I recently opened a Pillar 3a account with Finpension and plan to transfer the maximum annual contribution soon. I have noticed that many people in this forum (and Swiss residents in general) make use of this instrument. I just wanted to make sure I fully understand its advantages and potential drawbacks, and check if I might be missing anything.
Pros:
The CHF 7,258 contributed to Finpension is tax-deductible. Assuming a 20% tax rate, that’s roughly CHF 1,450 saved per year. When the funds are eventually withdrawn, a tax is applied on the total amount, although I’m not sure of the exact percentage (I am aware that you can open up to 5 accounts to minimize this). Let’s say that reduces the net benefit to about CHF 1,000 per year. This would be the very approximate annual tax savings from using Pillar 3a. Another advantage is that the funds in Pillar 3a are invested. However, I don’t really see this as a major benefit in my case, since I already invest independently through IBKR.
Cons:
The main downside is that the money is locked in until retirement. Early withdrawal is possible (e.g., for buying property or leaving Switzerland), but it involves a withdrawal fee of around CHF 200.
Many of your questions already have an answer in the forum. Anyway…
Assuming a 20% marginal tax rate
You can easily estimate your marginal tax rate by adding 100 CHF of income to your tax declaration: let’s assume your tax bill increases by X CHF, then X% is your marginal tax rate.
a tax is applied on the total amount, although I’m not sure of the exact percentage
Correct, online you will find all the tax rates for each canton.
Another advantage is that the funds in Pillar 3a are invested. However, I don’t really see this as a major benefit in my case, since I already invest independently through IBKR.
Another benefit is that the funds in the 3rd pillar (and 2nd pillar as well) aren’t used in the computation of your wealth, meaning that your wealth tax will only depend on the funds outside of 2nd and 3rd pillars.
No, the tax at source rates are not exact. Check the calculator from the confederation for example.
Note: if you have lowish salary, 3a may not make a lot of sense initially. Esp now that you can contribute for missing years later (if your income increases).
My gross annual salary is 100k CHF (though I’m not sure whether that’s considered low or high).
Ah, I didn’t know that. Interesting. I was actually trying to figure out whether contributing to Pillar 3a makes sense for me, since I already plan to invest the money on my own anyway.
Consider taxation if you might move to another country in the future: taxation varies wildly between the countries and might in stome cases be higher than the regular taxes you would be paying now.
Tip: you are now allowed to pay into 3a up until 10 years later (for the years you were eligible).
Also: you may check with AVS/AHV whether you are eligible to contribute for up to (?) the past 5 years.
It won’t work for you. You can contribute to 3a for previous years if you were allowed to do it, but haven’t done in the first place. I.e., you were employed in Switzerland.
For 3a, there are many more tax advantages than just saving the income tax. Everything in 3a is not taxed in any way.
In 3a, you don’t pay income tax on what normally considered as such - dividends and interest, as well as some withholding taxes to third countries. This alone is sufficient to make a 3a investment with 0.5% management fee cheaper than a taxable investment with 0 TER.
Don’t even get me started on the behavioral aspect. You can’t touch money in 3a for decades, so you don’t.
Also, a Swiss person can amass half a million in 3a by contributing and investing over many decades. For you, contributing 35000 over 5 years might be just not worth the hassle. You should save much more to build substantial wealth.
On the other hand, expats in Switzerland tend to stay some decade longer than they were thinking originally.
The hassle is minimal. Opening a Finpension account takes about 10 minutes, and choosing an investment strategy only a bit longer. I just wanted to understand whether it’s truly worth it. Even saving around 1500 CHF per year through a 3a pillar investment would amount to roughly 7500 CHF over five years, plus any capital gains. That does seem quite appealing. The inevitable disadvantage is that the money will remain locked there
Imagine you have 30k CHF in 3rd pillar because you invested in it for some 4-5 years. Then you decide to return to your home country X.
Well, you might discover that X taxes your 3rd pillar like income, and you are hit by a 50% tax bill (each country is different so you should check).
So basically you were better off stay away from the 3rd pillar and investing outside of it.
One aspect that seem not to have been covered so far is, are you required to file the tax return? And if not, are your current taxes at source lower the actual tax liability would be with a full tax return?
If the answer to the two questions is “no” and “yes”, then just to be able to use the pillar 3a deduction you will have to file taxes and that will forfeit the advantage of having underpaid the taxes at source. That drawback might fully or partially offset the tax advantages of 3a deduction
Yes, absolutely possible and even probable, so your hard work in CH may end up being a gift to someone else, in another country.
You need to really look into the detail of the taxation laws in the country/countries you may want to go to after CH. Some recognise and differentiate protected retirement savings from other countries, others don’t. You also need to look into what it’d take to get the money withdrawn and taxed in CH rather than a country taxing >50% any amount over 20-30k, meaning what documents do you need to provide. Currently the forum - ever erring on the side of optimism - believes that withdrawing a 3A is easy, you just deregister from CH and that’s it. This may be the case, but it can change in the future and withdrawing may require proof you’ve settled and/or become a tax resident elsewhere, which would make you a bright red spot on another country’s tax agency’s radar, ever keen to get your juicy CHF
Some countries have incentives for citizens returning, foreigner retirees, citizen retirees, what provisions are there, how to access them, (when) are you eligible etc. You need to look at that too.
That’s really helpful to know. I wasn’t aware of it, as I thought 3a funds were treated as regular savings. Does the same rule apply to the 2nd pillar?
I’m inclined to stay in Switzerland, but that also depends on future job opportunities. Since it’s hard to predict which country I might move to (if any) in the next 2–3 years, I can’t really look into specific taxation details yet. Given what you mentioned, it seems wiser to wait on investing in the 3rd pillar until my long-term plans become clearer.
Less clear about it, there are very knowledgeable members here and several threads about the 2nd pillar.
You can always invest in transferable securities (ie in a brokerage account) which is completely open and if you by some miracle feel 10000% sure you can and want to settle in CH then pull from the brokerage and fill up the 2nd and 3rd pillars to also lower your tax liability.
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