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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Will I have any advantage of using Third Pillar if I am Permit B holder? This means all my taxes are deducted monthly by my employer. Is it possible to switch to different way of deducting taxes like for permit C holders or citizen or I need to wait until I get permit C? If I cannot do this I would not go for Third Pillar but just chose low fees broker like Interactive Brokers and invest over there in accumulating ETF due to the rather high taxes on dividends. However, I will check with tax advisors if there’s any possibility for me in getting these tax advantages.
Hi Paul,
I believe even as a permit B you can opt for a posterior-full-declaration that will then recalculate your taxes. But there is no simplified form. And this means that the calculation for your taxes will change and this can be either higher or lower, very difficult to say. You may ask a tax advisor indeed for advice. If you reach 120’000 CHF of income per year, I believe you will be forced into the tax declaration, it probably makes sense to wait for that threshold since 3a is best with high incomes. In the meantime, if you can, it’s good enough to start investing in a great broker with cheap ETFs as you mentioned.
Thank you, Baptiste.
This is all clear and helpful!
Thanks!
Love your page! Always good discussions and topics!
I have a question for the all the resident experts here, I am operating as an Einzelfirma for 3 years now, but first I had 1 year as an employee and a Pillar 2 account was opened in my name with one year’s contributions only. I am now excluded from contributing the amount to a 3rd pillar for a self employed person because I have a 2nd pillar?
The rule is here: In 2023, employed persons can pay a maximum of CHF 7,056 into the 3rd pillar; self-employed persons without a 2nd pillar, a maximum of CHF 35,280.
I cannot find the definitive answer anywhere else.
Thanks in advance,
Hi Rob,
No, you are not. You can still contribute. This phrase was not very clear!
The fact that you have an old vested benefits acount will not prevent you from contributing to the third pillar.
I will make this clear in the article, thanks for pointing that out.
Hello Baptiste, SwissLife is suggesting incorporating a ‘Savings Target Guarantee’ on my 3a Pillar account, what is it, and how effective is the guarantee, really? Thanks.
Hi Una
I had never heard of that before. I checked it online and it looks like a combination between a 3a bank account and a 3a life insurance. It sounds like another complicated way for them to sell life insurance.
Like any life insurance 3a, I would steer clear of that.
Hello Baptiste,
Thanks very much for your valued opinion. Very much appreciated! I was already sceptical, but wanted to make sure. Thanks for the valuable articles and keep up the great work Baptiste!
Hi Baptiste
I have a gambler’s side to my character and I take risks probably when I shouldn’t.
Following your advice, last week I switched my Credit Suisse 3rd pillar over to Finpension. It is in the process of being funded. Not knowing what I am doing at all and being a gambler, I selected 100% Risk. Being 55 years old, just starting to invest now, and not having such a great pension pot, I thought, win or bust!
I have no idea whether I should be sticking to 40% risk or whether my strategy is actually not idiotic. Would you be so kind as to give me your thoughts?
With much appreciation
Simon
Hi Simon,
Gambling is bad but aggressive investing is not necessarily bad if you have the means to withstand it.
You have to ask yourself whether you can withstand the loss of your 3a. In the next 10 years, it could fall down by 50%. Is your 3a a large part of your entire asset allocation? Is it really important for your retirement?
I can’t tell you the asset allocation you need, because that’s really a personal choice. It may be fine at your age to go 100% stocks if your 3a is not the bulk of your retirement. But it’s true that many people at 55 will go lower than 100% stocks.
Wise words once again, Babtiste. Many thanks for giving me your time and expertise. I will think about what you’ve said.
Hi Baptiste! appreciate your help here!
Imagine I opened multiple portfolios with smb like Finpension – will they somehow calculate my total contribution a year and limit it to CHF 7k+? or how does it work?
Do I understand it correctly that I may choose to have multiple accounts to have smaller amounts on each and thus pay smaller tax when withdrawing over time, but the total contribution per year to save on tax would still be collectively summed up (if I have 5 accounts – I will need to contribute +/-1.5k to each, and this way I will have total annual 7k+ contribution? Do I see the problem right that if I need the money to buy real estate (for example) – I cannot withdraw all 5 altogether? I will need to do 1 per year? But if I had them all on one account – I would have paid higher tax but would have had the flexibility to withdraw all at once?
thank you!
Mikhail
Hi Mikhail,
Yes, even with 5 portfolios, they would still limit your total contribution to 7056 for 2023.
For retirement, having 5 allows to maximize the potential tax savings due to staggered withdrawals.
However, you can withdraw 5 accounts to buy real estate, no problem. What you can’t do is withdraw at retirement partially from an account, you need to withdraw in full.
So, you don’t lose flexibility for real estate by optimizing for taxes.
just used your referral with finpension – thanks for your contribution :)
Thanks for using my code!
How am i suppose to max out the 3a pillar each year if i invest young and don’t want to have accounts over 40000CHF (Friboug) using finpension ? I will need more than 5 accounts no ? Especially if you say to invest up to 20000CHF(7000x3years) if i expect my investment to double.
