The pillar 3 system by parts
Pillar 3a (Tied Pension) is a flexible addition to an individual’s pension plan. There are several benefits to taking out a Pillar 3a pension plan, but for this article we will look at how you can best use this system as an investment savings that is tax-deductible from your taxable income.
When saving for retirement, the intention is to save as much as possible, without sacrificing your current standard of living. The maximum amount of money an employed individual can contribute to Pillar 3a in 2017 is CHF 6,768, whereas a self-employed individual can contribute anywhere up to 20% of their income (to a maximum of CHF 33,840 per calendar year). These amounts will remain the same in 2018.
Remember, this amount is tax deductible from your taxable income! “How much can I benefit from this?”, you might ask. Well, as a practical example, a married couple, living in Zürich, with a CHF 200,000 taxable income can save CHF 2,373 in taxes when paying CHF 6,768 into a Pillar 3a. But wait, there’s more…if both partners work, and each contributes CHF 6,768 to a Pillar 3a, then, as a couple, they can save a combined total CHF 4,746 in taxes per annum – not bad!
There are several other benefits to Pillar 3a, including;
- Early withdrawals (restrictions apply)
- No wealth tax is levied during the term
- No withholding tax on earnings (from interest and bonuses)
Pillar 3b (Flexible Pension) is a supplement to Pillar 3a, but unlike Pillar 3a, this plan comes with a few interesting differences:
- No restrictions on contributions
- The contract/payment term is completely flexible
- Free choice of beneficiaries
- You can take out money from the 3b plan if needed
As there is no fixed contribution amount, you are free to supplement your Pillar 3a savings.
What this means is: once you have contributed the maximum tax-deductible amount into Pillar 3a, you are still free to set aside more money for your retirement into your Pillar 3b. Pillar 3b offers mid to higher salary earners the ability to set aside more money for their retirement, ensuring they can sustain their current lifestyle during retirement.
For anyone entering the Swiss pension system, whether you are a local, an expatriate or a foreign worker, the best course of action is to contact a financial advisor who will be able to assess your individual needs and provide a solution for your current financial situation. When it comes to pensions and insurance, a deliberate and considered approach needs to be taken.
I can’t really stress this enough: If you haven’t already taken out a Pillar 3 policy, right now is the ideal time to do so. Apart from reaping the immediate rewards of a tax-deduction, you are also ensuring that your retirement will exemplify comfort and self-sufficiency – and isn’t that what we’re all working for?