Switzerland has a very comprehensive social security system that is unique in its kind. The system is based on three “pillars” and each pillar aims to help retired individuals and their immediate family to maintain their accustomed lifestyle. The first pillar, which this article focuses on, contains the Old Age and Survivors/Disability Insurance (OASDI) also known as the Swiss state pension. The second pillar covers the occupational pension scheme (BVG/LPP), and the third pillar covers private pension provisions. Each pillar secures different entitlements and is subject to different regulations.
In addition, employers are obliged to take out a range of insurances for their employees. Some insurance premiums are fully covered by the employer, whereas the employer may ask the employee to contribute to other insurance premiums. Finally, the mandatory Swiss health insurance is a significant cost to a household. The insurance premiums are considered a private cost, rarely covered by the employer.
Third pillar – private pensions and their characteristics
The voluntary third pillar pension are flexible pension plans in addition to the plans of the mandatory first and second pillar schemes. Their purpose is to close financial gaps if your benefits from the first and second pillars are insufficient. Neither the state nor your employer is involved with funding your private pension provisions. The decision as to whether you want a private pension provision is completely up to you.
The third pillar is divided into restricted and unrestricted pension provisions. The restricted pension provisions (pillar 3a) are long-term plans which are tax deductible upon contributions, but the capital is locked into the retirement plan. The unrestricted pension plan provisions (pillar 3b) are flexible plans without mandatory terms and usually not tax deductible upon contribution. The capital can be withdrawn at any time. As pillar 3b provisions vary depending on the insurance provider, this article focuses on the pillar 3a plans provisions/insurances only.
Pillar 3a pension/insurance plans and its solutions
Pillar 3a provisions are very popular among Swiss taxpayers, as whenever a contribution is made, the taxpayer can claim a tax deduction in the tax year when the contribution was made. However, the maximum amount which may be contributed within a tax year is CHF 6’826 (2020) for employed individuals. The easiest way to get a pillar 3a pension is to open a restricted pillar 3a bank account with a financial institute in Switzerland. Every transfer to this bank account is counted as a qualified contribution. Once transferred, the money is blocked, and you are not allowed to withdraw it unless there is a qualified distribution reason. Usually, pillar 3a bank accounts are interest-bearing. However, the interest rate depends on the financial institute.
Alternatively, you have the possibility of going for a life insurance that meets the requirements to qualify as a restricted pension provision. Many Swiss insurance providers offer a variety of life insurance solutions. The benefits of a life insurance are that not only can you accumulate savings for your retirement, but you can also insure financial risks in the event of disability or death. The premiums you pay towards your life insurance policy qualify as pillar 3a contributions and are tax-deductible, just as if you had transferred money to a pillar 3a bank account. However, the major difference with most life insurance solutions is that you are contractually bound to pay the annual premiums, while with a bank account solution, you have no obligation to contribute.
US citizens/green card holder and other nationals who remain taxable in their home country should seek professional advice before arranging for any pillar 3a pension or insurance provisions. Like for the second pillar pension plans, a tax is triggered when withdrawing your pillar 3a pension savings. With a bank account solution, there is no other option than a lump-sum withdrawal. Only with certain life insurance solutions can you opt for an annuity rather than a lump-sum withdrawal.
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