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3rd pillar

In Switzerland, the 3rd pillar system is closely linked to a real estate acquisition. It can be used as part of your down payment, to pay the principal indirectly, to pay for renovation work, or, for exemple, to pay off all or part of your loan once the mortgage contract ends. This can all be done while being tax deductible.

 

Basics of the 3rd pillar system

 

The swiss pension system, consisting of 3 «pillars », was accepted by the population on December 3rd 1972. Initially put in place to add retirement funds to the 1st (social security) and 2nd (for americans, similar to the 401k) pillars, the 3rd pillar has become a useful tool when it comes to the acquisition of a main residency.

 

By contributing to a 3rd pillar plan, you will save sustainable amount of money through tax deductions, allowing you to acquire your down payment quicker, or to lower your monthly fees once being a homeowner.

 

Exemple of the advantages of contributing to a tax deductible 3rd pillar :

 

A married couple, living in Lausanne, without children, and having a taxable income of CHF 200k, would like to become a homeowner.

 

Their goal is to save an extra CHF 150k as quickly as possible in order to have the necessary funds.

 

Their annual saving capacity is CHF 15’000.-

 

Plan A : Save through a regular banking saving account each year, and have the amount needed at disposal after 10 years (based on a 0% interest rate)

 

Plan B : Save through tax deductible 3rd pillar plans CHF 6’883.- each per year (maximum allowed per year per person). By doing so, the couple will save CHF 5’826.- per year through tax deductions

 

After 7.5 years, the couple will have then accumulated CHF 103’245.- through their tax deducible 3rd pillar plans + CHF 43’695.- saved in taxes + CHF 9’255.- done through a regular banking saving account. When withdrawing the tax deductible 3rd pillar, the couple will need to pay taxes for an amount of CHF 4’688.- (related article : Tax on retirement funds). Their net saving will therefore be CHF 151’507.-

 

Difference between Plan A and Plan B : We can see that by a simple tax strategy done through the tax deductible 3rd pillar system, the couple has gained 2.5 years in accumulating the necessary funds.

 

Tax deductible 3rd pillar (3a) and non tax deductible 3rd pillar (3b)

 

Before deciding between a banking or a life insurance 3rd pillar, it is necessary to understand the differences between a tax deductible 3rd pillar (3a) and a non tax deductible 3rd pillar (3b) :

 

3a (tax deductible)

 

The annual contribution is tax deductible.

 

Maximum annual contribution allowed for an employee is CHF 6’883.- and CHF 34’416.- for a self employed worker with no pension fund plan (LPP), but 20% maximum of his/her annual self employed income.

 

The wealth accumulated into a 3a plan is not taxed.

 

The earnings from a 3a plan are not taxed.

 

The capital accumulated into a 3a can only be withdrawn under strict circumstances :

  • Up to 5 years prior to retirement age (59 yo for women / 60 yo for men)
  • If you leave Switzerland permanently
  • If you decide to start a self-employed activity
  • To buy or build your main residency
  • If owning your main residency, you can use the amount to do renovation work, or to pay back part of your loan

 

When withdrawing a 3a, taxes will be owed. 

3b (non tax deductible)

 

The annual contribution is not tax deductible, other than two exceptions :

 

  • Fribourg: Up to CHF 750.- per per year and per person is tax deductible
  • Geneva : Attractive tax deductible system. However, the possibilities are specific to each situation (employed / self-employed, single / married, children / no children).

 

No contribution cap.

 

The wealth accumulated into a 3b plan is taxable.

 

The earnings from a 3b plan are not taxed.

 

No restrictions on when you can withdraw the capital.

 

When withdrawing a 3b plan, no taxes will be due, except for the states (cantons) of Fribourg and Geneva.

Who offer the possibilities to open a 3rd pillar plan (3a and/or 3b)

 

Banks and insurance companies do 3a plans.

 

3b plans can only be done through insurance companies, as a « risk » (death and/or disability) needs to be covered in order to meet the 3b criteria.

 

Here are the differences between banks and insurance companies plans:

Banks

 

A banking 3a plan can be done either through an account (similar to a saving account, 0% interest) or through a mutual fund. If you choose the latter, you will expect higher earnings, but the capital will not be guaranteed.

 

No death and/or disability risk is covered. If you were to pass away, the disposable amount at the time of death will be added to your wealth, and will be passed on to your heirs, according to the law.

 

The advantage of a banking 3a plan through an account (not a mutual fund) is that it allows you to acquire part of the nessary assets for the down payment, while knowing exactly the amount at your disposal in the future. If you contribute CHF 6k per year for 3 years, CHF 18k will be available (before taxes). 

Insurance companies

 

Insurance companies offer the possibilities to open a 3rd pillar plan (3a and/or 3b) through life insurance policies. These products can be fully guaranteed (with little earning expectations), partially guaranteed (with part of it being invested in mutual funds), or non guaranteed (fully invested into mutual funds).

 

A life insurance policy will cover at leat one risk (death or disability).

 

A life insurance policy will allow you to cover your family while being used to pay your mortgage principal indirectly, for exemple. A detailed evaluation of your situation will be necessary in order to choose the more efficient option.

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