Third pillar: investment or welfare?

An uncertain future, with the hopes and fears that come with it, is something we all share, wherever we live and whatever our situation. In Switzerland, a country known for its economic stability and its well-structured social security system, financial security is a central topic for many people.

The third pillar, a key component of the pension system, plays a crucial role in it. Yet it is often seen simply as an investment tool, and its fundamental role in retirement planning is forgotten. In recent years, apps and online banks have made it very easy to open a pillar 3a invested in funds in a few minutes. That is a good thing, but it has also reinforced the idea that "doing the third pillar" means choosing the fund with the highest return. Let's see why it is not that simple.

People often confuse investment with pension provision, so let's start from the definition. Being provident means taking precautions in time against possible future difficulties. When we think about our income, these "possible future difficulties" are three:

• disability;
• death;
• retirement.

Saving and investing address only the third. For a plan to deserve the name "pension provision", it must also be accompanied by adequate cover for the first two. This combination of savings and risk cover is what you find in an insurance third pillar.

Pension provision is more than a financial investment: it is the safety net that protects us from the uncertainties of the future. It is not only about building retirement capital, but also about protecting ourselves against unforeseen events such as serious illness, disability or death. When we consider the third pillar, we need this broader perspective to understand its role in our overall financial security.

The first and second pillars already provide some cover for disability and death, but often less than expected: the self-employed without a pension fund, part-time workers, young people with a short contribution record and unmarried couples can have large gaps. The third pillar is the place where these gaps can be closed.

When planning for the future, it is essential to invest with awareness. This means not only aiming to grow our wealth, but also making sure we have the cover we need to protect ourselves from the unexpected. Insurance covers against loss of earnings are core elements of a solid retirement planning strategy, and integrating them into the third pillar is what makes the plan complete.

Mr Rossi, aged 30, starts paying CHF 3,000 a year into a bank third pillar. Mr Bianchi, also 30, pays CHF 3,000 a year into an insurance third pillar with premium waiver.

Both are 35 years from retirement, so both should reach 65 with capital of about CHF 105,000 (without counting interest, returns or surpluses).

But what happens if both become disabled after, say, 7 years?

• Mr Rossi has paid into his bank third pillar for 7 years: at retirement he will have CHF 21,000, plus any interest or returns.
• Mr Bianchi has paid into his insurance third pillar for 7 years: after the waiting period, the insurer pays his premiums until retirement, so he will have CHF 105,000, plus any surpluses.

The difference, CHF 84,000, is produced by the premium waiver included in the insurance third pillar.

The premium waiver is the insurance cover that takes over the payment of the premiums if you can no longer work because of illness or accident. A few details make the difference:

• The waiting period: the insurer starts paying after a defined period of incapacity, typically between 3 and 24 months. A shorter waiting period costs more.
• Partial incapacity: if you can work only in part, the waiver is usually proportional to the degree of incapacity.
• Disability pension: in addition to the waiver, the contract can pay a monthly income in the event of disability, to replace part of the lost salary.
• Health questions: risk covers require a health declaration at the start. That is why it pays to set them up while you are young and healthy.

To choose with awareness, you also need to know the limits of insurance solutions. Guarantees and covers have a cost, so the share of the premium that is actually invested is lower than in a bank solution. In the first years, the surrender value is often lower than the premiums paid, which makes these contracts unsuitable for those who might have to stop after a short time. And since a contract can last thirty years or more, the choice of company, product and costs deserves careful comparison.

An alternative is to separate the two functions: a bank or fund third pillar for the savings, and a pure risk insurance for disability and death. It can work well, provided the risk cover is actually taken out, and not postponed until it is too late.

The third pillar in Switzerland is more than an investment tool. It is the foundation on which our future financial security is built, offering both the possibility of realising our plans and protection from life's uncertainties.

It is important to take a broader view of retirement planning and to invest with awareness, making sure we have the insurance cover we need for the unforeseen events along the way. Reducing pillar 3 to a mere investment tool is a mistake that can have major consequences for our future well-being.

So, in a few words, "bank" or "insurance"? If we are talking about retirement planning, and you want to look to the future without worries, an insurance third pillar, or at least a combination of savings and risk cover, is the solution to consider. A pension analysis shows you which one fits your situation.