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

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The Third Pillar of Retirement in Switzerland

In our Three Pillars of Retirement of Switzerland series, we already talked about the first and second pillar. 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 than 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 reach retirement, 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 post, 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 last 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 post, 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 the Pillar 3a.

Pillar 3a

If we focus on the 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.

It is essential to know that 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.

In both cases, contributions to your third pillar are tax-advantaged. Each year, you can deduct up to 6826 CHF (as of 2019) from your salary. The exact amount removed from your taxes will depend on your income. Generally, you can easily save 2000 CHF per year in taxes by contributing the maximum to your third pillar.

For 2020, the amount will remain the same. If you want to keep informed about the maximum contribution, you should consult the official Swiss third pillar website.

Contrary to popular belief, you can put more money into your account than the yearly maximum. But this is not tax-advantaged and thus not useful. Some banks will actually prevent you from doing that. So, never put more than 6826 CHF per year into your third pillar. You will receive a certificate with your contributions at the end of each year. You can use this to fill your taxes.

What 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 reached retirement. 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.

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.

And the best third pillar provider in Switzerland, VIAC, lets you invest 99% in stocks. This is the best option for investing in stocks for your third pillar. This is also the cheapest of the third pillar providers.

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 fund, you should worry about the interest rate of the account. Be aware that currently, it is pretty bad. The best interest rate I have found is 0.75% (with Bancastato)
  • 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 100% (with VIAC), currently invested at 97%. Be careful in 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 returns each year. The fees are generally high on these funds. The lowest fee I know of is 0.5% (with VIAC). 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. Almost all the retirement funds are only investing in Swiss stacks and Swiss bonds. But some of them are more diversified. For instance, VIAC offers one fund with 60% world and 40% Switzerland.

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.

In the past, before I did the comprehensive research on third pillar accounts, I had a PostFinance third pillar account. It was invested in a pension fund, PostFinance Pension 75, with 75% allocated in stocks. It is a good option since the allocation to stock is higher than the average in Switzerland. But the TER was too high, and the international allocation was too low.

So, I made a full comparison of the options for third pillar accounts. After this, I found out that VIAC is the best third pillar available in Switzerland. It has very low fees, and you can invest almost 100% in stocks which is great for the long-term. If you are interested, you can find out how to open a VIAC account in a few minutes.

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 handicapped, 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! Never stops a life insurance contract!

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, it is true that 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, and 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.

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 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 interest rates 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 your research well. Do not take 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 to your spouse, your children, other dependent persons. If you do not have children or spouse, this could be dividend among your brothers and 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 as to what you can and cannot do with inheritance. For instance, you cannot disinherit your children or your spouse.

For the third pillar insurance, it is based on the policyholder. Generally, you need to indicate on your policy, which 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.

If you have it in a bank account, you should 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 it 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, the more money you will get. 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 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. That is, 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 as 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.

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.

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 pillar. 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 post, 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

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.

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

  1. Yikes! That third pillar is incredibly oddly structured and taxed! Having to drain the entire account at once is not very friendly for a retiree and having to set up multiple small funds to avoid it is pretty complex. However we’ve got ridiculous regs in a lot of areas over here too. Very interesting set of posts, it is fun to see how other countries handle things. I would be retirees are in much better shape in your country both because of the three pillars and because, well, you guys are Swiss!

    1. HI steveark,

      Yeah, it’s a bid odd at first :)
      I completely that having to drain the entire account at once is a very bad idea. On the other hand, you are likely to be able to invest it better outside of a third pillar. Therefore, you’ll probably reinvest it, but that will incur fees as well. It would definitely be better to be able to take it out in small parts.

      Yeah, it’s great to see how the different countries handle thing.

      For now, we can’t really complain about the system indeed. We’ll see if it’s still working in 30 years ;)

      Thanks for stopping by!

  2. Hey,

    Thanks for your post.

    As I already mentioned earlier, I started a VIAC 3a account at the beginning of this year. I know they going to update their product this spring and allow up to 5 portfolios / accounts per person.

    I live in the state of Vaud and I was unable to find the official ressources which says they only allow up to 2 accounts (that’s what I also read somewhere but I only found one information on a french blog from bonasavoir, it’s an old article from 2011…). Couldn’t find these informations on vd.ch or anywhere “official”… Where am I supposed to check this ?

    Also about the taxation rate, in a case of 30-40 years ahead and mostly invested in stocks (let say 75% if via PostFinance and more via VIAC), I don’t think 50’000 CHF / account is a good example. I couldn’t neither find the informations on the % of taxation in the state of Vaud for these 3a withdraws… Let’s say with between 500k CHF – 2Mio CHF (total). How much taxes does it cost for that kind of amount ? And split between 1 withdraw (no optimisation), 2 withdraws (apparently max allowed in Vaud…), and 5 (max in certain german cantons apparently), how big is the difference ?

