribute a maximum amount each year. This account is tax-advantaged.

How much will I receive from the third pillar?

How much you will receive is entirely depending on how much you contributed. It will also depend on the returns on your investment you got.

How can I optimize my third pillar?

The first thing you need to do is to contribute the maximum each year. Then, you need to find a third pillar provider with the lowest fees. Finally, you need a third pillar account with a large allocation to stocks  (up to your asset allocation). Stocks will increase the returns of your third pillar.

Conclusion

The third pillar is the last part of the retirement system of Switzerland.

It will help you cover what is missing from the first and second pillars. Contrary to the previous two pillars, it is an optional part of the system. It is entirely up to you to invest in it. Since it is tax-advantaged, you should invest in the third pillar.

At retirement age, you will get the capital back and pay some taxes on it. But the amount of taxes will be greatly reduced compared to not investing!

If you have not yet read about the first pillar or the second pillar, I encourage you to do so now. In the next and final article, I  summarize Switzerland’s retirement system. I also talk about early retirement in this context.

What do you think about the third pillar? What is your preferred account? Do you have tips to optimize it? Do you have any questions regarding this pillar?

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

45 thoughts on “All you need to know about The Third Pillar to retire in Switzerland”

  1. would you reccomend 3b pillar for an educational plan for childrens? Any good solution with lower fees that you know?

    1. I do not know any 3b solution. I would not really recommend any 3b plan. In most cases, you are better off with proper life insurance if you need it. And if you do not need life insurance, there is no point in having a 3b in my opinion. The tax advantages are not worth the premium of the life insurance.

  2. Hi,
    I was wondering why no one ever mentions the deadline for 3rd Pillar. I just learned about this now. And of course have missed the Dec 31, 2020 deadline. Are there anyways to get around this? An exception to put money back in? I had no clue this pillar existed and have money sitting in a savings account doing nothing and would love to have my taxes decreased. I’m only 16 days past the deadline so if you know of any exception I would really appreciate it. Thanks
    Janice

    1. Hi Janice,

      The deadline is actually the same as for all the other things in the tax declaration. Anything happening during a fiscal must be declared the next year.
      Unfortunately, I am not aware of any possible exceptions. Just make sure you contribute this year.

      Thanks for stopping by!

  3. Thanks for the great article, I should have stopped by your blog much earlier. It is much easier to understand than the other bank websites which are trying to just get the people sign off their products.

    Anyway, I still couldn’t find the answer. My wife and I both work 100%. When I look at the way they calculate the tax reduction the incomes from both get involved. When we talk about we can save up to 2000CHF both will save 2000CHF (2000+2000=4000) or 2000CH per family. I am really curious. Thanks in advance for the answer ;)

    1. Hi,

      Thanks for the kind words :)

      Married couples do a single tax declaration. It means that both of your incomes are added together in the declaration to calculate your taxes. In the case of the third pillars, if you are both working, you can both contribute up to the maximum (currently 6826) per year and deduct that from the total income. So, a married couple can do a double deduction, which should in theory be twice more than if you filed separately. But of course, it is a bit more complicated to that in practice. But, shortly, a married couple should use two third pillar, each with the maximum.

      Thanks for stopping by!

      1. Hi Mr. The Poor Swiss,

        Thank you very much for your reply. It is really appreciate.

        If we consider 3rd Pillar in the investment term. The benefits I can see here below.

        – 25% (Let’s assume 1700/6826=25%). No compound so let assume we invest in a dividend stocks or bonds stock with 25% return.
        – 8% capital gain possibility in case of allocating in stock strategy mainly.
        – Pledging for home owning.

        Of course if you are really keen in investing, 6826*2 (For family) probably could do more if you invest in growth stocks. Still, guarantee 25% yield is a good investment.

        I am consider among this 3 options. Things to consider are return and fee. Frankly is interesting to me since the fee is all inclusive, not sure how return it will be. Don’t want to bother you with this question since you have other posts talking about them I will go through them for sure :)

        – VIAC
        – Frankly
        – Finpension

        Thanks and all the best!

        1. Hi Sikarin,

          This is a good way to summarize. Actually, it’s difficult to do better with stocks. Indeed, the 25% you save on the taxes, you can invest in the stock market. This makes a nice difference.
          I have a post about whether you should to your third pillar.

          I would not recommend Frankly for the high amount that is hedged, unless that is something you want. If you want to go 100% in stocks, Finpension will be cheaper than VIAC.

          Thanks for stopping by!

  4. Hello The Poor Swiss,

    Thank you for all this info. We just moved to Switzerland and this has been very helpful!

