What is the Swiss pension pillar 3a? – Top Benefits Of The Third Pillar

What is the Swiss pension pillar 3a? – that will be the topic of today’s article.

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With its high standard of living, low taxes, excellent healthcare and numerous places to visit, it’s no surprise that so many expats choose Switzerland for their retirement. In fact, the country has become so popular that the Swiss government has even introduced a special retirement living program to accommodate the influx of retirees.

Switzerland ranks second in the world in terms of the number of pensioners. It is also one of the most expensive places to retire; with Zurich, Geneva and Bern among the top 10 most expensive cities in Mercer’s 2020 global cost of living survey. Indeed, the high cost of living in the country is an important factor to consider when retiring in Switzerland.

What is the Swiss pension pillar 3a?

Switzerland is rightfully considered one of the most comfortable countries for pensioners, since social protection of the population is one of the priorities of this state. Retirement in Switzerland allows you to provide the elderly with the most comfortable living conditions.

Structure of the pension system in Switzerland

The pension system in Switzerland belongs to the category of multi-level, which allows citizens, if they wish, to increase the amount of payments received after retirement. It provides for the presence of 3 levels, among which:

  • Old Age and Survivor Insurance, abbreviated as AHV. It is a mandatory state program, the amount of payments for which is tied to seniority and average annual income at the time of employment.
  • Labor insurance, abbreviated as BVG. This program is a funded part of the pension, in which all able-bodied citizens whose annual income exceeds 21,150 francs participate.
  • Individual retirement savings. This level of the pension system is completely voluntary and is represented by various private investment funds. Products designed for pensioners are offered by large insurance companies, banks, and small organizations.

Each of the above levels of pension has different characteristics. However, before studying them, it is advisable to familiarize yourself with the retirement age in Switzerland. This figure is currently 64 years for female citizens and 65 years for men.

First level – AHV

As mentioned earlier, the basis of the Swiss pension system is a mandatory state pension insurance program called AHV.

The main role in calculating the final payments for it is played by the seniority of the pensioner and his annual income. The amount of payments under the program ranges from 1200 francs (the minimum possible) to the maximum amount – 2350 francs per month.

It is quite difficult to get the maximum payment under this program, since the mandatory requirement for this is a work experience of 45 years for men and 44 years for women.

In addition, there is another condition – the annual income of a citizen claiming the maximum pension must not be less than 84,600 francs annually, which seems to be a large salary even by local standards.

The number of pensioners permanently residing in this small European state is 2.5 million people, among which only 28% of males and 13% of females receive the maximum payments under the AHV program. If the income of a married couple is calculated, then it cannot exceed 3,525 francs per month for both spouses.

The program implies that during the working life, each citizen pays 5.125% of the salary to the state insurance fund, in half with the employer. This allows you to save the necessary amount of money to receive payments in the future.

Due to the rapid increase in living standards, the government of this state plans to equalize this indicator at around 65 years for both sexes by 2020. At the same time, some industry associations have repeatedly proposed raising the retirement threshold to 67 years, however, such an initiative did not find support from the Swiss authorities.

Pension legislation provides that citizens of the country can retire early, but not earlier than 62 years for women and 63 for men. Early retirement is associated with a decrease in the amount that a person will receive in the future as benefits.

Second level – BVG

Since prices in Switzerland are significantly higher than in other European countries, AHV payments seem relatively small for local residents.

In view of this, the population uses the second level of insurance, called labor insurance, abbreviated as BVG. It is a funded system, contributions to which are paid by all employed residents whose earnings exceed 21,150 francs annually.

Such a requirement does not apply to the category of self-employed citizens (IEs), who can independently make pension contributions on a voluntary basis.

When calculating future payments, a coefficient system is used. It provides that the Swiss government annually sets the percentage that a citizen will receive from the total amount of accumulated funds on a monthly basis.

At the moment, the interest rate is 6.8%, however, there are more and more proposals to reduce it to 6%.

Payments under this program allow a citizen to significantly improve his financial situation after retirement, as they are added to state payments for AHV.

Among other things, this program provides for the possibility of paying out the entire capital, however, only in certain cases. Among them:

  1. acquisition of real estate;
  2. opening your own business;
  3. the need to repay a mortgage loan;
  4. moving for permanent residence abroad;
  5. receiving disability benefits.

The main purpose of this part of the pension is to ensure an adequate standard of living for pensioners. The amount of these payments in total with the state, according to the program, is about 60% of the salary of a citizen during his employment.

The third level is voluntary

Voluntary pension insurance in Switzerland is very similar to similar systems and funds that are common throughout Europe. As a rule, they are special investment products for pensioners, which are distinguished by favorable conditions and the optional regular deposit of funds.

