1. What is changing?
In June 2020, the Swiss parliament motioned in favor of a motion by Council of States member Erich Ettlin which had already been approved by the Federal Council in September 2019. The initiative initiated with the Verein Vorsorge Schweiz (VVS), an association of Swiss retirement and vested benefits foundations.
The move by parliament enables individuals who have earn an OASI-eligible income in Switzerland to contribute money to make up for failed opportunities to maximize contributions to the tax-privileged voluntary Pillar 3a providence category. The motion must now be implemented by the Federal Council.
2. What are the current pillar 3a rules?
Up until now, it has only been possible to contribute to pillar 3a retirement savings or providence solutions up to a predetermined annual limit.
In 2020, the limit for pillar 3a contributions and tax deductions is 6826 Swiss francs for individuals who also participate in an occupational pension fund (pillar 2).
The maximum possible pillar 3a contribution and tax deduction for individuals who do not participate in occupational pension funds (self-employed persons, for example) is 20 percent of their income. The highest possible contribution is five times the limit applicable to occupational pension fund participants (34,128 francs in 2020).
The limits are reviewed on an annual basis and adjusted when deemed necessary. In recent years the limit has been increased fairly often. You can find more information in the guide to pillar 3a contribution limits.
3. What new pillar 3a rules will apply in the future?
The current rules and limits for the pillar 3a will continue to apply. However, the rules are being extended. It will now be possible to make up for past years in which you did not make the maximum possible contribution to your pillar 3a.
Once the new rules take effect, contributions in arrears can be deducted from your taxable income along with standard pillar 3a contributions. You can even make contributions in arrears for years in which you did not earn an OASI-eligible income.
There are a number of conditions and limitations which will apply to making pillar 3a contributions in arrears:
- You have to earn an OASI-eligible income at the time that you make the pillar 3a contributions in arrears.
- Contributions in arrears may only be possible for adults aged 25 or older (the Federal Council has yet to clearly define this point).
- You can only make contributions in arrears for years in which you did not already use your full pillar 3a contribution allowance. For example, if you contributed 1000 francs less than your maximum possible contribution in a given year, you can contribute an extra 1000 francs for that year in arrears.
- You can only contribute to the pillar 3a in arrears once every 5 years.
- Contributions in arrears are limited to five times the annual limit applicable to occupational pension fund participants. In 2020 this cap would be 34,128 francs.
- If you have withdrawn pillar 3a assets early for the purpose of buying or renovating a primary residence, the amounts withdrawn are accounted for when determining the maximum pillar 3a contribution in arrears which you can make.
4. When do the new rules take effect?
The Federal Council is responsible for the implementation of the new pillar 3a regulations. This will happen over the next years, but the exact date at which the rules will take effect is not known. Implementing the new pillar 3a regime is a fairly complex task, and the new rules are not likely to take effect for at least another two years.
5. What are the advantages of the new pillar 3a rules?
The biggest advantage of the pillar 3a has always been the possible tax savings. While pillar 3a retirement savings accounts have a slightly higher average annual interest rate than regular savings accounts, the difference is small, making this a marginal benefit. In the case of pillar 3a retirement funds, your choice of funds is very limited in comparison to non-privileged investment vehicles.
The main advantage of the new pillar 3a rules is that you can contribute and claim tax deductions in arrears for past years in which you did not use your full allowances for pillar 3a contributions. What this means is that you can take advantage of years in which you paid less than the maximum into the pillar 3a to reduce your income tax obligations. Assets held in the pillar 3a are not taxable wealth, so making additional contributions also reduces your wealth tax liability. When you withdraw money from the pillar 3a, you pay capital withdrawal tax, which is generally lower than income tax.
Verdict: The pillar 3a will now provide a more favorable voluntary retirement saving solution. This is especially true for individuals with high incomes who want to make up for past gaps in retirement saving and reduce their tax liability.
The new rules also benefit banks, which hope to profit from cash inflows into the pillar 3a through higher revenues from their private retirement saving solutions.
6. Are there disadvantages to the new pillar 3a rules?
Opponents of the motion claim that the new pillar 3a rules primarily benefit wealthy individuals with incomes above 100,000 francs per year. They argue that change has little benefit for the bulk of the population because most residents do not have large amounts of savings which they can use to close gaps in their pillar 3a savings. To their view, the change profits a minority of residents, while reducing the State’s tax revenues.
The Federal Council acknowledges these points. It determined that only around 13 percent of taxpayers in Switzerland can afford to make the maximum contribution to the pillar 3a. However, the Federal Council is obligated to implement the motion.
Increased administrative work for tax authorities is another possible disadvantage attached to the new pillar 3a rules.
7. Who could benefit from pillar 3a payments in arrears?
Making up for gaps in your pillar 3a savings can be financially advantageous – primarily because of the potential tax benefits. If claiming pillar 3a tax deductions in arrears would significantly reduce your taxable income, then doing so can be a good financial move. This is particularly true if it would place you in a more favorable tax bracket. The same applies to wealth tax.
However, it is important to only contribute money to the pillar 3a if you can afford to live without those assets. Pillar 3a assets are held in escrow by a retirement foundation until you reach retirement age or qualify for early withdrawals.
More on this topic:
Interactive pillar 3a retirement account comparison
Interactive pillar 3a retirement investment fund comparison
