Is Pillar 3a worth it? Advantages and disadvantages
Saving for retirement while reducing taxes: that is the idea behind Pillar 3a. Whether Pillar 3a is really worth it for everyone and what to watch out for, Compando explains.
1. Is Pillar 3a worth it?
For most working people: yes. You build up pension capital and at the same time lower your taxes. Contributions to Pillar 3a reduce your taxable income, while the balance grows tax-privileged over the term. The tax advantage rises with income; building capital works at every income level.
Many look only at the limited availability and overlook the long-term overall effect. Even small monthly amounts add up over 20 to 30 years to a large difference compared with free saving, reinforced by the annual tax savings and the compound interest effect.
Calculate your Pillar 3a capital
How much your pension capital grows over the years is shown by the calculator based on contribution amount and investment period.
2. What are the advantages and disadvantages of Pillar 3a?
The advantages
The greatest advantages are the long-term build-up of capital and the annual tax savings. You regularly set money aside for retirement; the compound interest effect lets the balance grow faster over the years and closes later pension gaps. During the term, neither wealth tax nor income tax on returns applies, which additionally supports the return. Contributions up to the maximum contribution also reduce your taxable income each year.
The disadvantages
Against this stand two restrictions; how heavily they weigh differs from person to person. The capital is tied until about five years before retirement, but can be withdrawn early for home ownership, self-employment or emigration; in the case of home ownership, you can pledge the balance instead of withdrawing it. It then stays invested and tax-privileged; the capital withdrawal tax only becomes due at the later withdrawal, then at a reduced rate separate from the rest of your income.
With a sufficient reserve and a long investment horizon, the annual tax advantage usually clearly outweighs the reduced flexibility. Those who already use the maximum contribution invest additionally freely or combine it with Pillar 3b.
3. Pillar 3a or savings account: which is better?
Whether a savings account or Pillar 3a is better depends on the goal: short-term available money or long-term capital build-up with a tax advantage.
Feature | Pillar 3a | Free savings account |
|---|---|---|
Tax deduction on contribution | yes | no |
Tax on wealth/returns | none during the term | annually |
Availability of the money | limited | anytime |
Long-term return potential | higher with securities | low (interest only) |
Taxation at withdrawal | capital withdrawal tax | no separate withdrawal tax |
For short-term available money such as an emergency fund, reserves or larger expenses in the coming years, the savings account remains the better choice. For retirement provision over many years, Pillar 3a is often more attractive than a savings account, thanks to the tax deduction and the ongoing tax exemption. Often both alongside each other make sense: the reserve in the savings account, the build-up in Pillar 3a. The right contribution amount results from how much you can tie up long-term without becoming short.
4. From what income is Pillar 3a worth it?
There is no fixed income threshold. Even small contributions build up pension capital, because every franc paid in grows tax-privileged. How large the additional tax savings turn out is determined by taxable income, place of residence and marginal tax rate.
The following overview shows how much accumulates with different contributions over 30 years.
Assumption: investment horizon 30 years, securities return 4 percent, marginal tax rate 25 to 30 percent (rising with income).
Contribution per month | Final capital after 30 years | Cumulative tax savings |
|---|---|---|
CHF 100 | around CHF 69,000 | around CHF 9,000 |
CHF 200 | around CHF 139,000 | around CHF 18,000 |
CHF 400 | around CHF 278,000 | around CHF 36,000 |
CHF 605 (maximum contribution) | around CHF 420,000 | around CHF 65,000 |
The tax savings are a model value before the later capital withdrawal tax and vary by place of residence and marital status. How high they are for your income and canton is shown by the tax calculator.
5. Conclusion: when is Pillar 3a most worthwhile?
Over the years, Pillar 3a pays off for the large majority. How strong the effect is depends above all on three factors. Over a longer investment horizon, the compound interest effect unfolds its full impact. A securities solution enables higher returns in the long run than a pure account solution. Finally, with rising income and a higher marginal tax rate, the annual tax savings grow.
Pillar 3a works particularly strongly with a long investment horizon, regular contributions and a higher marginal tax rate. Those who can bear market fluctuations additionally raise their long-term return potential with a low-cost securities solution.
Compare Pillar 3a providers
Which provider suits your profile is shown by the comparison based on costs, investment strategy and minimum contribution. Even small cost differences have a noticeable effect on the final capital over the decades.