Such proposals are most often developed by small private companies, insurance organizations and financial institutions. At the same time, the administration of the fund, and not the state, is responsible for the safety of funds. However, in terms of the reliability of financial companies, Switzerland is generally recognized as one of the international leaders.

Income at this level of the pension system is practically unlimited, since the citizen himself determines the amount of the contribution, the type of product, the method and regularity of contributions, as well as other important indicators. If you add up the income of three levels at once, you get an amount sufficient for a comfortable stay for people of retirement age in Switzerland.

It should be noted that the use of the third (optional) pillar of the pension system is encouraged by the state. This is manifested, first of all, in tax incentives, which can significantly reduce the costs of a pensioner.

The total income for the three levels reaches an average of 6,000 francs, which corresponds to the salary of a citizen employed in a leadership position.

Who can retire in Switzerland?

What is the Swiss pension pillar 3a?

Fortunately, Switzerland has a relatively open policy for retirees who wish to settle in the country. However, foreign nationals must meet certain criteria in order to obtain a Swiss residence permit, which they require in order to retire in Switzerland. However, it is important to know that these requirements differ depending on your nationality and the Swiss canton in which you wish to live.

If you are over 55 and not working, you can apply for a residence permit. You must prove that you are financially self-sufficient and have accident and sickness insurance. You must also have a connection to Switzerland, whether through family, property, business or financial investment.

Switzerland is divided into 26 cantons or regions, which have autonomy regarding immigration within their territory. This means that every foreigner must obtain a residence permit in the respective Swiss canton. For citizens of the European Union (EU) or the European Free Trade Association (EFTA – Iceland, Liechtenstein and Norway), the process is relatively simple thanks to bilateral agreements on freedom of movement.

For example, EU/EFTA citizens can move freely to Switzerland for up to 90 days without a visa. However, those planning to stay longer must register with the local office of the Swiss canton within 14 days of arrival and apply for a non-working residence permit.

Retirement taxes in Switzerland

The status of Switzerland is, in fact, a tax haven. The country has relatively low tax rates, which can boost your retirement income. It is important to understand the Swiss tax system and the tax system of other countries where you have pension funds. As a general rule, after moving to Switzerland, you must declare your worldwide assets, which are subject to Swiss taxes.

What is the Swiss pension pillar 3a?

Retirement income

Switzerland recognizes pension income as taxable income. The tax rate depends on the canton where you live and the amount of your retirement income. It is noteworthy that the country has a number of agreements in force with many countries that prevent double taxation of pensions. In this case, taxes apply only in the country of residence.

As a foreigner, you can also pay a lump-sum tax when you enter Switzerland. This allows individuals to request that their Swiss taxes be based on an estimated per diem amount to cover expenses; as opposed to their actual income and net worth, which is taxed at the current rate. However, it is not available in all cantons, and those that prohibit it include Zurich, Schaffhausen, Appenzell-Ausserrhoden, Basel City and Basel-Land.

Inheritance and gift tax

Retirees in Switzerland may also be subject to other Swiss taxes, such as inheritance and gift tax, and capital gains tax on wealth and assets. However, again, much depends on the canton. Fortunately, the transfer of wealth by inheritance is tax-free for spouses in all cantons. This is also usually the case with descendants and direct ancestors. In addition, while capital gains tax generally applies to real estate gains, it generally does not apply to capital from stocks or bonds.

Swiss pension system: About 3rd pillar

The 3rd pillar is an option of the Swiss pension system. This non-mandatory private pension plan complements the benefits offered by the first and second pillars. It was firstly presented in 1972 as a supplementary pension capital scheme to the 1st and 2nd pillar pension schemes.

On average, Tier 1 and Tier 2 only cover 60% of your last wage before retirement, or even less if you earn a high income from a paid job.

When you retire, your income will decrease. This decline in income can be problematic depending on your expectations or retirement plans. By subscribing to an individual third pillar pension plan, you guarantee your normal standard of living.

With this in mind, and to encourage citizens to accumulate Tier 3 capital, the government introduced significant tax breaks.

What are the benefits of the third pillar?

What is the Swiss pension pillar 3a?

The third pillar offers many opportunities depending on your goals, expectations, savings opportunities, current or future circumstances, and your tax situation.

  1. Accumulate capital – Accumulate capital and make dreams come true, such as buying a house, starting your own business and being self-employed, reducing your mortgage, financing work in your main home, or even retiring early.
  2. Ensure your family’s financial security – Ensure your family’s financial security by accumulating capital for retirement with Tier 3 life insurance. By taking this step, you will protect your family from financial hardship in the event of death or disability, and make sure you have a disability pension. At the same time, you receive additional income after retirement and replenish the pension gap.
  3. Take advantage of tax deductions – Take advantage of tax deductions from the moment you make your first deposit, throughout the entire period of the deposit, as well as when withdrawing assets. Contributions are deductible from taxable income, capital and interest are exempt from withholding tax upon expiration; and early withdrawal tax is withheld at a reduced rate.

