Third Pillar: All you need to know to retire 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.
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 are not many 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 mainly discuss the first one, Pillar 3a. For information about the 3b, you can read Section Pillar 3b. Otherwise, when discussing the third pillar, I talk 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 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 7056 CHF (as of 2023) from your salary. The exact amount removed from your taxes depends 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 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, you should never put more than 7056 CHF per year into your third pillar. It is not interesting to lock money without advantages. Most third pillars will prevent you from doing so. There are better alternatives if you do not have tax advantages. You will receive a certificate with your contributions every year. You can use this to file 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, only the employed person will be able to contribute.
How much you will get in retirement will depend on whether you have a third pillar in a bank or with an insurance company.
Pillar 3a and self-employment
So far, we have covered the case of employed people, with a salary. However, self-employed people do not get a salary directly. We are talking about sole proprietorship.
If the self-employed does not contribute to a second pillar, he can contribute to a third pillar. In this case, the maximum contribution is at most 20% of the net revenue of income and at most 34’128 CHF (five times the maximum contribution of employees).
Other than the maximum contribution, the other facts are the same for self-employed and employed persons.
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 retire. You can directly deposit money into this locked account. Pretty much every bank has one or several third pillar accounts. The only difference between these accounts is the (small) interest. The interest on the third pillar 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 for 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 will 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.
Finpension 3a is the best third pillar in Switzerland.
Use the FEYKV5 code to get a fee credit of 25 CHF*!
*(if you deposit 1000 CHF in the first 12 months)
- Invest 99% in stocks
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. I have an entire article about choosing the best third pillar for your retirement.
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 monthly amount that will go into your insurance. Once you reach retirement age, you get some money (plus maybe some interest). The minimum amount of money that you will get at the end is guaranteed. But, the interest you will get is not guaranteed. And the returns are not great.
If you cannot pay anymore (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 contract terms, your spouse will get the guaranteed amount.
If you break the contract or stop paying, you will lose much 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!
Many people will tell you not to use this kind of insurance. And many insurance people will tell you that everyone should have one. So, who tells the truth?
Should I take Life Insurance Third Pillar?
No! For most people, life insurance 3a is a bad idea.
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.
On top of that, the returns over time are really bad. You will lose a significant amount of money in the long term.
To know more, you should read my article about life insurance 3a.
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 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 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 canton 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 canton 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 canton.
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 cantons in Switzerland are considering this as tax evasion! For instance, the canton of Vaud allows you to have three different accounts. My canton (Fribourg) does not currently prevent this. But this may change.
So, you should be careful with this technique. You should check with your canton 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 canton allows it!
If you want to learn more, you can read my article about staggered withdrawals. It also explains how to combine this with your second pillar.
Third pillar and tax at source
It is important to mention that you only get tax advantages with the third pillar if you can declare it. And you can only declare it in a tax declaration.
So, if you are paying tax at source and are not filing a tax declaration, you will have no tax advantages with a third pillar. And in that case, you are likely better off saving in a broker account or robo-advisor.
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 for the third pillar in your net worth is fairly easy. For a third pillar in a bank, you can simply account for it like all your other accounts. It is money you own. 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
Pillar 3b is a bit more obscure and is less known. There are many significant differences between 3b and 3a. Pillar 3b is often misunderstood.
Pillar 3b means anything outside of the three pillars. So, a bank or broker account is part of the 3b. And in most cases, there are no tax advantages.
Indeed, only two cantons have tax advantages. For instance, my canton (Fribourg) allows a married couple to deduct up to 1500 CHF yearly. 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.
However, these tax advantages are only for 3b life insurance. And these products are generally so bad that they are undesirable for anybody. Insurance companies heavily advertise them, but they only profit from them, not you.
However, life insurance linked to a third pillar is a bad investment. It is not worth the tax advantages, so I would recommend against it.
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?
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Hi there, thank you for your post.
I have some questions:
1) Do I pay withdrawal taxes in the canton where I live at the time of the withdrawal?
2) I think withdrawal taxes in Zurich are higher than in Geneva and Freiburg. Is there a webpage showing tax rates applicable to withdrawals in all cantons?
3) What if I buy a house and withdraw earlier? I assume in that case I cannot withdraw little by little over a number of years.
4) If I want to buy a house, can I resort to early withdrawal only if the house is located in Switzerland?
Cheers
Hi Marco,
1) Yes
2) There are a few comparisons, like this one https://www.vermoegenszentrum.ch/fr/calculateurs-et-comparatifs/impots-retrait-caisse-de-pension
3) I don’t get your question. You can never withdraw little by little over a number of years. You get everything from the third pillar.
4) No, but the house has to be your principal residence.
Hi,
In this post you mention you have a 3a life insurance, but as I can see, you also have a Finpension 3a right?
Have you cancelled your previous 3a life insurance or you just reduced your premiums and split the 3a between the life insurance and Finpension?
Hi,
My 3a life insurance is at 300 CHF per month. So, it’s a split between 3a and Finpension.
Hi Mr. TPS,
Thanks a lot for writing such an insightful blog.
You mentioned that some states in Switzerland consider the withdrawals spread over several years s tax evasion. By any chance, do you know if this is also the case in Geneva?
Thanks again!
Hi,
I am afraid I do not know. You should ask the tax office directly.
Hi there,
I did asked the Geneva tax office and I have been told they authorize up to 3 accounts “3ème Pilier A”.
Hope this helps other readers!
Hi Henrik
Thanks for sharing, this is very useful!
would you reccomend 3b pillar for an educational plan for childrens? Any good solution with lower fees that you know?
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.
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
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!
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 ;)
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!
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!
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!
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!
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!
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
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!
Hi the Poor Swiss,
Practical question on the strategy. I also have about 30 years to go. Considering 100% stocks allocation in Finpension3a, how much money would you allocate in each of the created sub-accounts?
Say, if you want to make sure you end up with below 25k on your account in 30 years, you need to have no more then 3k on this account now (with an expected annual growth at 7%). Does it mean you open several (1-3) accounts every year? If yes, does the Swiss system allow for it? I am interested in Zurich canton, in case you know anything about that local system. If you have any extra info or links in English, I would highly appreciate.
Many thanks for your work, it is super informative and systematic!
Hi Pavel,
I use 5 accounts, which is allowed by Swiss law and is the maximum. In some cantons, they allow fewer at withdrawals. But that does not mean you cannot have multiple accounts. You can have as many accounts as you want. What you can’t do is spread the withdrawals over more than 5 years. And in some cantons, you cannot spread it over more than 2 years. But still, 5 accounts is optimal in general.
I am using a simple rotating strategy, with a single investment each year on each account. 1 -> 2 -> 3 -> 4 -> 5 -> 1 -> 2 -> 3 -> 4 -> 5 -> 1 …
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
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!
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?
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!