Paying into pillar 3a
Only people who have paid in diligently over years and decades can benefit from larger amounts of money from their tied retirement provision to raise their standard of living. Find out what to look out for here!
Requirements: who can pay into pillar 3a?
Anyone who earns income subject to old-age and survivors’ insurance (OASI) contributions in Switzerland can pay into the third pillar. It can also be used by people who receive daily allowances from unemployment insurance.
In general, a distinction is made between two types of pillar 3a:
The small pillar 3a: employees and self-employed persons who voluntarily join a pension fund (second pillar) pay into the small pillar 3a.
The large pillar 3a: self-employed persons who do not belong to a pension fund and employees who do not reach the Occupational Pensions Act (OPA) minimum salary of CHF 22,050 (2023) and are therefore also not obliged to join a pension fund pay into the large pillar 3a. The maximum amount here is around five times as high as in the small pillar 3a.
When can you start paying in?
The point in time at which you can start paying into pillar 3a is based on the obligation to pay OASI contributions. A distinction must be made between:
Employed persons: who are liable to pay contributions from the 1 January after their 17th birthday and can therefore pay into the third pillar from the age of 18.
Inactive persons: who are liable to pay contributions from the 1 January after their 20th birthday and can therefore pay into the third pillar from the age of 21.
How long is it possible to pay in?
You can pay in until the obligation to make OASI contributions ends. Normally, this comes after retirement at the age of 64 for women and 65 for men (as of 2023). But this doesn’t have to be the case – withdrawing OASI assets can be brought forward by up to two years or postponed by up to five years.
In all three cases – normal retirement, early retirement and pension deferral – it is still possible to earn a (secondary) income subject to OASI contributions, so payments into pillar 3a can continue to be paid.
However, the option to pay in ceases no later than the age of 69 for women or 70 for men (as of 2023), as pillar 3a assets must be realised and withdrawn by that time.
If no income subject to OASI contributions is earned from a secondary occupation after early retirement, savings may no longer be made in pillar 3a.
The maximum amount (see below) can once again be transferred to the third pillar in the year in which gainful employment, including all secondary employment subject to OASI contributions, ends – regardless of whether you retire in January or December. From the following year onwards, no more contributions can be paid in.
Maximum amount for 2023: how much can I pay in?
The maximum amount of payments into pillar 3a is capped by law. It is set anew each year by the Federal Social Insurance Office (FSIO); the maximum amount usually remains the same for at least two consecutive years before it is increased.
In general, a distinction must be made between two types of maximum amount:
Small deduction: the maximum amount for employees and self-employed persons who are members of a pension fund is CHF 7,056.
Large deduction: the maximum amount for persons subject to OASI contributions who are not members of a pension fund is 20% of their net income up to a maximum of CHF 35,280.
What are the tax advantages of paying in?
The main feature of pillar 3a is the tax break. As far as the accumulation phase is concerned, it is important to distinguish between two types of tax saving.
Tax savings as a result of a deduction or refund
The entire amount saved in pillar 3a in a tax year can be deducted from income in the corresponding tax return. The amount of tax savings achieved as a result depends on a number of factors:
Which canton and commune do you live in?
How high is your income, and thus your tax rate?
How much was paid into the third pillar?
Are you claiming the “small” or the “large” deduction?
People who pay withholding tax can also deduct contributions to pillar 3a for tax purposes – provided they are subject to the mandatory or voluntary retrospective ordinary procedure, i.e. file a tax return.
Putting these questions to one side, if we are looking for a rough figure for the maximum annual tax saving, we can say that people who pay into the “small pillar 3a” can save around CHF 2,000 in taxes a year in the best-case scenario. The possible equivalent tax savings from payments into the “large pillar 3a” can amount to a maximum of around CHF 10,000.
Immediate return of over 20% possible
Especially if you have invested your pillar 3a assets in listed investments, it is interesting to convert your tax savings into a return.
