Swiss-Prime-International-3-pillars

“Yes, I’ve heard of Pillar 3 pensions, but look, I’m already covered by Pillar 1 and Pillar 2…”

- The famous mantra of someone on a course to a disappointing post-retirement income.

 

As an employed local, expat or foreign worker in Switzerland, you are likely already aware of the compulsory 1st and 2nd Pillars, namely: State Pension Regime (Pillar 1) and Occupational Benefits (Pillar 2). These two systems ensure you are relatively well provided for when you reach retirement age (currently 64 for women and 65 for men). The term “relatively” is used because the typical outcome of the first two Pillars is that they’ll provide you with a post-retirement income that’s equivalent to only around 60% of your final paycheck. Hmm.

Now you might still be thinking: “That should be fine” …When I retire, I plan to have all my large assets paid off, my children will be finished with or very close to finishing university and I probably won’t need more than what the first two pillars can provide.

BUT.

As we all can attest to, life is always full of surprises – not all of them good. Even if you feel that your current financial situation is quite comfortable, events such as death, accidental disability, divorce or even illness can make retirement difficult, for you AND your family. If you’re an expatriate, you could also have already missed out on potentially a great many contributions towards your Pillar 1 and Pillar 2 funds, putting your post-retirement income at even greater risk!

Three distinct pillars. Three specific outcomes.

The pillar that carries the team

Rising to the task of closing the potential coverage gaps of Pillar 1 & 2 is Pillar 3 (or the 3rd Pillar). It’s an entirely voluntary plan, but one whose growing importance is recognized and promoted both at federal and cantonal level (through fantastic tax advantages). Pillar 3 private pension plans are available to all citizens in Switzerland as well as expatriates and foreign workers and are doing an outstanding (and crucial) job of supplementing Pillar 1 and Pillar 2, allowing you to take advantage of a truly effective way of saving for a comfortable retirement.

Some noteworthy examples of where our hero, Pillar 3, jumps in and closes the gap:

As an individual’s income increases, so does their pension gap! One can already envisage the impact on middle income earners that this could have on post-retirement quality of life. With Pillar 3, that gap is reduced.

Pillar 2 insurance already covers individuals for accidental death or disability BUT statistics show that illness is actually a bigger cause of pension gaps than accidents. Pillar 3 once again steps up and saves the day in the event of you coming down with a serious illness.

The birth of your first child will certainly change your life forever, but few realize that, with this remarkable event, their family’s pension requirements too will change. At this point you might begin to start thinking about what the consequences for your family would be in the event of the death of you or your partner OR indeed how you would cope if one or both of you lost your income. These sorts of losses, although difficult to bear both financially and emotionally for the family, can be compensated (at least from a financial perspective) by your private pension. Without a private pension to fall back on, the relatives of the deceased are often faced with a significant provision gap. The same goes for those who have the misfortune of becoming disabled in one way or another, and are unable to work, or any other individual who loses all or a part of their income.

Swiss-Pillar-3

The pillar 3 system by parts

3a.

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)

3b.

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?

At Swiss Prime International, our team of highly qualified and experienced advisers will help you take full advantage of the benefits that Pillar 3 pension plans can offer, ensuring real peace of mind in retirement.

Contact us today to book a consultation with one of our top advisers.