Pillar 3a is worthwhile because of the great tax advantages and in order to increase the capital in the longer term through interest. This capital gain within the 3rd pillar is completely tax-free!
However, taxes are payable when the 3rd pillar is paid out. When the capital can be withdrawn and how it is taxed, you will learn in this blog.
In short: What is a 3rd pillar?
The 3rd pillar is a “blocked account” and all contributions that you pay into the 3rd pillar, up to a maximum annual amount (currently CHF 7’056), can be deducted from your income tax.
With the capital in this account you can invest in securities, bonds, gold and other commodities, so that the account not only saves taxes, but also earns interest.
You can also optionally include an additional disability pension or life insurance with Pillar 3a.
Taxes on Pillar 3a withdrawals
Pillar 3a is not completely tax-free; it is taxed upon withdrawal, but at a much lower percentage.
To ensure that you pay less tax, it is advisable to open several 3a accounts or contracts and have them paid out in stages. In this way, the tax progression can be reduced. After all, 1x CHF 100’000 is taxed more heavily than 2x CHF 50’000.
The saved capital is taxed as income at the time of payout, but at a reduced rate (1/5 of the income tax rate of your municipality) and separately from other income. This is called a capital withdrawal tax.
Tax example 3rd pillar
You earn CHF 100’000 in the last year before retirement and have CHF 500’000 in the 3rd pillar.
As an example, let’s assume that in your municipality of residence the income tax rate for CHF 100’000 is 25%.
- You pay 25% tax on your income of CHF 100’000 = CHF 25’000 tax.
- You pay 1/5 of 25% on your 3rd pillar capital of CHF 500’000 = CHF 25’000 tax
- Total tax burden = CHF 50’000
When is the Pillar 3a payout possible?
The saved capital can be withdrawn at the earliest five years before the normal retirement age. For men, the retirement age is 65, for women 64.
This means that men can access their 3a capital from the age of 60 and women from 59. There is an exception if you decide to continue to be gainfully employed. In this case, the payout can be postponed by up to five years.
Under certain conditions, an early payout of pillar 3a is also possible
1. self-employment: if you become self-employed and are no longer insured under Pillar 2, you can withdraw your Pillar 3a capital early.
2. emigration: if you emigrate permanently from Switzerland, the saved 3a capital can be paid out to you immediately.
3. purchase of residential property: early payment of the 3a capital is possible if you want to use it to finance residential property or amortize your existing mortgage loan.
4. disability: in the event of permanent disability, the 3a capital can be withdrawn early.
5. partial retirement: in the event of a gradual reduction in the workload until retirement, the 3a capital can also be paid out early.
Saving taxes through staggered 3a payouts
To illustrate the tax savings, let’s take the example of Michael and Sabrina, who both live in Lucerne:
Michael has his saved pension capital totaling CHF 450’000 paid out on his retirement at the age of 65. This will incur around CHF 40’000 in taxes, which will be collected by the federal government, the canton and the municipality.
Sabrina has distributed a total pension capital of CHF 450’000 over two accounts that she had opened some time ago. She decides to have her two accounts paid out in two different years. Each account has a balance of CHF 225’000.
Due to the different payout dates in two years, her tax burden is reduced to a total of CHF 28’000 – even though she, like Michael, lives in Lucerne.
Sabrina has saved over CHF 12’000 compared to Michael by staggering the payout of her 3a capital from several accounts, spread over different years.
It is therefore worthwhile to think about optimizing taxes when paying out the retirement capital from pillar 3a and to spread the money over several accounts.
Conclusion
For high earners, the 3rd pillar is worthwhile anyway, because otherwise too much savings end up in the bank account, where they do not yield any interest. This way you can save up to CHF 2’500 per person, per year.
The 3rd pillar is not completely tax-free, but is taxed when it is paid out, but at a much lower percentage.
Consider the tax aspects when paying out pillar 3a and plan early to secure your financial future in the best possible way.
If you have any uncertainties or questions, it is advisable to seek professional advice.