Example: the current maximum amount of CHF 7,056 was invested, resulting in a tax rebate of CHF 1,500. In this case, the investment has already achieved a return of around 21% after a year or less. In the best-case scenario, there are also the actual increases in value (book profits) on the investment over the years.
This way of looking at things is important if you are weighing up buying listed pillar 3a products against comparable products as part of an unrestricted investment (pillar 3b). Freely traded (passive) products tend to be somewhat cheaper and – depending on their composition – also offer higher returns. But, in order to stand the comparison, they first have to make up the return generated by the tax savings.
Exemption from wealth and income tax
An investment in pillar 3a secures further benefits, as the relevant capital is exempt from wealth tax during the accumulation phase. This means that all funds in this pillar are kept separate from taxable assets.
Example: after 30 years, someone has CHF 150,000 invested in pillar 3a. They also hold CHF 450,000 in equities as part of unrestricted retirement provision, i.e. pillar 3b. Only the latter investment (less the exempt amount) is used as the basis for calculating wealth tax.
Pillar 3a investments are also exempt from income tax. Income from the third pillar arises from interest payments and dividends:
investors can receive interest payments if they deposit their money in a traditional pillar 3a account with a bank or insurance company – and the bank pays interest on it. In addition, investments in bonds, i.e. “fixed-income securities,” can generate interest under pillar 3a.
Investors can receive dividends from companies in which they have invested via equity index funds – which is also possible under pillar 3a.
These passively managed index funds accumulate company dividends, i.e. they do not distribute them to the fund’s shareholders. Instead, they reinvest the money directly, which increases the fund volume and creates a compound interest effect over time. Both increase the value of an accumulation fund on a given index more than the distributing variant of the same fund.
However, dividends retained and reinvested by the fund are now taxed in Switzerland – unlike in Germany. Income tax is payable, because even if the investor has never received this income, it has nevertheless been credited and used for new investments. Index funds purchased as part of pillar 3a do not incur this tax, meaning the compound interest effect can be enjoyed practically free of charge.
Find out more about index funds here!
Can I catch up on payments into pillar 3a?
Until now (August 2023), it has not been possible to pay into pillar 3a retrospectively, as you can with a pension fund. If you miss paying in for a year or do not use up the maximum amount, the opportunity has been missed.
However, it has now been decided that this regulation, which has been in place for around 50 years, will change, because in 2019 and 2020, against the recommendation of the Federal Council, the Council of States and the National Council adopted a motion by Erich Ettlin, Councillor of States for Obwalden, allowing retrospective payments in future.
According to the motion, which has yet to be converted by the Federal Council into an amendment to the Federal Act on Occupational Old Age, Survivors’ and Invalidity Pension Provision, all years in which the respective maximum amount under pillar 3a has not been used up can be topped up retrospectively up to the corresponding maximum amount. The rule also includes years in which you did not have any income subject to OASI contributions. This is intended to give people such as previously unemployed mothers or self-employed people who initially did not have the money to pay pillar 3a contributions the opportunity to make up their pension shortfall.
However, the new law is expected to contain a number of restrictions:
Only people with an OASI income can make retrospective payments.
A buy-in is only possible every five years.
The buy-in amount is limited to what is known as the large deduction (see above).
If capital has already been withdrawn early from pillar 3a for home ownership, this must be deducted from the maximum purchase amount.
The entire buy-in amount can be deducted from income in the year the buy-in is made. It has not yet been decided when the change in law will be implemented and buy-ins will be possible.
FAQs on paying into pillar 3a
- Why should I pay in?
- Is there a minimum income above which you can pay in?
- Is there a minimum amount you have to pay in?
- What is the deadline for paying in?
- Is it possible to pay in and withdraw in the same year?
- Can I pay into more than one account?
- What happens if I have paid in too much?
- Is it possible to pay in more than the maximum amount?
- Can part-time employees pay in?
- Can cross-border commuters pay in?
- Is it possible to pay in if you are unemployed?
- What are the rules for married couples?
Why should I pay in?
There are arguments in favour of paying the maximum amount into pillar 3a each year:
Year after year, you enjoy tax benefits which have a cash value.
