Why a 3rd Pillar?
Switzerland’s social security system has been under heavy pressure for several decades and will no longer be able to support tomorrow’s pensioners.
Why is that?
The AHV is at its absolute limit
The problem of the 1st pillar is purely demographic:
- Birth rate in sharp decline (fewer taxpayers in the future)
- Increase in the number of retirees and pensioners
- Longer life expectancy (pension should be paid longer)
It is no longer enough to rely on state pension, because those who retire in the next 10 years will be much worse off than our ancestors who retired 20-30 years ago.
For young people who will only retire within 30-40 years, it is most likely that there will be almost no pension, because there will simply be very few taxpayers.
In the 2nd Pillar (Pension Funds) the outlook is not bright either
While the first pillar serves to provide 40% of the income previously earned in old age, the second pillar, also called the occupational pension plan, serves to increase income to approximately 60-70% of the income previously obtained.
Those who have a high income have a particularly big problem. This is because the second pillar only applies to salaries of up to CHF 86,040.-
The coordination deduction of CHF 25,095.- should be deducted from this maximum salary, which results in an insured maximum salary of CHF 60,945.- This is also called coordinated salary.
Supplementary insurance in the second pillar is rarely available, which is why the pension gap can be huge for those with high earnings.
The retirement pension is determined by the conversion rate. This is currently 6.8%. This means, for example, that if you have CHF 100,000 in your pension fund, you will receive an annual pension of CHF 6,800.- from the occupational pension scheme.
When BVG was introduced in 1985, the conversion rate was 7.2%. This rate will continue to drop significantly. New reforms could now reduce it to 6%. In the next 20-30 years a drop to around 4-4.5% is realistic.
The Swiss Government wants you to take care of your own Pension, in order to close your pension gap.
The Swiss Government itself is aware of this problem and therefore promotes voluntary Pension Planning through pillar 3a, in order to create an incentive so that citizens do not depend only on the provision of state and occupational pensions.
That’s why you can deduct the entire amount paid from your income tax up to a certain upper limit – CHF 6,883.-/year for employees and CHF 34,416.-/year for people who are self employed.
Depending on the canton and the municipality, this results in an annual tax savings of CHF 1,000 – 2,500.- We think this are considerable savings for something that can be setup quite easily.
The sooner you start with a 3a pension, the more the compound interest will work for you.
For people between the age of 20 and 35, Pension planning is almost mandatory for the above reason, in order to be able to continue to ensure a good standard of living.
The later you start with Pension Planning, the harder it will be for you to build decent retirement capital through compound interest.
Let’s assume that two young people put CHF 300.- per month in their 3rd pillar.
- Jonas starts at the age of 25
- Karl doesn’t start until 35
We will assume an average interest rate of 5% per year, which is easily achieved by professional asset managers.
Jonas, 25 years old – CHF 300.- month
Karl, 35 years old – CHF 300.- per month
Since Karl has been missing for 10 years, his retirement capital is CHF 200,000.- less!
His interest income is only CHF 137’657.- and therefore is not even half of Jonas’s large income of CHF 302’657.-.
Karl, 35 years old – CHF 500.- per month
Karl earns well and therefore decides to start with CHF 500.-/month instead of just CHF 300.-
How does it look like:
Although Karl paid an additional CHF 200.- per month than Jonas, he can’t catch up to him. He is still missing almost CHF 40,000.-
This is because Karl was unable to take advantage of the compound interest effect early enough and only managed to earn CHF 229’429.- through interest.
A total of CHF 73,228.- less, although he paid more than Jonas all the time.
Therefore, the best time is now! It is better to start small than to try to catch up later with large quantities.
3rd Pillar Bank vs. 3rd Pillar Insurance
You can set up a 3a and 3b with a bank or with an insurance company.
Both are quite suitable for Pension Planning.
What questions should I ask myself before I start looking for a 3rd Pillar in Switzerland?
- Approximately how much money do I need in old age to live comfortably?
- Who can guarantee that I will actually achieve this goal?
- What if I earn less because of disability and can’t afford it anymore? Will I still reach my savings target then?
Your bank will certainly contact you when you have saved enough and convince you to make your 3rd Pillar.
And in fact, it is better to save money in a 3a in the bank than in the savings account, because the savings account brings no interest, even negative interest sometimes.
Your banker will tell you that you are completely flexible and will only have to pay to the 3rd Pillar whenever you want.
However, when it comes to saving for retirement, the question arises: Is it really an advantage that I only pay when I feel like it?
People are usually very poor savers. A 3rd Pillar in a Bank lasts, on average, only 2.5 years.
At first you’re motivated and then you go on that overpriced cruise or you get that new TV set that you don’t need anyway and forget to save for the future, “No problem, I’ll do it later.”
Out of sight, out of mind – that “later” usually never comes and you have to survive in old age with just CHF 3,000.- (for foreigners even much less).
What are the advantages of a 3a at an Insurance?
Third-pillar at an insurance is no longer as inflexible as some people think.
In the past, you only had the option of taking out a mixed life insurance policy in addition to the classic life insurance policy.
This meant that in the first 3 years, most of the premiums paid were used for administrative costs.
Today you can invest in a 3a fund and the money you invest in the third pillar belongs to you from day one.
This is advantageous if, for example, you have to leave Switzerland in 5 years because of your work or something similar. So you haven’t lost anything – your money is yours.
With 3rd pillar insurance, you can also pause payments if for instance you become unemployed for a longer period of time.
