Pillar 3A: When Is the Right Time to Pay In?

Many people in Switzerland use the pillar 3a to save for retirement and reduce their tax bill. A frequently-asked question is: When and how should I pay into my pillar 3a saving or investment solutions?

The answer depends on your personal situation and on which kinds of pillar 3a solutions you use. From a tax perspective, the time of year at which you pay into the pillar 3a makes absolutely no difference. The only thing that matters is that the money has been credited to the pillar 3a account by December 31, at the latest. 

How much money should I pay into the pillar 3a?

From a financial perspective, it makes sense to start contributing to the pillar 3a as early as possible. The sooner you begin, the more retirement savings you will have. Using the pillar 3a has a unique benefit in that your savings are protected from impulse spending.

But there are also times when it is better to put off contributing to the pillar 3a. Before you begin contributing to the pillar 3a, you should first build up a financial buffer in the form of an emergency fund. That is because once money is placed in the pillar 3a, it cannot be accessed in financial emergencies, and can only be withdrawn in very specific cases. Your income also plays a role. If you currently have a low income, but expect to earn more in the near future, it can make sense to postpone your contributions to a later year when they could bring a larger tax benefit. 

When is the best point in time to pay into the pillar 3a?

Once you know how much you can afford to place in your pillar 3a savings, the next step is to choose the right time to contribute. Here are some common examples:

• At the start of the year
• In monthly installments
• At the end of the year
• Spontaneously

Which option makes the most sense for you depends on your personal situation and on which pillar 3a solutions you use. Of course, it is also possible to use a hybrid system that suits your specific needs.

Should I pay in at the start of the year?

If you use pillar 3a savings accounts, paying in at the start of the year is advantageous. That is because the longer the money sits in your account, the more interest you will earn. Thanks to compounding interest, always paying in as soon as possible results in larger yields over the long term.

That is not necessarily the case if you invest your pillar 3a savings in securities. Because there is no way to predict how markets will behave, making your full pillar 3a contribution at the start of the year brings a risk of buying in at a bad time.

Regardless of whether you use a pillar 3a savings account or a pillar 3a investment solution, paying in your annual contribution at the start of the year only makes sense if you already have a sufficient emergency fund.  

Should I contribute in monthly installments?

If you find it difficult to save up a large lump-sum of money, then it can help to divide your annual pillar 3a contribution into smaller monthly contributions. Many people prefer to pay in monthly because their finances follow a monthly pattern – with a monthly salary and monthly bill payments. Monthly pillar 3a payments are easier to incorporate into a monthly budget.

For pillar 3a investment solutions, monthly installments have another advantage. Because investments are divided up throughout the year, some transactions are made when prices are high, and others when prices are low. This cost averaging effect minimizes the risk posed by price fluctuations.

Should I pay in at the end of the year?

Some people do not even think about the pillar 3a at all until the year begins to draw to a close, and then rush to take advantage of the tax deduction. Other people wait until the end of the year because they are not sure if they will have extra money to contribute to the pillar 3a.

Often, self-employed people without an occupational pension fund can only assess their annual income at the year’s end. Because the limit for pillar 3a contributions is a percentage of their income, knowing their annual income is essential to knowing how much they can contribute.

Should I pay into the pillar 3a spontaneously?

Many people contribute to the pillar 3a spontaneously, without a concrete savings plan. This method gives you a lot of flexibility, but you run the risk of forgetting to pay into your pillar 3a savings.

Often, people make these spontaneous payments in months when income is exceptionally high, or when they receive a thirteenth monthly salary. This can be a good strategy if you have a variable income – a salary based on sales commissions, for example.

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