As the money you contribute is tied up until it is paid out, you are not tempted to use it for anything other than retirement provision.
You ensure optimum protection in line with the three-pillar principle.
Modern pillar 3a products such as those offered by relevate allow you to achieve a significant return on the capital invested, comparable to direct investments in securities in equities, ETFs, bonds, real estate or gold.
The OASI pension is set by law and your pension fund is also subject to legal requirements on its investments, which limits the maximum return and therefore your expected payout. With pillar 3a, you have flexibility in the available investments and can decide for yourself how much risk you want to take and how much return you want to target.
Is there a minimum income above which you can pay in?
Yes, there is. You can only pay into pillar 3a if you have an income subject to OASI contributions. You must pay contributions for old-age and survivors’ insurance (OASI) once your income exceeds CHF 2,300 per year (as of 2023). The minimum income for using pillar 3a is therefore currently CHF 2,301. Hence it is not possible to contribute if you have a lower income or none at all.
Is there a minimum amount you have to pay in?
Everyone talks about the maximum you can pay in. But is there also a minimum amount that has to be transferred to a pillar 3a account each year? No, there isn’t. All you have to do is open an account and then decide at leisure how much you want to pay in. But of course, a tax saving only becomes noticeable once a significant amount has been paid into pillar 3a.
What is the deadline for paying in?
To be included in a tax return for a given year, the money must be transferred in time so that it is posted to the pension provider and credited to the individual account by 31 December. If this deadline is missed, the amount counts for the following year – it is not possible to pay in retrospectively.
Is it possible to pay in and withdraw in the same year?
Yes, it is possible to pay in and withdraw in a single year. Unlike with a pension fund, there is no vesting period.
Can I pay into more than one account?
Yes, you can. You can save in several pillar 3a accounts at the same time. The maximum amount then applies to the several accounts together, i.e. there is no specific maximum amount per account. As long as the total amount of CHF 7,056 or CHF 35,280 is not exceeded, you are free to choose how much to pay into which account.
What happens if I have paid in too much?
If more money has been transferred to the third-pillar account than was intended, the money cannot be reclaimed – unless the maximum amount is exceeded (see below). Example: CHF 5,000 is transferred instead of CHF 500. As the maximum amount is currently CHF 7,056, this will not be exceeded and the CHF 5,000 has to remain in the account. It is only possible to have it paid out again early as part of standard advance withdrawals.
Is it possible to pay in more than the maximum amount?
Yes, it is technically possible to pay in more than the maximum amount – for example, by inadvertently transferring too much money to the institution where the pillar 3a account is held. In this case, the excess money does not form part of the pillar 3a assets and can be reclaimed.
Can part-time employees pay in?
Yes, part-time employees can pay in as long as their annual salary exceeds CHF 2,300 and they are therefore required to make OASI contributions.
Can cross-border commuters pay in?
Yes, cross-border commuters – for example from Germany – can pay into pillar 3a if they earn an income subject to OASI contributions in Switzerland.
However, whether paying into the third pillar makes sense for cross-border commuters is another question, as they are normally taxed in their country of residence. In many cases, the pillar 3a contributions subsidised by the Swiss government cannot be deducted from income there. It therefore makes more sense to have a private pension scheme subsidised by the country of residence.
Is it possible to pay in if you are unemployed?
Yes, anyone who draws daily unemployment insurance benefits can pay into the third pillar.
What are the rules for married couples?
There is no joint maximum amount per married couple – each spouse saves their own pillar 3a up to the currently permitted maximum. One half of a married couple with income subject to OASI contributions may not open or save a second pillar 3a for their spouse who does not have such income – for example, if they are a homemaker.
It is also not possible to pay into a pillar 3a if you work as a conjugal assistant in your spouse’s business without paying OASI and invalidity insurance contributions. Overall, the principle remains the same: if a person does not earn an income subject to OASI contributions (and does not receive daily allowances from unemployment insurance), they cannot pay into pillar 3a.