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I have already covered in detail each of the three pillars of retirement in Switzerland. In this article, I summarize the entire system. I also talk about how early retirement works in this system.
It is essential to know about the three pillars if you want to retire in Switzerland.
Three Pillars System
Let’s first summarize the system of the three pillars.
1. The first pillar
The first pillar is a mandatory state pension.
Everybody pays this directly either from their salary or with a bill if they do not work. And everybody in Switzerland is entitled to get a pension from the first pillar. What you will receive from the first pillar will depend on your salary and how many years you contributed. However, it will only cover the fundamental needs of your life in retirement. And there is very little you can do to optimize your first pillar. That is why the other pillars are essential.
2. The second pillar
The second pillar is an occupational pension for workers.
Only people who work are contributing to the second pillar. And consequently, only people who contributed to it will receive a pension (or a lump sum) once they reach retirement age. The second pillar is more complicated than the first pillar in that it will depend on the company you are working for.
Moreover, you can also contribute voluntarily to it. There are some tax advantages to doing so. Find out whether you should contribute to your second pillar.
3. The third pillar
The third and last pillar of Switzerland’s retirement system is a private pension.
The third pillar is entirely optional. It is also reserved for people who are contributing to their second pillar. You can have your third pillar in a bank or as life insurance. There is a nice tax advantage in contributing to the third pillar. And you can choose where you want to invest your third pillar. That gives it a lot of opportunities for optimization.
Choosing a third pillar account is not an easy task. Currently, Finpension 3a is the best third pillar in Switzerland.
If you are interested in early retirement, you have seen that none of the three pillars covers it.
You can withdraw the second and third pillars at most five years before retirement. Currently, this means that you can withdraw money at 60 years old. But early retirement means retiring earlier than 50. Some people even retire before 40. If you plan to retire significantly earlier than Switzerland’s legal retirement age, these three pillars will not help you a lot.
But, the current system is still helping for early retirement. While the three pillars may not cover your expenses after retirement, they will cover most of it. If you have invested enough in the second and third pillars, you should be covered. That means you only need to save for the years between early and official retirement. I say only, but it is not easy. But after official retirement, you will have new income (first and second pillar) and new savings (third pillar). Also, since you get tax advantages with three pillars, you will save more before you retire.
But you will have to pay the first pillar for these middle years. Indeed, you are entitled to pay it until your official retirement age. If you do not work, the amount you have to pay is based on your net worth. So, if you accumulate a lot of money, you may have to pay significant first pillar fees each year. However, I do not think this is a large problem. But it is something that you have to take into account.
If you are not interested in early retirement, you can focus mostly on the three pillars. If you want to retire early, you should focus on each of the three pillars and on saving money to cover your expenses for several years. You will need an investment portfolio to cover expenses for many years.
The three pillars system
Personally, I kind of like the retirement system in Switzerland. Of course, it is not perfect. But I do not think any retirement system is perfect. Overall, it is okay.
Let’s start with the good. It is somewhat flexible. You have many choices for the third pillar and some choices for the second pillar. It is somewhat fair. The first pillar is socially fair. Indeed, the rich will pay significantly more than what the poor will receive. And they will not receive significantly more. It forces you to save for retirement. The first and second pillars are forced savings. This means that everybody will save at least something. With this, everybody will have at least something. This is a good thing, in my opinion.
Only the basic part is mandatory. Those that want complete coverage can use second pillar buy-ins and a third pillar. There are tax advantages. Contributions to both the first and second pillars are tax-advantaged. This encourages people to save money for retirement. Your employer is contributing. This is also excellent. Your employer will match your contributions. Moreover, your employer could also offer you an excellent pension plan.
Areas of improvement
Now, let’s see what could be improved. As I said, it is a good system. But it is far from being a perfect system, in my opinion.
First, the system is too complex. It took me over 7000 words to cover all the details in the first three articles. And I did not cover several things such as divorce, death, foreigners, or self-employment. While doing my research, I learned a lot. I had to gather information from many sources. In my opinion, it could be simplified. Or, at least, there should be a complete source of information. Moreover, the biggest issue is that it depends on each state. There are big differences from one state to another.
One thing that is really missing is the ability to invest this money in the way you wish. I am talking here about the second and the third pillars. For the third pillar, you have the choice of retirement funds. However, we should be able to choose index funds ourselves for both these pillars. This would lower the expense ratios, especially for the third pillar. This would also improve the returns, especially for the second pillar. Good funds should definitely be an option for the second pillar. Currently, the returns on the second pillar are laughable.
Finally, another issue is that you contribute more and more as you age. This makes it less interesting for early retirement. Moreover, the first years should be the ones with the biggest interest compounding. And therefore, it would be interesting to contribute more in the first years. This would also force young people to spend less, which would be good.
Strategy for the Three Pillars
Let’s recap the main things about the three pillars to get the most out of them.
For the first pillar, there is not a lot you can do. Depending on your life expectancy, you could choose to take it early or late. This could significantly change the pension you will receive. But of course, nobody knows its life expectancy. So this is only an educated guess.
As for the second pillar, there are a few things you can do. If you are still working, you can try talking to your company about increasing your contributions. This could be interesting to reduce your taxes and increase your safe allocation in your portfolio. You can also make voluntary contributions to your second pillar for the same reasons. When you are not working, you need to make sure that your second pillar is with the best second pillar provider.
I think it is a bit dumb that there is no incentive to contribute to the second pillar after buying a house with the second pillar’s money. Indeed, you have first to put back the money into the second pillar without any tax advantages. Since the interests on the money are bad, there is no reason to contribute without tax advantages.
Finally, for the third pillar, you have a bit more freedom. You need to make sure that you are contributing the maximum every year. This is very important. Then, you need to make sure you are using the best third pillar provider. This is very important if you want your third pillar to be invested. For most people, the best way to invest in a third pillar is to invest in a bank, not life insurance.
That should cover the basics of each three pillars. If you want the details, you can read the other parts of the series again!
Finally, here is my current strategy regarding the three pillars:
- First pillar: Nothing to do, continue to pay for it.
- Second pillar: I contribute the default amount that my company matches. If we could still contribute with tax advantages (we cannot since we bought a house), I would have contributed a little every year. But without tax advantages, there is no point.
- Third pillar: I plan to have 5 accounts at Finpension 3a soon. I currently have 4 and will open the fifth next year.
I think I have covered everything important about the three pillars system. I hope this will be helpful! If you live in Switzerland, it is important to know these things.
You need to make the best use of these three pillars to retire properly in Switzerland. They are even more important if you do not plan to retire early. They will really be the pillars of your retirement!
If you do not know where to get started, learning about contributions to the third pillar is the best way.
What about you? What do you think about this retirement system? Do you have any questions about this system? Do you have any tips to optimize your retirement?