Self-employed workers: Grand 3rd pillar A or LPP affiliation?

To be independent (on an individual basis) is to opt for a certain freedom. Unlike employees who contribute to 1^er (AVS) and 2^th pillars (LPP), self-employed people are only legally required to contribute to the AVS.  And yet, ignore both^th and 3^th pillars has serious consequences for longer-term retirement benefits.

In this context, self-employed status sometimes raises complex questions. Among them, that of knowing whether it is more judicious to affiliate with the LPP or to opt for a capital 3^th pillar A is regularly installed. Here are some things to think about.

 The "big" 3^th pillar A :

Tied pension provision is enshrined in the Federal Constitution and represents one of the elements of the three pillars of old age, disability and survivors' pension provision. It is encouraged, among other things, by tax measures and by a policy facilitating access to property.

The big 3^th pillar A allows self-employed people subject to AVS who are not affiliated to a provident institution of 2^th pillar of building up savings deductible from taxable income, up to 20% of income from gainful activity but at most

CHF 34,416 per year. It is of particular importance in the sense that it acts as a 2nd pillar depending on the case.

Among the accepted forms of related insurance, we will find:

• The pension policy linked to an insurance establishment:

It offers more security than 3^th banking pillar A since it offers an option to release the payment of premiums in the event of incapacity to earn and thus guarantees the continuity of their payment even in the event of disability. In the event of death before the end of the contract, the heirs will receive the planned capital in full, such as life insurance. Any interest and surplus income also benefits from advantageous tax treatment, since they are exempt from income tax for the entire duration of the contract.

Different risk profiles and therefore investment strategies can be chosen.

• The account /provident deposit linked with a banking foundation:

It offers more flexibility in terms of contributions. The amount paid each year is not contractual and must only respect the constraints of the planned annual ceiling. However, there is no option to release premiums and, in the event of death, heirs only receive the accumulated savings. As with the insurance solution, various investment profiles can be chosen.

The services provided for by 3^th pillar A are most often paid in capital.

 Affiliation to professional pension provision (2^th pillar) :

Very often, the advantages offered by professional pension provision prevail, while keeping in mind that it is possible to combine the 2nd pillar with a "small" 3^th pillar A, whose annual contribution then fiscally accepted today amounts to CHF 6,883/year.

Contributions paid into the professional pension plan can amount to up to 25% of income and are tax deductible, the personal part in the same way as for an employee, the company part as expenses. This also lowers the base subject to AVS contributions.

In this context, self-employed workers can also make voluntary redemptions of missing years allowing them to reduce their tax burden (and partially AVS contributions), particularly during years when their operating profit is greater.

From a death/disability risk point of view, the second pillar automatically includes attractive risk coverage, the cost of which is often significantly lower than that of insurance 3^th pillar A. Finally, the self-employed person can decide, subject to compliance with contractual deadlines, to cease their affiliation with their pension fund, while maintaining their activity.

The benefits paid by the second pillar are decided by the fund's regulations, to which particular attention must be paid, in annuity, capital or a mix of the two.

What are the possibilities for optional affiliation with a pension fund?  

• Join the provident institution of your professional association and transfer all or part of your existing vested benefits there,
• Join the provident institution of its staff. Coverages and benefits are aligned with those of employees,
• Announce yourself to the supplementary foundation, knowing that a pension plan meeting only the legal minimum may be established there, or even
• Add to the legal minimum benefits a non-mandatory plan with a chosen investment strategy and tailor-made services.

In conclusion, a self-employed worker whose annual profit submitted AVS is less than CHF 172,080 can simply opt for a large 3 solution^th pillar A, since from an economic and fiscal point of view the contribution ceiling of CHF 34,416 is sufficient. If his annual income exceeds CHF 172,080, it would be more appropriate to optionally join the second pillar and accumulate a small 3^th pillar A with an annual contribution of CHF 6,883. This being remembered that even for the lowest incomes, a 2^e pillar offers the possibility of redeeming contribution gaps, which is not yet the case within the framework of a 3^e pillar A.

Finally, all accumulated pension capital is exempt from wealth tax and is, at the time of payment, subject to advantageous taxation separate from other income.

For any questions do not hesitate to contact us at contact@impact-fe.ch