How to choose the right 3rd pillar A!

If there is one area where it is difficult to make a choice it is in the area of 3^e pillar A. The solutions are multiple and the market is full of very different solutions, but very difficult to compare.

The objective of this Newsletter is to provide some useful reminders to our loyal readers on the subject.

What is the point of subscribing to a 3^e pillar A?

The 3^e pillar A is part of the Swiss pension system, at the level of optional individual pension benefiting from tax advantages. It provides additional income or wealth to finance our retirement needs. Because it is still necessary to remember that the services of 1^er (AVS) and 2^e (LPP) pillars are not sufficient in most cases to meet annual liquidity needs once they retire?

What solutions exist on the market?

Banks and Insurance offer solutions of 3^e pillar A.

Banks limit coverage to retirement savings. This means that each franc invested will be returned in capital upon retirement.

Insurance also offers death and/or disability coverage, sometimes adding usefully to the insufficient benefits of the 1^er and 2^e pillars. In this case, the entire premium is not earmarked for retirement savings. Part of this is used to cover risks.

In terms of possible investments, there are plenty of solutions. The most cautious will opt for a cash solution, which is currently very low paid (around 0.3% to date). A person who has a long investment horizon will more easily opt for an investment of their savings 3^e pillar A in the capital market with a risk profile ranging from low to dynamic.

We too often hear that banking solutions are more advantageous. At Impact, we say that the solutions complement each other usefully. In many cases, insurance solutions provide valuable additional benefits to policyholders who, without them, could find themselves in a situation of need in the event of a risk occurring.

How is a 3 financed^e pillar A and what are the tax advantages?

As a general rule, we contribute to 3^e pillar A annually.

A person affiliated to a pension fund (LPP) can claim as a deduction from taxable income up to CHF 7,056 /year (in 2023), while the unaffiliated active person can contribute up to 20% of their income, but a maximum of CHF 35,280/year. Depending on the amount of taxable income, the tax gain can amount to more than 40% of the premium paid. When withdrawing capital (generally upon retirement), there is a single tax separate from other income at an attractive scale of around 10% on average in Switzerland.

More rarely, we will be able to find solutions 3^e pillar A in the form of a single bonus. In this case we provide capital 3^e existing Pillar A to an insurance solution (without other future contributions). Some insurance companies today offer very competitive guaranteed alternatives compared to low-paid cash solutions.

Can we opt for several solutions 3^e pillar A in parallel? Usefulness and limits?

In practice this is what we see. Sometimes we even met customers who subscribed to five 3s^e pillar A cash with the same banking establishment, with the idea of deducting them from different tax years from five years before reaching the ordinary retirement age, with the aim of limiting exit taxation.

At Impact, we remain cautious in this matter. Tax authorities could be critical of such a taxpayer, arguing that the one and only goal of having multiple 3A solutions is to be able to spread them out over time and thus save taxes when they are withdrawn.

Several solutions can be justified other than from a tax perspective. This is the case in the event of diversification between several providers (banking and insurance) and in the event of diversification of investments (cash and investment in funds). From this angle, have several 3s^e pillars A is less open to criticism from the authorities.

Is a redemption from past years (non-contributory) possible?

At the time of writing this Letter, no! A year without contributions is a year wasted!

In the current state of the information in our possession, it will be possible from 2024 to make purchases in solutions 3^e pillar A, but their amounts will be severely limited, therefore much less attractive than those that can be made within your pension fund.

What about cross-border workers’ contributions?

With the reform of withholding tax, many cross-border workers have abandoned their contributions to 3^e pillar A. It is true that the information was not easy to understand and many insurance companies have simply stopped "selling" solutions 3^e pillar A for cross-border workers active in Switzerland.

For people active in Geneva in particular and who are eligible for quasi-resident status (at least 90% of their income is taxable in Switzerland), they can request subsequent ordinary taxation (TOU) until March 31 of the year following and claim the same deductions as an ordinary taxpayer.

Subscribing to a solution 3^e pillar A is far from trivial and its choice will mainly depend on your situation and your needs.

 At Impact FE, we will guide you independently in choosing what suits you best. Do not hesitate to contact us! For more details on our service offering, visit our site at www.impact-fe.ch !