    Any informations ? Thanks for the help.a

    Cheers.

    1. Hi Cashfl0w,

      You are welcome :)

      Very interesting! I’ll definitely have to check VIAC next year.

      First, don’t forget that opening many accounts is not a problem for the state. The problem is when you spread the withdrawals over several years. So you can always open several accounts even if you are not sure you are going to spread the withdrawals.

      For my state, I found the information on the guide of the taxes (https://www.fr.ch/scc/files/pdf97/instructions_2017_fr.pdf). I just took a look at Vaud instructions and it seems they are more vague than Fribourg. Normally, taxes on the third pillar fall under “Prestations en capital imposées séparément”, but they don’t give details. Let’s take 500’000 CHF as a base example. For my state, here are the details: 2% for the first 40’000 CHF, 3% for the next 40’000, 4% for the next 50’000, 5% for the next 60’000 and 6% for the rest. If we do some math, that gives us 25’600 CHF of taxes with 1 withdraw (no optimization), 21200 CHF with 2 withdraws and 14000 CHF for 5 withdraws. The maximum case is 10 withdraws with only 11’000 CHF of taxes. This makes a very significant difference in my opinion.

      Now for your state, I found the information in the law directly (Impôt cantonal et communal / Loi du 4 juillet 2000 sur les impôts directs cantonaux (LI)). Please don’t cite me on this, I’m not a law expert neither a retirement expert, neither a tax expert ;) If you look at “Art. 49 Prestations en capital provenant de la prévoyance”, it states that your third pillar is taxed at a third of normal tax. Normal tax is shown in “Art. 47 Taux d’imposition”, it’s more complicated than my state. For the same example of 500’000 CHF. If we do the math again, it gives us 22’970 CHF for 1 withdrawal, 20107 CHF for 2, 15389 CHF for 5 and 11960 for 10. Again, it’s pretty significant. I encourage you to do the math yourself to make sure and triple-check all my numbers :)

      My source for the tax evasion was also the same as you, in French. If you want the details for your state for tax evasion, I advise you to call the tax service of Vaud (or email them), their contact information is on their site. It’s their job to give you all the information you need. If you get the information, please let me know, I’d very interested :)

      I hope that is helping :)

      1. Thanks for your help and your findings. I finally found these documents.

        What base numbers did you use to get to your numbers ? I tried to take your final numbers and calculate the base numbers by I arrived to weird stuffs (or I’m completely wrong somewhere…)

        I also tried to double check results via these two calculators from vd.ch and postfinance but I end up with huge numbers also (but both are close though), not sure what’s happening…

        For the vd calculator I tried to simulate with the third checkbox (“Je désire effectuer une simulation de l’impôt distinct sur les prestations en capital provenant de la prévoyance”)
        https://www.vd.ch/themes/etat-droit-finances/impots/impots-pour-les-individus/calculer-mes-impots/

        https://www.postfinance.ch/fr/particuliers/assistance/outils-calculateurs/impots-capital-deuxieme-pilier.html

        Both give me about 7-12% of taxes (100k = 7% and 500k = 12% normal ?) which seems huge I don’t get it. Seems they compute like it was taxed at the full rate and not at the third.

        1. Hi,

          You are most welcome :)

          I used 500’000 CHF as base example. I forgot to mention it :S

          For the calculators, I dont’ get the same numbers as mine either. But, they are including both the state and the county, so they are more than twice higher than my own calculations.

          I still agree that it is weird :s It does not seem correct.
          It seems they are applying the last percent to the entire sum, for instance for Fribourg, 6% of 500000, instead of 40000*2%+40000*3%+50000*4%+60000*5%+310000*6%

          To be sure, I would call them or contact them by email. Try to give them an example and work out the tax, for instance 100’000 and then we can be sure.

          I may have been misunderstood the law, but it does not seem that complicated.

  3. Hi Mr. The Poor Swiss!

    great site and great articles! Very much appriciated :)

    I now also looked closer into the 3a savings account but arrive at a differnt conclusion than you, as is – it is in most cases not beneficial to put your money into a 3a savings account(!!).

    You will likely think now that I am insane or made some calculation errors and that can of cource be true – but until now I think it I did not, here is why (extremly simplified).

