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An Introduction to the Swiss 3 Pillar System

Overview

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Switzerland’s three pillar system gives a broad financial safeguard for the retired Swiss population. The name  “three pillars” presumably stems from the phrase “three-legged stool”, which is used by  financial planners to describe the most common sources of retirement income: 1. Social Security, 2. Employee pension, 3. Personal Savings. 

The first pillar is guaranteed by the Swiss government and assures a minimum existence, but it hardly covers more than the basics. The second pillar, which helps to maintain living standard in old age, is mandatory for employees and financed in equal parts by both employees and company. The third pillar consists of private saving schemes giving the most flexibility to people, therefore providing the biggest upside potential.

First pillar  – State Pension

The first pillar was designed to secure the financial existence of the retired population and to avoid people falling into poverty. It also protects surviving dependents in the event of death and there are provisions, should one suffer from income shortcomings due to invalidity. It works by a pay-as-you-go system (employed persons pay for retirees). The amounts paid into the first pillar is split between workers and employer currently each contributing 5.125% of the salary of a person (as of 2016).

It consists of:

  • old age and survivors insurance
  • disability insurance
  • income compensation allowances

Some people add the mandatory health insurance (Grundversicherung) to the first pillar.

Second pillar  – Occupational Retirement

The occupational pension (Pensionskasse) is mandatory for people working in Switzerland with a wage above a certain amount (in 2019: 21’330 CHF). It is intended to ensure a certain standard of living during retirement. 

Usually the pension plan is picked by the employer; larger companies sometimes opt to run their own pension fund. Self-employed people can opt to join a pension plan scheme, but are not obliged to. The monthly contributions are determined by the plan chosen by your employer and is matched 1:1 by your company. 

The goal of the first and second pillar is to secure 60-70 % of the last salary during retirement. People refer to the missing 30-40% as the “income gap” or “income shortfall”. This gap needs to be covered by other means if you want to keep a similar standard of living during retirement. 

Third pillar – Personal savings

The third pillar is split into two broad categories: 3a pillar and 3b pillar.

Paying the maximum 3a pillar contribution can result in a reduction in actual taxes of up to 2’300 CHF per year depending on the canton!

Swiss Personal Finance

3a pillar

The 3a pillar is essentially a tax advantaged blocked account. The government caps the tax advantaged contributions at 6’826 CHF per year (in 2019), which can result in a reduction in actual taxes of 900 – 2’300 CHF per year depending on the canton¹. Because the 3a pillars are highly incentivized the government allows the liquidation of 3a pillar accounts (as well as the 2. pillar) under the following conditions: 

  • for purchasing a home ownership (only for primary residence)
  • for taking up self-employment (starting a business)
  • Definitive departure from Switzerland (👈 😂 imagine the Swiss saying: “Sure you can leave, but please take your money with you!”)

¹Assumption: married couple with two kids and yearly taxable income of 100’000 CHF)

3b pillar

Finally, the pillar 3b includes all voluntarily accumulated assets. So basically, anything that was not covered above: This may include, savings accounts, shares, securities, real estate or even your stamp collection. 

The biggest lever in terms of choice and wealth growth will be found in the 3b pillar.

Swiss Personal Finance

Final words

Obviously there is a lot more to say about the three pillar system. For the sake of clarity and to stay true to the word “introduction” I kept the information density low.  Most important to note is that in order to achieve financial freedom, the biggest lever in terms of choice and wealth growth will be found in the 3b pillar. So I will spend a lot more time talking about how to do that in the coming weeks, months and years…


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