You don’t have to keep it below 40’000 CHF, you have to keep it as balanced. This is just an example. What matters is to have 5 accounts and keep them balanced.
Ah okay i got it, but if i still want to keep the taxes low it is better to have multiple accounts at 40000chf ? for example 5 at finpension and 5 at VIAC ? or is it too much hassle to manage
No, because you need to withdraw only one per year. You wont’ be able to withdraw over 10 years, so 10 accounts won’t serve you.
Hi Baptiste!
Based on this article and others online, one could get the idea that Pillar 3a accounts should be a no-brainer for anyone working in Switzerland. Do you agree with this statement? Because I have some doubts about it.
I have moved here less than a year ago, so I do not have one, but I want to know if I really should open one or not. Back in my home country, I had a pension plan, very similar to pillar 3a, the more I put into the account each year, the more I could get back from my income tax, up to a certain limit.
But in my country, these accounts were not really recommended to young people, who are financially somewhat savy, and want to invest anyway. Maybe because of higher fees in general (a usual fee amount would be 0.9% averaged out across 30 years, and 1.6% across first 10 years), but the main point was that each year the rebate amount stayed the same, which was a lower and lower amount of your total saved sum in the account, so it got less and less relevant over the years, compared to investment performance and annual fees.
Compare this to a brokerage account, where you do not get the rebate, but you can decide to take out your money anytime. I have 35 years before retirement, maybe just an interactive brokers account better for me for my first swiss investment account?
Hi Zoltan,
Excellent question :)
I cover this in detail in this article: Should you contribute to your third pillar in 2023?
* It’s almost a no-brainer, but you need sufficient income if you are going to invest very early in to the third pillar.
Merci Baptiste for this amazing summary of the pension system in Switzerland! Would it be possible to explain how the Pillar B, voluntary contributions work with some who has a B permit ? Is this third pillar based on your `residential` status with your permit? Many thanks
Az
Hi Az,
What’s the pillar B? Second pillar?
For voluntary contriubtions to the second and third pillar, you need to fill a tax declaration . So, if you are taxed at source, you need to switch to a full tax declaration. But it should not matter on your permit, only on the way you file taxes.
Many thanks Baptiste for the prompt response. Its Pillar B, `Pillar 3b`that I was referring to. Does this make my original question a tad clearer? Appreciated.
Hi,
So, the pillar 3b means either a life insurance outside of the 3 pillar system where only two cantons have tax advantages or it means any investment outside of the retirement system, without any tax advantages.
In general, you should avoid anything called 3b.
Ah Ok Baptiste , many thanks for clarifying. Appreciated!
Hello Baptiste,
Thanks for the valuable articles! Three questions for you:
1. How many Pillar 3a accounts do you recommend opening to make a staggered withdrawal tax-efficient? I’ve read 2 to 3, but I know some people working in finance who have 5.
2. I’ve seen that the official retirement age for men is 65, and withdrawal can start at 70 for people who continue to work. Assuming I will have 5 pillar 3a accounts, will I be able to withdraw them 1 per year for a year, i.e. from 70 to 74?
3. Now opposite scenario by starting the withdrawal 5 years before retirement age, so at 60, can I have 10 accounts and make a staggered withdrawal from 60 to 69?
Thanks a lot
Reno
Hi Reno,
1) The optimal number has always been 5.
2) No. You can postpone up to 5 years, not starting from 5 years. So the latest you can do is 66, 67, 68, 69, 70
3) No. The maximum number of 3a accounts is also 5.
Hello,
I was wondering if I open 5 portfolios with finpension for example, can I still stagger my withdrawal?
Yes, you don’t need multiple providers to stagger withdrawals.
Hi Baptiste,
I just opened up account/s yesterday using your code as well! Thanks for the very insightful information here.
I just wanted to ask regarding this topic, when you say 5 3a account smax does that mean 5 portfolios regardless of provider? So basically what I did was open 3 portfolios on Finpension (1st provider), 1 portfolio from VIAC (2nd provider), then 1 portfolio from Frankly (3rd provider). That’s 5 portfolios/3 different providers but my contributions are divided equally amounting to the maximum allowed contribution (7056 CHF). Is this what you mean by 5 3a accounts and can do eventually staggered withdrawals?
Also, on the Finspension, since I have 3 portfolios in that account. How does it work when I deposit money? Does it go to a “main space” where I need to move the amounts manually to each portfolios? Or do I deposit directly towards the portfolios (making it 3xto do it)?
Appreciate it if you can confirm if I did it correctly. :)
Thank you!
Hi,
Thanks for using my code :)
Yes, it’s regardless of provider. You can have 5 at the same providers, spread around multiple providers. You can even have more than 5, but you can’t spread them over more than 5 years.
When you deposit money, you need to choose. At Finpension, you choose a portfolio, click Deposit and then they will give you the information to deposit on this particular portfolio. If you want to contribute to three portfolios, you will do that three times and each money transfer will be slightly different.