The 3rd pillar is used to profitably invest capital that you set aside for retirement anyway and to benefit from high tax savings.
The 3rd pillar is voluntary in Switzerland, but highly recommended (you find out why in a bit).
3rd Pillar Advantages
Advantage 1: Save up to CHF 2500 in taxes annually
As an employee, you have only 2 options to legally save taxes significantly.
- Move to a tax-favorable canton (not always practicable)
- 3rd pillar (can be implemented at any time)
Depending on the municipality & canton of residence, you can save CHF 1500-2500 in taxes annually with the 3rd pillar.
Currently, no retroactive payments for previous years are allowed. The law could change on this soon.
Advantage 2: Protection against inflation
A carefully chosen pillar 3a invests in shares and has a positive return in the longer term. This return protects you against inflation. Why is this important?
Inflation in Switzerland has averaged 1-1.5% per year over the last 100 years.
How much will my money be worth in 30 years? (Example)
You want to save CHF 200,000 in 30 years. You save your money in a bank account where it does not yield any interest.
As a diligent saver, you reach your goal in 30 years. However, your CHF 200’000 will not be worth as much as it is today, but:
- CHF 147’940 value at 1% inflation per year
- CHF 109’096 value at 2% inflation per year
Advantage 3: Return on Investment
A pillar 3a with securities (shares) is always the right solution in the longer term, for people with a savings horizon of at least 12 years.
Therefore, it is advisable to look into the investment strategy of the 3a provider or to get help from an expert.
For example, the US S&P 500 has gained an average of 9.4% annually over the last 50 years (nominal, without inflation).
If one is pessimistic for the next 30 years and assumes only 5% per year, then with a monthly payment of CHF 300 at the end of these 30 years:
- CHF 239’180! Of this, CHF 131’180 is only due to compound interest.
Advantage 4: Indirect amortization of the property
When you take out a mortgage, you can amortize it directly or indirectly.
With the direct mortgage, you pay off the amortization directly each year.
With the indirect mortgage, the payments into the 3rd pillar are pledged and thus serve as collateral for the bank.
Advantage 5: How do you finance your life if you can no longer work?
Or who will provide for your family if you can no longer do so?
Optionally, with the additional disability pension or death benefit, you can close gaps that can be devastating for you or your remained family members.
Advantage 6: The money is always yours!
The money in the 3rd pillar is one of the only funds that no one can take away from you. Why?
No matter if in case of private bankruptcy or after your death for your inheritors: The bankruptcy & inheritance privilege ensures that no one can get their hands on the money, except you or your heirs.
3rd Pillar Disadvantages
Disadvantage 1: Holding period
Since the paid-in capital serves as a pension, the legislator does not want you to be able to spend it on a car or a cruise, for example, when you feel like it. The money is blocked for a period of time and can only be withdrawn under the following circumstances:
- You retire
- Up to 5 years before retirement, the capital can also be withdrawn
- You move abroad
- You become self-employed
- You buy a property in Switzerland in which you live yourself.
Since the capital is blocked until one of these points occurs, we recommend paying the amount into the 3rd pillar, which you put aside for later anyway. Because if you put it aside, you should not spend it just like that.
Never pay in capital that you need for food, rent, health insurance, etc., that obviously makes no sense. We will be happy to create a suitable budget plan for you.
“But I don’t understand anything about stocks”.
You probably don’t understand anything about trains either, yet you hop on one anyway. Just as you trust your life to the train driver, you trust an experienced fund manager with your money.
“What if the value of the stocks drops to 0?”
For this to happen all the companies in a fund would have to go bankrupt, while the fund manager keeps them in the fund instead of kicking them out.
Since often large and important world companies are represented in such funds, at this point electricity, electronics, food, medicine would be scarce (since these companies are bankrupt) and the money you did not pay into the 3rd pillar would not be of any help anymore anyway.