Pillar 3b is part of voluntary private pension in Switzerland. Contrary to pillar 3a, which enjoys tax advantages, pillar 3b offers greater flexibility but with no direct tax advantages. It is particularly interesting for persons who would like to design their pension provision individually and flexibly without having to abide by strict regulations. Pillar 3b can be a sensible complement to pillar 3a and the first two pillars (federal and occupational provision).
Main characteristics of pillar 3b
There are two main options, bank and insurance solutions, both of which offer advantages and disadvantages depending on the circumstances of the person saving.
1. Flexibility
There are no fixed contribution limits and the savings can be used without restrictions. Contributions can be made toward a variety of pension products including life insurances, securities, or savings plans.
2. Availability
Contrary to pillar 3a, pillar 3b savings are available anytime. There are no restrictions regarding minimum age for withdrawal or reasons for withdrawal.
3. Taxation
Contributions to pillar 3b can generally not be deducted from taxable income. However, profits made in the context of pillar 3b may be tax-exempt under certain conditions, for instance payments from life insurances after a certain contract duration.
4. Individual design
Pillar 3b makes it possible to design pension solutions according to one's personal requirements. It therefore offers a high degree of flexibility in the selection of investment products and definition of risk structure.
Overview of advantages and disadvantages
Advantages:
- Flexibility: No rigid rules in terms of contributions, withdrawals, or use of assets
- Availability: Assets are available anytime, making them attractive as a tool for medium-term savings goals
- Individual adjustment: Pillar 3b can be tailored exactly to one's personal pension provision goals
- Risk diversification: Since investments in various asset classes are possible, diversification may be broad
Insurance protection:
- Bank solutions: Higher retirement capital, as no deductions are made for insurance costs.
- Insurance solutions: Lower retirement capital, as a part of the contributions is used for insurance protection. However, the set goals are ensured even in case of loss of income.
Disadvantages:
- No tax deductions: Contrary to pillar 3a, there are no direct tax benefits for payments into pillar 3b.
- Taxation upon withdrawal: Taxes may become due in the event of withdrawal, particularly if investments were held in securities or other sources of return.
- Less regulation: Compared to pillar 3a, pillar 3b is not subject to strict framework conditions, which can be both an advantage (flexiblity) and a disadvantage (less protection).
Differences versus pillar 3a
Pillar 3a is a tax-advantaged tool that is primarily destined for retirement provision. Payments into pillar 3a can be deducted from annual taxable income up to a certain amount. However, the savings are restricted until retirement is reached or are only available if certain conditions are met (e.g., when buying residential property).
Pillar 3b is not tax-privileged, however, with contributions subject to tax. Yet there are no restrictions with regard to contribution amounts and withdrawals. This renders pillar 3b more flexible, though it is suitable rather as a complement to tax-privileged retirement savings.
When does pillar 3b make sense?
Pillar 3b can be sensible if a flexible pension provision solution is needed that is not restricted by any rigid framework conditions. In particular, it is suitable for:
- Persons who have already fully exhausted the tax advantages of pillar 3a but would like to continue saving for retirement.
- Persons with irregular income such as self-employed or freelance workers who cannot pay the same high amounts every year.
- Persons who would like to save for medium-term goals (e.g., purchase of real estate, education of their children) but remain flexible.
- Persons who would like to diversify their pension provision by relying on various investment products that offer a broad risk diversification.
In sum
Pillar 3b is a flexible complement to restricted pension provision in Switzerland. It is particularly attractive for anyone who would like to flexibly design their provision beyond the options that benefit from favorable tax treatment. Given its advantages and disadvantages, pillar 3b makes sense particularly in cases where flexibility and individual pension planning options are a priority.