    We have opted for Pillar 3a option (banking) and will be investing the maximum annual amount.

    We are on a B-permit and thus our income tax is deducted at source.

    Does this mean we will get a tax refund for the taxes paid on CHF 6826 (annually)? Or does this tax advantage only work if we pay income taxes in the standard way (like Swiss people do).

    Thank you for your help!

    1. Hi V,

      Very good decision!

      You should get a refund based on your tax rate. But, you will have to ask for it since you are taxed at source. I am not an expert since I have never paid taxes at source, but my understanding is that you can ask the local tax office (of the state you are working in) for a simplified tax declaration. This simplified declaration will let you declare how much you have paid in the previous year. So, you should do that in early 2021 and you should get a tax return based on that normally.

      Thanks for stopping by!

  5. Hi there,
    I am uncertain about the “exit” strategy of the 3a accounts.. Lets say you have multiple (maybe 3-5) 3a accounts of similar value as you get closer to retirement age. They are all invested in Stocks because its a long term investment. But if there is e.g. another pandemic when you start to withdraw you will have a problem (my Viac Global 100 Portfolio is currently down 8%, and it was as bad -25% in march). If you have to close one portfolio each year (you still want to minimize income tax, and you only have a couple of years to withdraw your 3a), you will risk having to sell at a loss.
    Could it make sense to convert at least one of the portfolios to a less volatile strategy beforehand so you could withdraw that in a bad year? This would be market timing which is generally discouraged, but going with stocks until the bitter end seems quite risky.. Of course you could also accept the loss and withdraw, profiting from lower income tax, and reinvest immediately once you receive the money.
    Oh well I have another ~35 years to ponder about this, but I can’t get this question out of my head and I would be interested in what you and other people on this forum think about this.

    Cheers

    1. Hi EarnestPear,

      That’s a good question! I also have more than 30 years before I can touch my third pillar, so this is not urgent.

      For the third pillar, since we will be forced to sell at some point, it is indeed risky to go full stocks all the way to the end. I believe it could make sense to reduce the allocation of stocks in one of the portfolios in the years before retirement.
      Now, I can see several strategies:
      * Risky: Go with stocks till the end and sell one per year
      * Medium: The first year, sell one and reduce the amount of stocks in one other, rinse and repeat
      * Less risky: 5 Years before, start reducing the allocation of stocks in the portfolio: the first year, you reduce one to 80%, the second year you reduce one to 60% and one to 80%, and so on.

      But it’s impossible to tell which is optimal. But I agree that it could be good to do something like this. The problem is being forced to sell.

      Thanks for Stopping by!

  6. Hello Mister, congrats for having such a great blog! Best one I’ve ever seen so far!
    I have a silly doubt regarding the third pillar yearly contribution’s cap of 6,826 francs. I’m relocating to Switzerland now on August 1st and I’m not sure whether (1) I should contribute during the 5 remaining months (Aug-Dec) of 2020 to reach the cap and get the best benefit out of it in terms of tax deduction, and also if (2) it would be worthwhile to do so. My goal here is to get that amount of around 2k francs on tax return through investing up to the limit in the third pillar.
    Thanks in advance for sharing your thoughts on this one.
    Regards, Pietro

    1. Hi Pietro,

      It’s really difficult to say how much it will profit you. If you are going to pay very low taxes for your first months, you will not have a great advantage with the third pillar.
      If you will have a very large income, it will be worth it, but otherwise, for 5 months, there won’t be a huge advantage.
      But again, without the numbers, it’s going to be difficult to estimate.

      Thanks for stopping by!

  7. Making some fast calculations in mind, it seems that if the target is maxing out the investment in stock, the 3a pillar is worth only up to a certain threshold, other than that you should stop depositing in your 3rd pillar account and start instead investing on your own.

    I have around 35 years of contributions ahead, it could be worthy to put 15k on a wallet or two (which is around 10/15 years of contributions) and then stop with the 3a pillar at all.

    In this way, you should maximize the tax reduction, while minimizing that nasty capital gain in disguise tax. Other than that time, the withdraw tax would probably (have to make some accounting) be higher than the saved amount upfront.

    What do you think?

    1. Hi Allessandro,

      Indeed, there is a low limit to the third pillar. You should only put 6826 CHF each year on this account. The limit can change each year and is per person with a salary.

      But I am not sure I understand your logic about stopping. For me, you should continue investing in your third pillar as long as you can. The tax reduction will always be there.

      Can you extend on how you find out the threshold you are talking about?

      Thanks!

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