As we all live longer, and with the cost of living continually rising, it is more important than ever that you boost your pension fund. The Swiss pension system offers several ways to save for retirement.
The pension system in Switzerland is split into three pillars.
The first pillar is provided through government state benefits, like state pensions provided in other jurisdictions.
The second pillar is made up of contributions from an employer in Switzerland, boosted by personal contributions to an individual pension fund. These funds are then invested to form a port of capital in retirement.
These first two pillars had historically represented the bulk of pension planning in Switzerland. However, an increasing shortfall between the benefits provided through the first two pillars and the projected needs of the average individual in retirement was foreseen. This was due to the rising cost of living and increased life expectancy.
The third pillar was introduced in 1972 as a private pension to boost retirement assets and close the gap in expected savings required for retirement.
It is split into two parts, a 3a pillar and 3b pillar.
Third Pillar 3a
Income tax-relief is offered on savings into a third pillar as an incentive to save. Contributions to a third pillar can be deducted from income tax in Switzerland, with greater advantage for those Swiss Cantons with higher rates of income tax.
An employed worker is able to save 6,883 CHF per annum into a third pillar and a self-employed worker can save 20% of their profits annually, up to a maximum of 34,416 CHF.
As with any pension, there are restrictions on withdrawals based on age. The normal retirement age in Switzerland is currently 64 for women and 65 for men. A 3a allows withdrawal 5 years prior to normal retirement, 59 for women and 60 for men. Conversely, if you favour a later retirement you can continue to work and contribute to a third pillar for an additional 5 years beyond normal retirement age.
Aside from the significant tax benefits of a 3a and the ability to boost retirement savings, there are other advantages. You can utilise a third pillar to assist in the purchase of a main residence or to reduce the borrowing required in the transaction. This can be a big benefit for those hoping to remain in Switzerland for the long-term and who could benefit from a boost in savings towards a relatively large deposit for a house purchase in Switzerland.
A 3a can be arranged with a local Swiss bank or an insurance company, each with their own benefits. An insurance 3a can include life and disability benefits which are attractive to those with families.
For many expats, living in Switzerland is a medium-term plan and a 3a has the advantage of being accessible to those who permanently leave Switzerland. Having access to a pot of cash, without the retirement restrictions within Switzerland could be of great value. The funds could be reinvested into another tax-efficient vehicle in the jurisdiction you move to or be used to purchase a property.
There are also those who see the advantage of the CHF as a historically safe and secure currency and would prefer to leave the funds invested after departure.
Third Pillar 3b
A 3b does not carry the tax-advantages in most Cantons in Switzerland, outside of Geneva and Fribourg. It does not, however have the restrictions on the level of contributions you can make.
A 3b is like an ISA in the UK, in that there is no tax-relief on contributions but there is also no tax on withdrawals. Though, there is a tax on capital throughout the life of the 3b, unlike an ISA.
Utilising a third pillar, whether a 3a, 3b or a combination of both forms an important part of financial planning in Switzerland, with many potential benefits. At Forth Capital, we understand the local Swiss market as well as the specific needs of international workers who may not remain in Switzerland forever.
Whether your plans are clear or uncertain, saving for retirement is required by all. A third pillar represents a tax-efficient solution to aid in retirement planning. To benefit from a financial review, contact Forth Capital to discuss your specific needs and objectives.