The Swiss Three-Pillar Pension System Explained

Most people living in Switzerland have heard of the three-pillar system at some point. But what is it? How does it work? What should you pay attention to? This moneyland.ch explains what the three-pillar pension system is, and gives you an overview of how it works.

What is the three-pillar system?

In Switzerland, provisions for retirement, disability, and death are based on a three-pillar system made up of:

• Social benefits
• Occupational benefits
• Private savings and insurance

Each of these plays a role in determining your:

• Old-age pensions
• Disability pensions
• Survivor’s pensions (the pensions your dependents receive if you die) 

Read on to learn how the three pillars work together to protect you financially.

Which Swiss old-age pensions can I receive?

The Swiss old-age pension system is made up of social pensions (pillar 1), occupational pensions (pillar 2a and pillar 2b), and private pensions and retirement savings (pillar 3a and pillar 3b).

• Pillar 1

In Switzerland, all residents between the ages of 20 and 64 are required to participate in the Old-age and Survivor’s Insurance (OASI) scheme, which is part of the first pillar (obligatory social insurance). You have to participate regardless of whether or not you earn an income.

The OASI provides a basic old-age pension that applies lifelong and worldwide. The first pillar also includes the supplemental benefits scheme (EL/PC). This scheme provides an additional pension that extends your OASI pension, but only for pensioners living in Switzerland whose income and wealth fall below certain limits.

• Pillar 2a (occupational pension funds)

In Switzerland, employers are required to enroll their employees in an occupational pension fund. Self-employed people can voluntarily join a pension fund.

The law dictates the minimum requirements that are obligatory for all pension funds, including required contributions, the interest rate for benefits, and the conversion rate used to calculate your pension.

These obligatory pension fund benefits are referred to as the pillar 2a or the mandatory occupational pension (OP).

• Pillar 2b (occupational pension funds)

In addition to the minimum, required occupational pension, each pension fund is free to add supplementary benefits to their pension plans. These benefits extend the mandatory benefits to enable you to receive a higher overall pension or to save more money for retirement on a tax-preferred basis. They can differ from one pension fund to another, and even between different pension plans from the same pension fund.

Collectively, these extra-obligatory benefits are referred to as the pillar 2b.

• Pillar 3a

In Switzerland, you can voluntarily save for retirement on a tax-deductible basis, up to a certain annual limit. Money placed in a pillar 3a retirement account, retirement fund, or asset management solution is held in trust by a Swiss retirement foundation until you reach retirement age.

The savings are taxed at a special rate at the time of withdrawal. You are then free to create a withdrawal plan or to use the money in any other way you see fit.

Some Swiss insurance companies offer private pension plans (life annuities) based on the pillar 3a. But there are few situations in which using life annuities is beneficial compared to using a savings plan combined with a withdrawal plan.

• Pillar 3b

The pillar 3b is a general category that covers all other private retirement savings and pensions that are not tax-deductible. You have the option of getting private pension plans (life annuities) from Swiss insurance companies under the pillar 3b. However, using a savings plan combined with a withdrawal plan often makes more sense. Refer to the guide to withdrawal plans and private pensions for more information.

 

 

 

Which disability pensions can I receive from the three pillars?

The three pillar system also applies to disability pensions that you can claim should you ever become disabled. For more detailed information, refer to the moneyland.ch guide to Swiss disability insurance.

• Pillar 1

All residents of Switzerland are covered by social disability insurance (DI/AI), which provides workplace integration measures, disability aids, and a basic disability pension.

The first pillar also includes the supplemental benefits (EL/PC) scheme, which pays a complementary pension if your income and wealth fall below certain limits.

• Pillar 2a (occupational pension funds)

Your employer’s occupational pension fund is required to provide a basic disability pension based on the part of your income that is covered by the pillar 2a. You receive this pension in addition to the basic pension you receive from the pillar 1.

Because employer-based accident insurance covers disabilities caused by accidents, the disability pensions from your pension fund primarily apply to invalidity caused by illnesses.

• Pillar 2b (occupational pension funds)

Swiss occupational pension funds may provide additional disability insurance on top of what is required by law. For example, a pension plan could include a disability pension that covers your entire salary, or let you claim a full pension even if you are only partially disabled.

You can find your exact disability pension, accounting for both pillar 2a and pillar 2b benefits, on your annual pension fund statements.

• Pillar 2a (employer-based accident insurance)

The accident insurance you receive from your employer (OAI/NOAI) pays out a disability pension if you are disabled in a covered accident. The highest possible OAI/NOAI disability pension – for a disability rating of 70 percent or more – is equal to 80 percent of the part of your salary that your employer is legally required to insure.

• Pillar 2b (employer-based accident insurance):

Your employer-based accident insurance (OAI/NOAI) can also include supplemental disability insurance on top of the mandatory cover. This extra-obligatory insurance could, for example, pay out an additional disability pension on top of the mandatory one. It can also cover accidents that are not fully covered by obligatory accident insurance, such as accidents caused by extreme sports.

