Pension fund

How to save on taxes with your pillar 3a

Anybody who uses their pillar 3a in addition to their OASI and pension fund pillars to save for their old age can deduct contributions from their taxable income. Foreign workers who file a tax return in Switzerland are also able to benefit from this tax deduction.

In Switzerland, employees who are members of a pension fund can pay up to 6,883 francs p.a. into their pillar 3a. Depending on where you live and your taxable income, if you pay in this maximum amount you can save between around 1,500 and 2,500 in tax. If you miss a payment, you are unable to catch this up subsequently. That is why it is worth paying in something every year, even if it is less than this maximum amount.

You can withdraw your pillar 3a balance no earlier than five years before statutory retirement age (65 for men, 64 for women), unless you are leaving Switzerland or wish to use the money to buy a home, for example.

Invest the money in securities – but as cost-effectively as possible

Banks and insurance companies offer a wide range of pillar 3a savings plans. The solutions offered by insurers often have serious downsides, however: usually you have to commit to paying in a fixed amount every year. In addition, the commission taken by the broker as well as the management and insurance costs usually account for a large proportion of the money you pay in.

With banks, you can be more flexible: you do not enter into a commitment and can decide whether and how much to pay in each year. Banks frequently offer two types of 3a plans: an interest-bearing account and a securities solution, where your money is invested in equities, bonds and real estate, for example.

Nowadays, interest-bearing accounts earn practically nothing. It is likely to be many years before interest rates rise noticeably. Over the long term, securities generate significantly better returns than interest-bearing accounts, provided you choose a solution with low fees, such as the pillar 3a with ETFs. ETFs replicate an index in a cost-effective way, meaning you can save a lot of money over the years.

This is shown in a comparison of the cost-effective pillar 3a with ETFs and a traditional and often expensive 3a securities solution offered by banks. If you pay in 6,000 francs each year, with an assumed securities return of 4.5%, you will have a balance of 169,430 francs after 20 years if the annual fees are in line with the average charged by Swiss banks of 1.32% (see table). With a cost-effective securities solution such as the pillar 3a with ETFs, where fees are only around 0.84%, the balance will be almost 9,400 francs higher.

Would you like to find out more about the pillar 3a with ETFs or learn how to best save on taxes? Then arrange a non-binding appointment at your local VZ branch.