Contributions to pillar 3a are tax-advantageous for low-income earners. The tax advantages come into play at different salary levels. There is no obligation to make regular contributions.

A good 25% of people in employment in Switzerland earn less than CHF 5'250 per month (as at 2020). The Federal Statistical Office (FSO) defines a low wage as CHF 4'443 per month. It is therefore not surprising that, according to the FSO, the savings rate of low-income earners is less than 4%, compared to the Swiss average of 19%. However, the lower participation of low-income earners in pillar 3a can be explained by several factors, as the pension experts at UBS know.

Various factors lead to a reluctance to purchase 3a products

As the experts explain, any savings made by low-income earners are initially aimed at creating a liquidity buffer for emergencies, or they are used for short-term savings goals rather than to better finance their retirement. The prospect of not having access to savings for a very long time can also act as a deterrent. In addition, low-income earners are less likely to withdraw pillar 3a assets for home ownership than their higher-earning peers. Therefore, from their point of view, any pillar 3a assets are generally not accessible before the age of 60, i.e. five years before the statutory retirement age. In addition, the tax incentives could be low, or be perceived as too low in view of the vesting period. Finally, there may be a lack of understanding of how pillar 3a works, particularly with regard to tax incentives.

Employees and self-employed persons can pay in

Employees who pay salary contributions to the AHV or receive unemployment benefits can pay contributions into pillar 3a regardless of parameters such as nationality or degree of employment. The maximum amount is calculated per employed person. However, the contributions that lead to tax benefits are capped. The upper limit can change every year and depends on the affiliation to an occupational pension scheme or the net salary, as the experts explain. Employees who are affiliated to an occupational pension scheme can pay in up to CHF 7'056 per year (as of 2023). Employees who are not affiliated to an occupational pension scheme can pay in up to 20% of their net salary per year, up to a maximum of CHF 35'280 (as at 2023).

Legally, employees aged between 25 and 65 must be insured with their employer's pension fund if they earn at least CHF 22'050 per year (as at 2023) from this employer. For self-employed persons, 2nd pillar insurance is generally voluntary. These rules apply regardless of the number of months worked during the year.

There is no minimum amount for contributions to pillar 3a. Furthermore, opening an account does not mean that contributions have to be paid in, as the experts emphasize. The holder of an account is free to choose when and how much to pay in.

Deposits are attractive for tax purposes

Both tax gains and capital gains are possible in pillar 3a. The former refers to gains from pure tax advantages and depends on the household characteristics and tax jurisdiction, while the latter is determined by the investment strategy. «Contributions to pillar 3a reduce taxable income and can therefore be tax-advantageous. However, this only applies to households that pay income tax at all», say the experts.

Beyond the salary threshold, the attractiveness of contributions to pillar 3a also depends on income tax rates and their progression levels, i.e. the extent to which tax rates increase for higher incomes. These differ significantly from canton to canton.

Effects of the capital gains tax

When Pillar 3a capital is withdrawn, a capital withdrawal tax is levied which, like income tax, generally follows a progressive tax rate. Experts advise that this tax can be minimized by withdrawing the capital in stages over a period of up to five years before actual retirement, but not before reaching the age of 60 and subject to the approval of the relevant tax authority. It should also be noted that Pillar 2 and Pillar 3a capital withdrawn in the same financial year are added together for tax calculation purposes, which increases the tax burden. The same often applies to simultaneous withdrawals by spouses and registered partners. The experts also point out that pillar 3a accounts cannot be partially withdrawn on retirement. A staggered payout therefore requires holding more than one account.

Pillar 3a is worthwhile for the majority

«As a rule of thumb, pillar 3a contributions are interesting as soon as a household pays income tax. Therefore, 3a contributions can be tax-efficient for many low-income households», the UBS experts conclude. And they add: «However, the tax gains depend heavily on the household characteristics and the place of residence. Irrespective of its tax appeal, pillar 3a is also a disciplined way to invest in retirement provision.»