To find out what is covered by your accident insurance, ask your employer for a copy of their accident insurance terms and conditions.

• Pillar 3a

Many Swiss insurance companies offer private disability insurance within the pillar 3a. You can choose the size of the disability pension, and premiums you pay can be deducted from your taxable income as part of the pillar 3a tax deduction.

• Pillar 3b

Private disability pensions are also offered under the pillar 3b. These are generally identical to pillar 3a offers, with the difference being that premiums paid for pillar 3b insurance are not eligible for the pillar 3a tax deduction.

Which pensions can my dependents receive if I die?

If you have dependents, it is important to understand which pensions they will receive if you pass away.

• Pillar 1

The OASI scheme, which is mandatory for all residents, provides basic survivor’s pensions to widow’s, widower’s, and orphans based on your accumulated OASI benefits at the time of your death.

If your dependents meet eligibility requirements, they can receive an additional pension from the supplemental benefits (EL/PC), which is also part of the first pillar.

• Pillar 2a (occupational pension funds)

If you are subscribed to a Swiss occupational pension fund at the time of your death, your dependents can claim widow’s, widower’s, and orphan’s pensions from your pension fund. These pensions apply in addition to those from the first pillar, and are based on the part of your income for which you must pay compulsory pension fund contributions.

• Pillar 2b (occupational pension funds)

Pension funds can choose to include additional life insurance in their pension plans, in addition to the basic, obligatory pensions. For example, a pension fund can choose to pay out widow’s, widower’s, and orphan’s pensions that are much higher than the pensions required by law. Some pension funds pay out pensions to a person other than a spouse, providing they meet certain eligibility requirements and are named as your beneficiary.

You can find the exact options in your pension plan's terms and conditions. The exact pensions that your dependents will receive, accounting for both pillar 2a and pillar 2b benefits, are shown on your annual pension fund statements.

• Pillar 2a (employer-based accident insurance)

If you have accident insurance from your Swiss employer (OAI/NOAI) and you die in an accident, your dependents can claim widow’s, widower’s, and/or orphan’s pensions from your employer’s accident insurance provider, as long as they meet eligibility requirements.

• Pillar 2b (accident insurance)

Depending on your employer’s accident insurance, the pensions for your dependents can be higher than the basic pensions required by law.

• Pillar 3a

If the pensions you receive from the OASI and your occupational pension fund are inadequate, you can close the gap by getting private term life insurance.

The advantage of getting term life insurance denominated by the pillar 3a is that you can deduct the premiums you pay from your taxable income, up to the annual limit. The disadvantage is that there are limitations on whom you can name as the beneficiary.

• Pillar 3b

Term life insurance offers in this category are generally identical to pillar 3a offers. The disadvantage is that there is no special tax deduction for the pillar 3b. While premiums can theoretically be included in the general tax deduction for insurance premiums, that limited deduction is often fully used up by mandatory health insurance premiums alone. The advantage is that you are free to choose any beneficiary you want to.

You can find more information in the guide to pillar 3a vs. pillar 3b term life insurance.

Does the Swiss three-pillar system fully protect me financially?

Whether or not your pensions will match your working income largely depends on how high your income is:

• Low income

If you have a low income, then the basic social pensions from the pillar 1 – including supplementary benefits (EL/PC) – are sufficient to keep you above the poverty line. However, you can only receive an EL/PC pension if you live in Switzerland, have relatively little personal wealth, and your income – from other pensions, for example – falls below a certain threshold.

• Average income

If your income is near the median Swiss income, the old-age pensions you receive will be equal to a fair part of your working income. However, that is only the case if you live in Switzerland and make the maximum possible obligatory and voluntary contributions to all three pillars for your entire working life. In all other cases, you will have to supplement the three pillars with personal savings.

Pensions for disability and dependents only match your working income if your occupational pension fund and accident insurance include supplementary insurance (pillar 2b) that pay out benefits equal to your entire salary. If not, then it can be worth taking out private disability insurance and/or life insurance based (pillar 3a or pillar 3b) to close the gaps.

• High income

If you have a relatively high income, the three pillar system generally will not provide a pension income equal to your working income. That is true for old-age, disability, and death. A possible exception to this rule is if your employer has supplementary accident insurance and a pension plan with extra-obligatory (pillar 2b) benefits that reflect your real income (a 1e plan, for example).

Even then, additional private savings, disability insurance, and term life insurance may be necessary for you and your dependents to maintain your standard of living in the event of old-age, disability, or death.

 

More on this topic:
Swiss pillar 3a account comparison
Swiss retirement fund comparison
A guide to Swiss occupational pension funds
Swiss vested benefits accounts explained
Disability pensions in Switzerland: A complete guide