The three pillars of Retirement in Switzerland – 3. The third pillar

Posted on Categories FIRE, Investment, Switzerland
The three pillars of Retirement in Switzerland – 3. The third pillar Logo
This post is part 3 of 4 in the series The three pillars of Retirement in Switzerland.

 

I started this series with details about the first pillar. I then continued with information about the second pillar. This post will cover the last of the three pillars, the third pillar. This pillar is the only one that is not mandatory. Everybody is free to choose to invest into the third pillar or not. It is simpler than the second pillar. But there are much more choices than you can make. In this post, you’ll find all the details you need to invest into a third pillar. And also, what you can do to optimize your use of the third pillar.

The third pillar

The third pillar is your private pension. This time, there is no complicated name associated to it. It’s 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 less 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 third pillar, I’ll be talking about the 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 an insurance. We are going to cover both of them in details in the next two sections. It’s important to know that not every body can open a third pillar. Indeed, you need to have a salary and pay for the first pillar. If you don’t satisfy these requirements, you cannot open a third pillar.

In both cases, contributions to your third pillar are tax-advantaged. Each year, you can deduct up to 6768 CHF (as of 2018) from your salary. The exact amount removed from your taxes will depend on your income. Generally, you can easily save 2000 CHF per year by contributing the maximum to your third pillar. Contrary to popular belief, you can put more money into your third pillar than the yearly maximum. But this is not tax-advantaged and thus not useful. Never put more than 6768 CHF per year into your third pillar. You’ll receive a certificate with your contributions at the end of each year. You can use this to fill your taxes.

What you’ll get in retirement will depend on whether you have a third pillar in a bank or with an insurance.

Third pillar in a bank

The simplest third pillar is a bank account. It’s a normal bank account except that it is locked. You can’t 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’s ridiculously low.

More interestingly, you can also deposit this money in Third Pillar funds. For instance my bank (PostFinance) has three different funds  for the third pillar. One with 25% stocks, one with 45% stocks and one with 75% stocks. You are investing this money for long-term. It’s better to invest it in stocks rather than let it grow very slowly with current interest rates.

You’ll be able to withdraw the money at most 5 years before retirement age and at most 5 years after retirement age. You cannot do a partial withdraw, you have to withdraw the entire amount.

Which third pillar account should I choose ?

I can’t recommend any third pillar account since I haven’t done a full research on it. 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’s pretty bad. The best interest rate I’ve found is 0.75% (with Bancastato)
  • Choice of funds. If you plan in investing into 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 don’t 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 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 amount of fees that you are going to pay. 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 important point is to see how the stocks (and bonds) are invested in the fund. Almost all the retirement funds are only investing in Switzerland actions and 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 don’t worry if you already have a third pillar, you can  have as many as you want.

Personally, I have a third pillar account with PostFinance. For now, it’s invested between three different retirement funds. I’ll invest entirely in PostFinance Pension 75 which is 75% invested in stocks. I won’t say it’s the best since I haven’t looked at all the options, but it’s a good default. I’m probably going to consider opening a VIAC account for my future wife. And maybe a VIAC as a second account for me. I’m not yet decided on that.

Third pillar with an insurance

The other option is to have a third pillar in the form of a life insurance. You’ll 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’ll get at the end is guaranteed. But, the interests you’ll get are not guaranteed.

If you are unable to pay anymore (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’ll lose a lot of the money you invested. The amount your life insurance is worth will increase faster and faster over time. The first two years, it won’t even be worth anything. If you think you may break the contract or stop paying, never contracts a 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.

Who to believe ? Should I take such an insurance ?

Again, it depends on your situation. There are advantages and disadvantages. First, it’s true that you won’t get back the entire amount you paid, contrary to a third pillar in bank. However, this amount is guaranteed. If your third pillar in a bank  has done poorly because of a bear market, you can end up loosing money. With an insurance, you’ll get at least the guaranteed amount. The interests will vary of course.

Most importantly, it’s a life insurance. If you are not in a couple and don’t plan to be, you probably won’t need a 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 doesn’t work and you don’t have much savings. It’s a great way to insure her/his quality of life. If you are both working with good salaries and you have good savings, you don’t need such a life insurance. A problem with a life insurance is that you don’t choose how much you put each month. It’s yet another bill to pay every month.

Personally, I do have a life insurance third pillar. I did because in case I’m incapacitated, it will still fill up. Also, my future wife will have no salary at the beginning and if I die, it’ll be much easier with the life insurance money. However, I didn’t do much research for this, so it may not be so great.

Which third pillar life insurance should I choose ?

Again, I don’t know which life insurance is the best one. Here are some things you should pay attention when you research a life insurance:

  • The amount per month: You should pay an amount per month that you are comfortable with. You’ll pay 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’ll get in the end. The insurance guy will try to make you look at projections. I would advice you to care mostly about the guaranteed amount. Nobody can project interests 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 your are the most comfortable with.

You should your research well. Don’t take any rash decisions.

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! Don’t get into a bad financial situation just to max out your third pillar.

If you have a third pillar 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 for how many years you’ll  invest and how much risk you want to take.

Now, a slight twist. When you’ll withdraw your third pillar, you’ll pay taxes on the amount. This amount is taxed as several levels and it depends on which state you’re in. For instance, in Geneva, for up to 25’000 CHF, you’ll pay 250 CHF in taxes (0 CHF for married couple). For up to 50’000 CHF, you’ll pay 1’500 CHF (500 CHF for married couple). If we take the state I’m living in (Fribourg), it’s 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 6% tax. You may have already seen the problem here. The taxes are more expensive the more money you’ll get. And it’s getting worse if you withdraw even more.

You can withdraw 5 years before and 5 after your retirement age. 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 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 it 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’s never a problem to have several third pillars. The problem arises when you optimize the withdraw over several years. Thus, I advice 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’m not sure there is a lot of value in doing that. You won’t be able to deduct this contribution to the second pillar from your taxes. So that you won’t be able to deduct it twice.

Accounting

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. For a life insurance third pillar, it is a bit more complicated. Your insurance should give you the 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. First, you don’t have the choice between a bank account and an insurance. A pillar 3b is always a life insurance. There is no way around it. But, it’s 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 an 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’ll touch at the term will not be taxed. That means that the interests accumulated over the years are not taxed. Then, some states have some more advantages. For instance, my state allows married couple to deduct up to 1500 CHF each year. Geneva is even better and you can have deductions per children. 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 decide is the term of the insurance.

Conclusion

The third pillar is the last part of Switzerland retirement system. 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 into the third pillar. At retirement age, you’ll get the capital back and pay some taxes on it. I have covered all three pillars now. In the next and final post, I will summarize the Switzerland’s retirement system. I will also talk about early retirement in this context.

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

6 thoughts on “The three pillars of Retirement in Switzerland – 3. The third pillar”

  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.

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