Is the pillar 3a worth it for young people?

However, most young people from18 to their mid-twenties are still in apprenticeships or studying at university and thus have only a low income, supplementing their pocket money with holiday or part-time jobs in order to keep their heads above water or relieve their parents. It is thus understandable that most are reluctant to transfer part of their meagre income to the pillar 3a.

But is this consideration correct? Wouldn't it be best to pay into the pillar 3a from a young age, even if it were only CHF 100 per month? We will address these two questions and want to inspire You - young, in training and with a low wage - to start thinking about pension provisions.

Pension provision in crisis

It is common knowledge that the Swiss AHV and pension funds are facing major demographic and economic challenges. Nevertheless, the 2020 pension reform was rejected by the people on 24 September 2017. It remains to be seen what will happen next with the pension reform.

Many young people therefore see their chances of receiving a sufficient pension in old age as extremely slim. Wouldn't this be just one more reason to take matters into one's own hands and secure oneself for retirement age independently of the AHV and the pension fund through a pillar 3a account?

Pillar 3a explained briefly

In principle, payments into pillar 3a are possible as soon as you are subject to AHV contributions (from the age of 18) and you have earned income. The end of the possibility to pay into the pillar 3a is when you reach the regular AHV retirement age (65 years for men and 64 years for women). Anyone who wants to work beyond this age may pay into pillar 3a for a maximum of five more years until he/she has to draw retirement benefits. There are various ways to invest in pillar 3a:

• You deposit the money into a pillar 3a account at a bank. The interest rates here are generally higher than on regular savings account, but can vary considerably depending on the provider. Therefore, it is important to compare the different providers before you decide to decides.
• Depositing money into a pillar 3a fund, where it is invested in various stocks: Young investors benefit from an important time advantage here, because possible losses can be compensated throughout the long maturity.
• Recently, an all digital pillar 3a solution was introduced: the 3a app called "Viac" enables you to open up an account in just a few minutes and invest your money in shares, and this from as little as CHF 1. The 3a app has therefore become particularly popular with young people.
• Investing money with an insurance company: While banking solutions offer more flexibility - payments can be adjusted and even interrupted - this is not possible with the insurance solution. On the other hand, you benefit from an insurance cover that ensures continuous contributions to the pillar 3a in the event of a disability, sometimes additionally in combination with a death risk insurance.

However, such insurance solutions are only suitable for people who can comply with such a contract until it runs out. Young people are therefore discouraged to take on such life insurance and advised to take out a flexible pension solution with a bank for the time being. Later on, risks of this kind can still be insured separately, without linking the insurance to pillar 3a savings.

Compare the advantages and disadvantages of banking and insurance solutions

There is a maximum amount that may be paid in per year (2019: CHF 6,826 for employees and self-employed persons with a pension fund and CHF 34,128 or a maximum of 20% of net income if you do not belong to a pension fund). The money paid in is also blocked until five years before retirement. This is why pillar 3a is also referred to as "tied pension provision". However, there are exceptions: A lump-sum withdrawal is possible for the purchase of residential property, in the case of emigration, a change to professional self-employment or in the case of disability.

Main advantage: saving taxes

Since the interest rates on 3a accounts are currently historically low, it is worth paying into a pillar 3a today primarily because of the tax savings. Payments into a pillar 3a account can be deducted from taxable income in the year of contribution. The basis for this is the payment certificate issued by the bank foundation or insurance institution, which must be enclosed with the tax return. The interest and capital income from Pillar 3a is tax-free and the capital that accumulates in Pillar 3a over the years is also exempt from wealth tax during the term of the Pillar 3a. The tax savings can vary depending on the canton of residence and income class. For example, the tax savings in low-tax cantons, such as the canton of Zug, are usually lower than in high-tax cantons, such as the canton of Neuchâtel.

Read the NZZ article of 3 March 2019 on this topic.

The Pillar 3a funds are not taxed separately, i.e. separately from the ordinary tax or withholding tax, until the early or ordinary capital payment is made. The tax to be paid is divided into a federal tax portion and a portion for the municipality and the canton. Cantons and municipalities have quite different tax rates, but these are generally lower than the regular income tax rates. The capital paid out is then transferred to private assets and from now on must also be taxed as such. The income from these assets must also be declared in the tax return and is subject to income tax and WHT. Many advisors therefore advise keeping several pillar 3a accounts so that the money can be withdrawn in different tax periods and the tax burden can thus be reduced.

Advantages for young savers

As you can see, paying into pillar 3a early has its advantages. The earlier you start, the more financial resources you have at your disposal in old age. Because small but constant payments can result in considerable assets thanks to the compound interest effect. In addition, you can only buy in for one year at a time, and since the maximum amount additionally limits the purchase sum, a missed payment cannot be made up for later. So instead of investing nothing one year and a large sum the next, it is better to pay in a constant (albeit possibly lower) amount. The deduction from taxable income can also be valuable in young years to keep the tax bill as low as possible.

On Cash.ch you can find an easy-to-use tax calculator where you can work out for your personal situation how much it pays to invest in pillar 3a.

Conclusion

Ultimately, everyone has to decide for themselves whether they can spare a small portion of their meagre monthly salary to invest in their pension provision. Because once the money is in the pillar 3a, it is tied up and cannot be taken out even if there is an urgent need for money. Nevertheless, we hope to have shown that there are many advantages to investing in the pillar 3a early. And that it is therefore worthwhile to start thinking about retirement provisions at a young age!