Different types of third pillar pensions

The third pension pillar is the wealth that you have accumulated during your lifetime or that you provide in anticipation of your life goals or retirement. The third pillar pension plan is provided in the form of a bank account or life insurance. Naturally, each of these two solutions offers very different benefits, but you can take full advantage of both by combining them.

  • Third pillar bank account – Works like a bank account where you can deposit money or not, depending on the options available1. The accumulated capital is deducted if you withdraw funds.
  • Third level insurance policy – Acts like a fixed-term insurance policy with premiums1. If you withdraw funds, the contract is terminated and the withdrawn capital corresponds to the redemption value of the insurance policy.

The Purpose of the Third Pillar

If you want to top up the 1st and 2nd pillars and get extra money for your pension, you can voluntarily contribute to the 3rd pension pillar. There are two types of 3rd pillar: limited private pension plan (3a) and unlimited pension plan (3b).

Limited Private Pension Plan (3a)

These are savings that you can accumulate during your working life until retirement with a bank or insurance company.

Features include:

  • There is a maximum amount you can deposit into your account each year.
  • Better interest rates than in a savings account.
  • The deposits you make are not taxed.
  • The withdrawal of savings under component 3a is subject to strict conditions.
  • When withdrawing savings under component 3a, you must pay a one-time tax based on your income at the time of withdrawal.

Unlimited Pension Plan (3b)

These are savings that can take the form of cash, savings accounts, life insurance, and investments.

Features include:

  • You can make unlimited annual contributions every year.
  • You must declare your accumulated capital to the tax authorities every year.
  • Capital is usually taxed annually.
  • You can withdraw capital at any time.
  • You are not subject to additional tax when you withdraw your savings.

What is pillar 3a?

What is the Swiss pension pillar 3a?

Pillar 3a, also known as linked pensions, is part of the third pillar of the Swiss pension system. Its main purpose is pension provision and it is usually paid out upon reaching retirement age. It can only be paid early under certain conditions. Because Pillar 3a is an important component of private pensions, the federal government provides tax credits on payments made under Pillar 3a schemes.

Paying into pillar 3a

Each year, you can deduct contributions to your linked retirement plan (pillar 3a) from your taxable income. Thus, by depositing funds into the component 3a account, you not only secure your future, but also receive a tax advantage. However, you can’t pay as much as you want: the linked pension plan is limited to a statutory maximum amount set by the Federal Council.

Pay-outs from pillar 3a

With the extra capital from your private retirement plan, you can maintain your standard of living in retirement and enjoy life without worry. Typically, your Tier 3 savings can be paid out five years before your regular retirement age or five years after that age. So, if you retire early, you can usually also get your 3a savings earlier.

When can you make an early withdrawal from pillar 3a?

You can use your linked retirement savings not only to secure your old age, but also to fulfill a long-held dream. Unlike flexible pension savings (component 3b), pension savings 3a can only be withdrawn early in certain cases:

  • House purchase or mortgage pay-off – Will you be able to fulfill your dream of owning your own home soon? To provide the required capital, you can withdraw your savings from component 3a. Instead of canceling life insurance, you can also pledge it. Pillar 3a benefits can only be withdrawn to finance owner-occupied residential property.
  • Self-employment – Have you decided to take the plunge and become self-employed and need some start-up capital? In this case, you can also close your 3a account early and withdraw the money.
  • Moving to another country permanently – Are you going to fulfill your old dream of starting a new life abroad? If you are moving abroad for permanent residence, you also have the option to withdraw your 3a funds early.
  • Pension fund purchases – If you want to improve your pension benefits by making a voluntary purchase into your pension fund, you can also withdraw money for this purpose from Tier 3a.
  • Disability – Life is unpredictable. If you become disabled as a result of an accident or illness and can no longer work, early withdrawal is also possible under certain conditions.

Who can benefit from the 3rd pillar pension plan?

You may be eligible to participate in the Limited 3a Private Pension Plan if:

  • You are already paying contributions to the 2nd tier (mostly employees).
  • You do not have an OPA (usually self-employed) pension plan.
  • You live abroad but work in Switzerland (for example, border workers).
  • You receive a daily benefit from Swiss unemployment insurance.
  • You are a partially disabled insured person with income on which you pay OASI (AHV, AVS).
  • If you have reached retirement age but are still working, you can continue to pay contributions for up to five years after age 65 (men) and 64 (women).
  • You can continue to pay contributions even if you are temporarily out of work (during civil or military service, unemployment, sickness, etc.).

There are no special requirements for the unlimited 3b pension plan. Pension plan providers can provide you with details on how to move up to the 3rd pillar.

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