The great advantage of 3rd pillar at an insurance is that the goal of saving is guaranteed.
While with the bank you only benefit from the deduction of compound taxes and interest, with insurance you have the added advantage that your savings target is guaranteed if a risk occurs.
The three risks are:
- Inability to pay your Premiums
Whether it’s due to an accident or illness, it can affect anyone. In the case of disability, you usually rely on disability insurance and, especially in the case of illness, your income is severely restricted.
So it’s understandable that you don’t have a lot of money left over for pension.
To ensure that you still reach your savings goal, the insurance company will help you.
In addition to the state disability insurance, you will also receive a previously agreed pension, also called a disability pension.
You can choose the value of this pension when starting your third pillar. This is typically between CHF 1’000.- and CHF 2’000.- per month, which would be paid to you in addition to your disability pension.
By law, up to a maximum of 90% of your salary can be covered by the disability pension.
The premium for this pension is very low.
Risk: Inability to pay your Premiums
In addition, you are exempt from paying premiums for the risks of disability and death. The insurance company now pays these premiums to you. This is called Premium exemption.
The great thing is that even the loss of savings is also insured.
Let’s assume you have paid CHF 3’600.- a year in your third pillar and can no longer do so because of your reduced income.
Since you have the third pillar at the insurance company and not at the bank, this is not a problem. You don’t have to worry about this risk anymore.
From now on, the insurance company will pay this CHF 3’600.- for you, or even more if agreed in your third pillar contract.
The risk of death should be covered especially if you have a family with children.
If a parent or the main earner loses their income, the difference is huge.
It also makes sense to cover this risk if the objective is the indirect amortization of the mortgage through the 3rd pillar, because in this way the property does not have to be sold prematurely in the case of death.
Indirect amortization of a mortgage through pillar 3 is the smartest way to finance your mortgage.
Advantages of indirect amortization for your own home
- 3rd income deductible premium
- Deductible interest
- The total tax burden remains constantly low
Are you thinking of buying a house or an apartment, but don’t know exactly how to finance it?
Does the third pillar have any other advantages?
There are 2 very important advantages to mention:
- Inheritance privilege
- Bankruptcy privilege
If a testator dies, the beneficiaries naturally inherit their goods.
If the deceased is so indebted that the debt exceeds even the estate, the descendants must renounce the inheritance so they do not have to bear the debt.
The great advantage of the 3rd pillar is that the capital that the deceased has in the 3rd pillar is always paid to the beneficiaries, regardless of whether they have to renounce the entire inheritance due to the indebtedness of the deceased. This means that the heirs never go away empty-handed.
If a person goes bankrupt, everything they have is pledged, so that they can pay their debts in the best possible way.
Everything can be pledged except your capital in the third pillar.
The capital you have in the third pillar cannot be taken from you and is protected from pledging.
So, you see, the third pillar has much more than just the advantage of having enough capital to live without stress in old age.
The 7 advantages of the third pillar
- Increase your capital through compound interest (the sooner the better)
- Tax savings of CHF 1’000 – 2’500.- per year
- Can be used for indirect amortization of your residential property
- Receive additional pension in case of disability
- Protect your family
- Your savings goal is guaranteed: insurance continues to pay premiums to you if you can no longer do so due to disability
- No one can take your money from you or your family (Inheritance Privilege and Bankruptcy Privilege)
The third pillar can be adapted to your needs. You can also choose from different funds.
Are you someone who wants to make bigger profits and accept a bigger risk, or someone who wants to play it safe and choose a more conservative portfolio?
You can even have your strategy adjusted.
If you are young and can take more risks, you have the option to choose the most aggressive background, and as you get older, you can slowly switch to a calmer conservative background.
That way, you won’t have any surprises when you get older.
Insurance or bank, what’s better?
In conclusion, it’s easy to say that…
- If you think you will never get sick in the next 30-40 years and will always be able to pay on yourself, then you can take the bank.
- If you want to ensure that you reach your planned pension target, regardless of whether you are disabled for a shorter or longer period, then take out the insurance.
Your individual pension advice through ajooda
Since 2010, we advise People in Pension Planning and have helped more than 800 clients to maximize their Savings.
Through our close cooperation with the largest Swiss banks and insurance companies, you have the opportunity to choose from the best of the best.
We are independent and free from any obligations to any of our partners.
One of our main Expertise is our in depth knowledge about the Stock Market and Funds. We know the Alpha Return and Total Expense Ratio (TER) of every Fond in Switzerland.
Therefore we can provide the best 3rd Pillar Fund Options for people that would like to maximize their Saving capabilities, by making the most of the compound interests effect.
An average of 10% – 16% return per annum are the returns we provided for our clients in the last 10 years.
With the Compound Interest Calculator Tool, you can easily calculate how much you would have now, if we had set up your 3rd pillar for you 10 years ago.
How does Pension Planning at ajooda look like?
- The analysis of individual needs: Age, income, marital status, desires and reasons for the 3rd Pillar in Switzerland are important reference points.
- We use the client’s pension certificate and the IK statement to calculate the exact difference in the pension.
- Based on the exact data, the next steps are discussed with the customer. Does the customer want to make adjustments or do they want to follow the same strategy?
- We obtain appropriate offers from our partners and introduce them to the customer.
- The customer chooses the best offer for him and his family.
Worry less, enjoy more.
Our pension experts help you with questions and explain everything so simply that you yourself will practically become a Pension Planning professional.
Now you can take advantage of our pension advice simply by using Zoom or Skype, or in the traditional way during a personal meeting.