If you are one of the many expats who live and work in Switzerland, you may have wondered about boosting your savings for retirement. Using the optional third pillar of the Swiss system offers various advantages to pension savers. In this post, we introduce the third pillar of the Swiss scheme, discuss the benefits of participating and review how it works with the first and second pillars.
What Is a Pillar 3 Scheme?
In the Swiss system, the third pillar boosts your income in retirement by supplementing the state pension (known as Pillar 1) and occupational benefits or company pensions via Pillar 2.
One of the most sustainable and efficient pension systems in the world*, the state scheme covers basic needs. However, even with benefits from state and occupational plans, the retirement income might not be sufficient to guarantee a similar standard of living. To bridge this possible gap in retirees' finances, the third pillar of the Swiss system offers two choices: restricted 3a pensions, or flexible arrangements known as 3b schemes. The latter option does not attract the same tax advantages as 3a plans.
A restricted type 3a pension scheme is, in other words, a government-supported private plan designed for individual retirement savings. Accounts provided by banks tend to feature flexible premiums without guaranteed returns, whereas insurance company plans usually have guaranteed returns with built-in life cover.
How Pillar 3 Works Alongside Pillars 1 and 2
Membership of the state pension scheme is compulsory, and employees who earn more than a lower salary limit are obliged to contribute to their company pensions, along with their employers.
In the same way that employees contribute to company schemes from their gross income (thus receiving tax relief at source), individuals who make payments to third pillar pension funds are also entitled to tax relief on the first CHF 6,768 per year of contributions (2018 figures).
Conversely, self-employed workers already enrolled in the state pension (first pillar) scheme can pay in up to CHF 33,840 into a Pillar 3 plan. The maximum is twenty per cent of earnings.
Benefits of Opting In
Jointly, the three types of pension help to maintain retirees' standards of living by combining state and occupational pensions with third pillar income from local Swiss products, such as those on offer from leading Swiss pension plan providers. Naturally, professional advice is advisable to ensure the right choice of long-term savings product(s), possible insurance cover for the investments and – if applicable – optimal pension transfer options.
All workers in Switzerland, including expats, can open a third pillar bank account or set up a third pillar insurance policy. Currently, the retirement age is 65 for men and 64 for women, but it is possible to withdraw from the account if you leave the country, buy your main home, or are within five years of retirement.
In this way, by selecting local Swiss products that offer stability and reliable performance, individuals can top up their retirement savings through additional, tax-deductible purchases. Notably, individuals who have moved to Switzerland in the last five years and who have not previously contributed to a Swiss pension plan are subject to an initial investment limit of one-fifth of their salary.
If you would like confidential advice on how to set up a Swiss pension, our financial experts here at Belgravia Wealth Management will be delighted to assist. As well as individual retirement plans, we also advise on the best local Swiss products to provide for your future or arrange a pension transfer.
*Footnote: According to a 2016 report from the Mercer Global Pension Index.