    (The calculations will be different for anybody based on factors like residence, income, marital status, yearly contribution, etc… so I used some simplifications to proove the point)

    The basic outcome is that a 3a savings account is only beneficial if you believe that the percentage increase per year will be lower than 4% per year. If the stock market (ie your fund) has a higher increase you would loose money.
    I considered the following:

    Consider you pay the maximal amount into your 3a savings account every year (neglect possible increase of that amount): 6826CHF.
    a) Lets assume that the saved taxes by this single contribution is 1250CHF (higher than it would in my case)
    b) We payed the amount into an 3a account at VIAC (like https://thepoorswiss.com/viac-best-third-pillar/)
    c) lets leave it in our account for 40 years (considering retirement age will rise…) and the total tax saving would be 50’000CHF over the years
    d) With a 4% on average increase per year this would result in a total amount around 674’000CHF after the 40 years
    e) assume you would need to pay 8% Tax on this (which you can only reach with different accounts and gradual withdraws – at least in Zurich) the tax you would need to pay is almost 54’000CHF! -> Already a loss of 4000CHF

    ans finally their are more factors making things worse like: the probable increase in the amount you can pay into your 3a savings account, the tax savings per year could be less each year as in my calculation and the biggest one, you would get 0.5% more year by year if you would invest your money at the stock market yourself (plus you can freely choose where to put your money). All of this means that the real “break even” percentage is likely much lower than 4% – I think it is probably below 3% or even close to 2%.

    Did I make some obvious mistakes? I would love to here what you think about this.
    Cheers

    1. Hi Mmmm,

      This is an interesting analysis.

      There is one thing I do not understand with your break-even point. You mean that below 4% increase per year, it is beneficial to get a 3a and above that, it’s not beneficial. Is that it?

      There is one thing you forgot in your calculations. The 1250 CHF you save each year can be invested as well. If you invest them in a broker account and also 4% per year on them, this will compensate the tax that you will pay at the end.

      At least in my calculations, if you want the tax savings, you are always better off investing in the third pillar.

      Now, there is one case in which a third pillar is not a great idea. If the returns on the third pillar are significantly lower than the returns on the stock market outside of the third pillar (you have much more liberty). Let’s say you generate 8% per year on your broker account and only 4% per year on your third pillar. In that case (a bit extreme), you are indeed much better off not investing in the third pillar.

      And as you said, this will be completely different in each situation: for some people, the third pillar makes more (or less) difference than 1250, for other, 8% tax will be different as well.

      I agree that the third pillar is not perfect.
      However, I still believe that it is a good investment.

      Thanks for sharing!

      1. You don’t get additional 1250 CHF to invest. That is a misunderstanding in my opinion.

        You have earned 6826 CHF as income and need to pay income tax on it. Marginal tax rate is 1250/6826=18% which is low by the way. I’m usually above 25% and live in Zurich with lower taxes compared to the rest of Switzerland. In Fribourg it must be higher for the same income.

        Anyway there are two options
        – transfer 6826 CHF into third pillar 3a
        – pay 1250 CHF income tax and invest/spend the difference 5576 CHF

        You don’t get money back as tax savings in either of the two cases for that year.

        Wrt break even point between investing with third pillar vs normally. In the latter case you need to consider the lower starting point of 5576 CHF. Or with 30% marginal tax rate its 4778 CHF.

        Lets say you don’t invest at all with your third pillar money. With the 5576 CHF investment option you need 5 years at 3% yearly to reach 6826 CHF.
        At 30% marginal tax rate its 8 years at 3.9%.
        Not to mention the risk which hasn’t been calculated in.
        Good luck with catching up ;)

        1. Hi,

          You don’t get money back, but you still save money on taxes and you can invest that money.

          For instance, let’s say you still have 6826 CHF to invest at the end of the year.
          1) If you do not invest in the third pillar, you will invest 6826 CHF in the stock market
          2) If you invest in the third pillar, you will invest 6826 CHF into a third pillar and you will save 1250 on taxes that you can then invest on the stock market.

          I think you have to take this into consideration if you want to be fair.
          If you do not invest your third pillar money, then the third pillar becomes much less interesting indeed.

          Are you investing in the third pillar yourself?

          Thanks for stopping by!

          1. Mmmm and capmaxmc made a valid point. The third pillar with a high stock percentage has a big drawback that most people don’t realize: You have to pay taxes on the stock gain! When you invesr freely (i.e. outside the third pillar) stock gain (but not dividends) is tax-free. The higher the profit and the longer you invest the more money you’ll loose with the third pillar.

            Here are some resources with examples:

            https://www.truewealth.ch/point-of-view/saeule-3a-achtung-vor-der-steuerfalle/

            https://www.graffenried.ch/de/ueber-uns/publikationen/?oid=10225&lang=de&news_eintragId=20041

          2. Apologies for answering very late. Yes, I invest my third pillar money. Viac, as many do.

            I’m still convinced that your way of thinking in this matter is flawed.

            It should be:
            1) If you do not invest in the third pillar, you will invest only 4778 CHF (with 30% marginal tax rate applied) in the stock market.
            2) If you invest in the third pillar, you will invest 6826 CHF into a third pillar

            With 1) you need the 1250 CHF to pay the additional income tax.

