The Swiss Pension System in a Nutshell

The Swiss pension is based on three pillars, with each pillar increasing your income level in retirement.

1st pillar: AHV

This is supposed to cover the minimum level of costs that someone would need to live. You only receive the full amount of AHV if you do not have any contribution gaps. If you have lived overseas at some point or studied and did not pay the minimum contribution, it is likely that you have gaps in your AHV and as a result, your future payments will be permanently reduced.

2nd pillar: BVG

The BVG is where both the employer and employees pay a specified amount into a company pension fund. You can also voluntarily buy-in to the BVG in case you need to close any gaps in your second pillar, such as when you were not employed.

3rd pillar: private pension savings

The third pillar is split into Pillar 3a and Pillar 3b. Pillar 3a comprises private pension savings that can be deducted from your taxable income up to 6’883 CHF each year. It is bound to your retirement, and therefore apart from a few specific cases, you cannot access the capital in your pillar 3a until retirement.

Pillar 3b is voluntary savings which you put aside for your retirement but it is not specifically bound to the pension and the capital can be deployed freely (basically whatever else you save on the side could be counted as 3b).

Although each pillar is crucial, failure to contribute to the 3rd pillar will reduce your future standard of living. Although it’s difficult to think about retirement during your 20s, this is actually the best time to start.

Read below the 5 reasons why you absolutely should start contributing to your pillar 3a today.

5 Reasons You Can’t Afford to Skip Your 3a Contributions

1. Your AHV is is less secure than you may think

Public pensions are in serious trouble worldwide. In Japan, 28% of the population is over the age of 65 and this is expected to increase to one-third by 2050. The Netherlands has already taken action and has raised the retirement age to 67 years by 2024 and further increases have not been ruled out.

Switzerland is still debating raising the age for women up to 65 and politicians have been extremely reluctant to enter any debate about raising the pension age higher.

The first pillar in the Swiss pension system relies on a pay-as-you-go scheme. This means that a large portion of AHV contributions from the current workforce are directly distributed to current pensioners.

However, due to demographic issues, such as a lower birth rate and higher life expectancy, the number of workers paying for the pensioners has dramatically reduced.

Projections show that public pension plans will face a severe funding gap in the future and the truth is governments aren’t doing enough about this.

It is highly likely that retirement ages will have to be raised far above what is currently being debated. As it currently stands, the system faces the largest threat to the provision of future public pensions so far and political answers have been lacking.

Therefore, it is essential for young people today not to rely on receiving the pension from the government at age 65 but to make their own plans for their future.

2. Your 20s are the best time to start

Your 20s are the time in your life when you have the least responsibilities and fixed costs with a high amount of disposable income.

In your 30s and 40s you will most likely have a family and mayble you will own a home. These responsibilities will restrict your finances with higher fixed costs and result in less disposable income.

Rather than falling into lifestyle inflation and fretting away your additional income on frivolous purchase, your 20s are the best time to start putting money aside.

For women this is even more important.

As this post explains, women on average live longer than men but retire with two-thirds of the retirement capital of men. Women typically will have employment gaps due to familial reasons and have a higher rate of part-time employment. This leads to contribution gaps that reduce the future pension income.

Furthermore, you can only contribute for the current year to your 3a account. Making up for lost contributions in previous years is not possible.

It is therefore crucial that you start contributing to your 3a during your 20s.

3. Save for the future while saving on taxes

When it comes to filing your taxes, you can deduct your pillar 3a contributions. Each year the Swiss government defines the total yearly contribution that you can legally deduct from your taxes.

In 2021, you can deduct 6,823 CHF in your tax declaration.

As this post shows, past an income over 85,000 CHF per year, pillar 3a contributions can significantly reduce your overall tax bill. Someone earning 100,000 CHF would save 1,850 CHF in income tax due to pillar 3a deductions.

Therefore, you are essentially getting a rebate from the government for saving for your future.

For tax purposes it is also smart to create multipe 3a accounts. That way, when it comes to withdrawing your retirement savings, you can stagger the withdrawals across the accounts and reduce the tax you have to pay upon withdrawal.

Creating multiple 3a accounts with as little as 70,000 CHF in each is a simple and easy way to not only save on your current tax bill but also on future taxes.

4. 3a is not only for retirement – use it to buy a house or start a business

Although the money in your 3a account is meant for your pension and cannot be withdrawn until retirement, there are a few exceptions to this rule.

You can withdraw the money in your 3a if you emigrate from Switzerland, if you need to buy in to your second pillar, or in order to finance the purchase of a home or start your own business.

If you want to buy a home in Switzerland you can either directly withdraw the money from your 3a account and use it for equity or you can “pledge” your 3a as additional collateral.

Both methods have advantages and disadvantages. A direct withdrawal incurs a higher tax burden and means that the money is directly removed from your retirement savings. However, pledging incurs a higher interest rate as the amount of credit that is loaned is higher.

You can also use the money in your 3a to help finance your own business. It must be used within the first year of your self-employment, it must be withdrawn in full, and it cannot be used to finance the founding of a corporation (as in this case you are technically the employee of a legal entity).

Therefore, even if retirement is too far away for you to think about yet, the contributions can help set-up your future life in other ways.

5. Saving in your 20s is worth more later

When it comes to saving and investing, the golden rule is that the sooner you begin, the better.

It’s ironic that the time you least want to think about your retirement is the best time to start saving for it.

As an investor, a long time horizon is your friend. If you start in your 20s you will have at least 40 years before retirement.

The longer time horizon allows you to take full advantage of the beauty of compounding interest on your investments.

If you start contributing the maximum amount into your 3a at age 25, you can expect to have 603,000 CHF in your account by 65.

If you start 10 years later at age 35, you can expect to have 360,000 CHF in your account by 65.

Investing earlier in your life also allows you to take higher risks due to the increased time horizon. Someone in their 20s can afford to make riskier investments (and thus higher returns) as the longer time horizon smooths out stock market fluctuations and the risk of losing the invested capital just shortly before retirement is reduced.

In summary: invest your money now and you will have more later. Waiting can cost you dearly.