What is the third pillar and who should subscribe to it?
Third pillar, its role in the Swiss pension system
The third pillar is one of the components of the Swiss social security system, along with the first and second pillars. The first pillar represents state provision, is compulsory for everyone living in Switzerland, and is made up of AHV (Old Age and Survivors' Insurance), IV (Invalidity Insurance) and IPG (Compensation for Loss of Earnings) and is intended to guarantee a minimum subsistence level. The second pillar represents occupational pension provision and consists of the BVG, occupational and non-occupational accident insurance, daily sickness benefits insurance and vested benefits institutions. In the collective ideal, it should be able to keep the beneficiary's standard of living unchanged from when he or she was working. But the reality is quite different since, between the first and second pillar, those with full contributions would reach retirement with about 60% of their last income. That is why the third pillar is worthwhile and highly recommended.
The third pillar represents private pension provision
The 3rd pillar is not compulsory and it is up to the individual to choose whether to take it out with a bank or an insurance company. It is a security buffer for the future and also for the present. Indeed, in the event of misfortune, i.e. death or disability, those with a third pillar could have an income for themselves and their family. So, it is convenient to subscribe to a third pillar? Absolutely yes. With the 3rd pillar, gaps in the mandatory social security system can be filled. More and more people are deciding to subscribe to a third pillar in anticipation of old age (knowing, however, that they can benefit from it in the event of life transitions such as buying a house, moving abroad or starting self-employment).
Tied and free pension provision, the different types of third pillar
The third pillar is divided into tied pension plan 3a and free pension plan 3b. There are many options, which can be adapted to each individual's needs. Having the third pillar also allows you to save on tax. While the first and second pillars are an obligation, the third pillar is a choice that should be implemented. If you opt for the restricted 3rd pillar pension, you should be aware that the money will be tied up and only in certain cases, such as those mentioned above, can it be withdrawn in advance. If, when taking out a 3rd pillar, you include cover such as a death lump sum or disability pension, your family or the 3rd pillar owner will have financial cover in case of misfortune. Thus, stipulating a third pillar is very important for both employees and the self-employed. The various forms allow capital to be set aside according to availability and there are also upper limits imposed by law. For example, in 2021, an employee who chooses to have a tied pension can pay in a maximum of CHF 6,833 per year. For the self-employed, on the other hand, the maximum is 20 per cent of income, but not more than CHF 34,128 per year. For the unrestricted pension plan there is no maximum.
Banking third pillar or insurance third pillar? The difference comes in the event of disability
A tied third pillar can be taken out with an insurance company or a bank. Which is more convenient? The fundamental difference lies in the 'waiver of premium in the event of disability' cover. If one chooses an insurance company, in the unfortunate event of a disability, even a partial one, the company itself will pay the premiums in the place of the insured, until the time of his or her retirement. The same is not the case with the bank, so when you retire you will only receive what you paid in.
Insurance third pillar, how does it work?
The insurance third pillar is, in fact, life insurance with capital accumulation, with a financial instrument such as investment funds, indices, certificates, etc. inside it. The way it works is very simple, by paying a monthly premium throughout your working life, you will accumulate a capital that will be paid out to you at retirement age in one lump sum. Each product has its own characteristics. There are products with or without a final guarantee, which focus more on yield, and others that focus more on security. But the choice of one product over another must be made, above all, according to the specificities and uniqueness of each person. It must be said that there is no product that is better or worse than the others, but there are products that respond to a greater or lesser extent to the needs of individual customers. Because the third pillar has to be tailor-made and after a careful analysis of existing covers. In this way, every possible scenario can be foreseen and, if necessary, cover for death and/or disability can be included to protect you and your family.
Third Pillar and taxes: what is the relationship?
The third pillar is also tax-efficient. It is in fact deductible from income tax. The deduction of the amount paid into the third pillar affects your taxable income, lowering the rate you use to calculate your taxes. So, having a third pillar also means paying less tax! And when you redeem the capital you will pay income tax at a reduced rate. If you opt for a free pension instead, there are no limits and you can pay into your third pillar as much as you want. Anyone living in Switzerland can take it out. You can redeem the accumulated sum (even partially) whenever you want, so in addition to saving for your retirement, the free third pillar can be designed for well-defined medium-term projects (educating your children, buying a house, for example). The amount paid in is not tax deductible, except under certain conditions, but when you withdraw the sum you will be taxed on your assets and not on your income.
Protect your family with the third pillar
What if a person dies or becomes disabled? Be careful, because the compulsory social security system does not offer much cover. If you do not have a 3rd pillar, your spouse will not receive a widow's pension unless you fulfil certain requirements, such as having at least one child in common, or being at least 45 years old and married for five years. If, on the other hand, the deceased person has taken out a third pillar and included a death benefit in it, it will be paid to the heirs, thus avoiding many problems. Think, for example, what would happen if, following a death, the spouse could no longer afford to continue paying the mortgage on their house, or the children could no longer afford to continue their university studies? This is why planning for the third pillar in good time becomes crucial. What happens instead in the case of disability? Again, if a disability pension was provided for when the contract was signed, it will be received until the end of the contract (i.e. until retirement). In short, thinking about protecting your loved ones and yourself is strongly recommended when you choose to take out a third pillar, because you are covering situations that you rarely think about but which, if they occur, risk putting everyone in serious financial difficulty. The third pillar is convenient for everyone: including people who are not gainfully employed and perhaps take care of the house and children, but who may find themselves in a state of disability and therefore need money to support themselves and find someone to help them, the very young who do not work and do not enjoy second pillar cover and would therefore receive a minimum pension from the IV in the event of disability.
Is it also worthwhile for cross-border commuters to subscribe to a 3rd pillar?
Certainly, for a worker living abroad and working in Switzerland it is almost even more important, because he/she is unlikely to pay all the contributions to the mandatory pension system. In order to guarantee himself a good standard of living, he has to make up for it with a third pillar. What about tax deductions, in this case source tax? For a cross-border commuter it is only possible to deduct the third-pillar share if he receives 90% of his income in Switzerland, where income means all family income. The biggest advantage for a cross-border commuter, however, is that he has money available after retirement and does not have to drastically lower his lifestyle.
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