Everyone should start planning their own pension as early as possible. The sooner you start setting money aside for your golden years, the more options you have for a future free from financial worries. No one should put off saving for retirement until they need reading glasses or have gray hair.
The Swiss pension system is built on three pillars: the state pension (first pillar), employee benefits insurance (second pillar), and private pensions (third pillar) (see inset). This three-pillar approach is rooted in the Federal Constitution itself, and is aimed at ensuring comprehensive financial coverage in the event of death, disability, and old age.
Of particular interest is the private pension provision, referred to as the third pillar, which is further divided into Pillar 3a (tied pension provision) and Pillar 3b (flexible pension provision).
The word "tied" in the Pillar 3a pension solution means that the capital saved up is intended to finance retirement, and is thus tied to a purpose. This means that as someone who is saving for retirement, you are rewarded with various privileges, such as higher interest rates on the capital saved as well as tax benefits. The capital that accrues in Pillar 3a cannot be withdrawn until five years before the normal retirement age under Old Age and Survivors' Insurance. However, there are also various exceptions that allow you make an early withdrawal of the capital. For instance, if you are leaving Switzerland permanently or would like to use the money to purchase your own home.
You receive no special privileges under the optional Pillar 3b, except under certain life insurance policies. However, Pillar 3b has no statutory restrictions on withdrawing funds either. This means that you always have unrestricted access to the capital set aside under Pillar 3b despite being unable to claim any tax benefits.
Pillar 3a Benefits
An increasing number of Swiss people are taking advantage of tied pension provision. The main reason for this is that the amount paid into Pillar 3a each year can be deducted from their taxable income. For employees who are members of a second-pillar pension fund, the maximum deductible amount for this year is CHF 6,768.
Under tied pension plans, funds must be set aside using a retirement plan format that is recognized by law. With banks, this can be done using a 3a pension account or a 3a securities solution, for instance. Unlike normal savings accounts, pension accounts offer preferential interest rates as well. 3a securities solutions provide greater potential for returns over the long run, since money is invested in securities such as equities. This can be particularly appealing given the current environment of low interest rates. It is, however, also associated with higher risks. That said, banks such as Credit Suisse offer a range of products and the personal advice you need to find the right product for your investment horizon and risk tolerance.
Expats Benefit as Well
Foreign individuals who work in Switzerland and pay withholding taxes can also reap tax savings by contributing to Pillar 3a. To do so, expats merely need to report their Pillar 3a contribution to the tax authorities, and this will allow them to request a refund on a portion of their withholding tax. Request forms can be obtained from the cantonal tax offices. Please note the deadline for submitting this form. Along with this request, a confirmation from the pension fund must generally be submitted by the end of the following March. This varies from one canton to the next.