Contributed by Tariq Dennison, Wealth Manager, MWC Group
If you live and work in Switzerland, you are probably aware that Switzerland has a “3 pillar” retirement system. Your 1st pillar is run by the government, your 2nd pillar is run by your employer, and it is your 3rd pillar you have full responsibility and control over.
This article briefly explains the main options and benefits available for your Swiss 3rd pillar pension, which is divided into two parts: “3a,” which has more tax advantages, and “3b,” which is more flexible.
What are the benefits of a Swiss Pillar 3a Pension?
One primary benefit of putting money into a Swiss 3a, whether to buy insurance, investments, or both, are its significant tax advantages, which include:
Contributions are tax-deductible at your marginal tax rate. In other words, if your marginal tax rate is 35%, putting 7,000 francs into your 3a would result in an annual tax savings of around 2,450 francs (0.35 x 7,000). You can estimate your marginal tax rate here on the Federal Tax Administration’s tax calculator here (https://www.estv.admin.ch/estv/en/home/fta/tax-statistics/calculate-taxes.html)
Investments inside a 3a grow tax-free, sheltered from both income taxes and wealth taxes. In addition, Swiss pillar 3a accounts also get special exemptions from foreign withholding taxes on investments made outside of Switzerland, for example, dividends on US stocks paid to a 3a face 0% US withholding tax, versus 15% withholding taxes to ordinary Swiss accounts, per the US-Swiss treaty.
Withdrawals from pillar 3a pensions are taxed at favorable rates depending on your place of residence at retirement or if you retire outside Switzerland, based on where your pension fund is located. For clients planning to retire outside Switzerland, MWC helps best position the 3a pension for tax purposes.
A second major benefit of 3a pensions is that contributions can be counted towards your mortgage payments, which is called “indirect amortization.” In other words, if you have a Swiss mortgage that schedules you to pay 10,000 francs per year towards the principal, the lender can often count your 7,000 francs 3a contribution as covering part of that principal payment, meaning you can enjoy the tax deduction on the 7,000 and the invested portion growing at a rate which may exceed the rate you pay on your mortgage.
What are the limits of a Swiss Pillar 3a Pension?
As contributions to a 3a are tax-deductible, the Swiss government has decided to limit how much you can contribute to a 3a each year, and as of 2024, these limits are:
7,056 Swiss francs if you are employed by a company covering you with a 2nd pillar or
35,280 Swiss francs if you are self-employed and have no 2nd pillar
Employees seeking additional tax deductions over and above the 7,056 CHF per year may consider doing buying back additional voluntary contributions in your 2nd pillar.
Also, as this tax benefit is provided as an incentive for retirement savings, you are restricted from taking your money out of your 3a to a limited number of reasons, including the following:
Upon reaching the age five years before full retirement age, currently 65 for men or 64 for women (meaning men can withdraw for retirement as early as age 60, women at age 59), or
To buy a home, or
To start a self-employment business, or
To buyback additional voluntary contributions in your 2nd pillar, or
You become invalid and start receiving an IV benefit, or
You leave Switzerland permanently
What can I do with my Swiss 3rd Pillar Contributions?
Your annual 3rd pillar contributions generally go to buying one of two things: insurance, or investments. Using your 3rd pillar to buy insurance is quite simply a way of protecting your family’s source of income in the event that you die prematurely or become disabled, and buying insurance with your 3a is a tax-deductible way of buying this insurance.
You can also invest part or all of your 3rd pillar contributions to build a tax-sheltered asset you can expect to grow over time. A pillar 3a invested 100% into investment funds with no insurance component is often called a “banking 3a”, in contrast to an “insurance 3a”.
One main advantage of bundling at least some insurance in your 3rd pillar is that only insurance-based 3rd pillars will allow you to continue contributing to your Swiss pension after you leave Switzerland.
What is the difference between a Swiss Pillar 3a vs 3b?
Complementing the 3a is the 3b, which has fewer tax advantages but more flexibility than a 3a. Contributions to a 3b are generally not tax deductible, except in the Cantons of Geneva and Fribourg, and the value of your 3b is included in your wealth tax calculation, which your 3a is not.
The main tax-benefit of an insurance-based 3b enjoy the shelter against annual income taxes on dividends and interest, and the accumulated value, including gains, are not taxed on withdrawal like a 3a. Also, you have much more freedom to withdraw from your 3b outside of the six reasons under which you can withdraw from a 3a.
Like a 3a, your 3b can also be used for indirect amortization against your mortgage, and to buy insurance cover you can maintain whether you stay in Switzerland or leave Switzerland.
Should Americans Put Money Into a 3a?
MWC does not give tax advice, but we understand many US tax advisers have said Swiss 3rd pillars are not qualified pensions for US tax purposes, so any Swiss tax advantages may be offset by US tax complications for US persons living in Switzerland. Contact your US specialist at MWC if you are a US person with questions about your 3rd pillar.
How do I set up my 3rd pillar?
Contact your MWC adviser for a consultation on how to make the most of your 3a and 3b opportunities while here in Switzerland.
This post is prepared for information purposes only and should not be interpreted as investment advice nor is it an invitation by MWC Group to any person to buy or sell any investment. MWC Group has based this post on information obtained from sources it believes to be reliable.
Manentia Wealth Consulting Group Limited is licensed and regulated by the Malta Financial Services Authority (MFSA) under the Investment Services Act to provide investment services as a Portfolio Manager and under the Insurance Distribution Act to act as an Enrolled Insurance Broker. Manentia Wealth Consulting Group Limited is a subsidiary of Manentia Wealth Consulting Group AG (Swiss company registered number: CHE-116.117.306).
MWC Group UK is authorised by the FCA FRN 973440 to provide Investment advice and portfolio management in relation to various financial instruments. It is a Branch of Manentia Wealth Consulting Group AG, which is registered with FINMA as an Insurance Broker under number 29575 and a member of PolyReg/PolyAsset as a Portfolio Manager.
Manentia Wealth Consulting Group AG is registered with FINMA as Insurance Broker under number 29575 and member of PolyReg/PolyAsset as Portfolio Manager.
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