  4. Hi,

    Thank you very much for the detailed content, very helpful to understand how to best invest and optimize the future results. Keep it up with the good work!

  5. For almost all cases I would not use a 3a insurance product. It makes much more sense to split the saving from the life insurance. So depending on your situation a life insurance might make sense but it’s much better to get a life insurance on its own as this will be cheaper as the cost is transparent to you. The 3a insurances are hiding a lot of the cost with giving you less interest. So normally it’s better to go with account/deposit for 3a and get a life insurance separately. This normally also is more flexible as it will even allow you to limit the phase of your life where you actually need/want a life insurance.

    1. Hi P,

      That’s a good point. You can also take a real life insurance (not linked to a third pillar) and still invest in the third pillar. In that case, you will still get the benefits of the life insurance and of the third pillar :)

      Thanks for stopping by!

  6. Hi Mr. The Poor Swiss,

    PostFinance now has a retirement fund with 100% shares: Pension 100
    https://www.postfinance.ch/en/private/products/retirement-savings-life-insurance/retirement-funds/pension-100.html

    72% is invested in Swiss companies and 28% in the rest of the world. With VIAC it is about 40% Switzerland and 60% global, if I understood correctly.
    The TER of Pension 100 is 0.98%. This is still a high cost compared to VIAC, but the increase compared to the other PostFinance retirement funds is not that high:
    – Pension 25: TER 0.87%
    – Pension 45: TER 0.91%
    – Pension 75: TER 0.97%

    I have two questions for you. Firstly, what do you think about this new retirement fund Pension 100 in general? Secondly, for someone stuck with PostFinance for other reasons, would you consider Pension 100 a good option?

    Thanks and keep up the good work!

    1. Hi RetirementDreamer,

      This is quite interesting. This is already a better option than the other funds from Postfinance. It’s sad that they only went to 28% of the world, the legal maximum is 40% like VIAC. It would have made the fund significantly better. And they could make an effort on the fees, but that’s not really what PF is about :(
      If I was stuck with PostFinance for a good reason (only a mortgage there could do that), then yes, I would use that. Otherwise, VIAC is still largely superior (smaller TER and higher international).

      Thanks for stopping and sharing :)

      1. Thank you for your response!

        I agree with you, that they could work on their fees. After all, they push them as being passive.

        Something small I noticed in your article. You say: “You will be able to withdraw the money at most five years before retirement age and at most five years after retirement age.” The second part is only true, if you continue working. If you retire before or at retirement age, you have to withdraw the money before your birthday of the year you reach retirement age. If you keep working, you have to withdraw your money when you retire, or before your 5th birthday after retirement age. Whatever comes first.
        As you also have to balance when to get the money from your second pillar, this might be an important detail to optimize the taxes you have to pay when getting the money from your accounts.

        Thanks again for your interesting blog!

        1. Hi again :)

          That’s very interesting. I was wrong! I will have to update this in the article!

          As for balancing, it’s a difficult question. When you start getting each of the three pillars is a very important consideration to have before retirement. It can make significant differences.

          Thanks a lot for letting me know!

  7. Hi, I’m also researching life insurance (I have a property and a family – we are dual income earners but I don’t want my husband to be solely responsible for paying down my property if I die). I also came to the conclusion that it’s better to keep pillar 3a and life insurance separate. I’ve spoken to a few brokers but no one can give me straightforward answers on the structure of the investment if I combine pillar 3a with life insurance, and life insurance itself (for me) would come out to something like CHF23/month, which is not that much (a total of 7,000 chf over the 25-year course of the insurance, or 2.8% of the overall cost over 25 years).

    1. Hi D,

      Standard life insurance is indeed cheaper than linked life insurance. But you will lose the entire amount, so it’s an expense, not an investment. And you have to choose the term yourself.
      But I agree with you that it’s probably best to keep it separated. That way, you will save money on the pillar 3a.
      Keep in mind that you can also do it as a pillar 3b life insurance. In some states, you can deduct this money from your taxes. But it will depend on the state you are living in.

      Thanks for stopping by!

  8. Hi,
    thanks for writing the article. Very interesting.
    I have a comment regarding the exposure in stocks.
    100% is reasonable when you are quite far from reaching the retirement year.
    I suppose that when you only have 5-10-15 years left from the retirement, you want to start gradually converting that capital into something that implies lower risks to consolidate the capital. Do you know if that is possible?
    Thanks

    1. Hi Marco,

      You can lower your risk as you get closer to retirement. But not everybody does that.
      At VIAC, that is something you can do indeed. You can change your portfolio once a month.

      Thanks for stopping by!

  9. 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!

  10. 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!

  11. 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!

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