BVG and pillar 3a: make smart buy-in’s

If you go to your online banking these days, you will be reminded that you can still pay the limit amount into the 3rd pillar until the end of the year – a maximum of CHF 7,056 for people with a pension fund and CHF 35,280 for the self-employed. Your taxable income will be reduced in the year of payment by the amount paid in. At the same time, you have the option of making a parallel purchase into your pension fund.

The tax effects are the same as when paying into the 3rd pillar: you save income tax in the year of payment, lower wealth tax is payable on the amount paid in until the year of withdrawal, and you pay one-off capital gains tax on the capital withdrawn from the 2nd pillar and/or 3rd pillar or – in the case of a pension withdrawal from the pension fund – higher income tax after retirement. The principle of progression applies to all taxes, i.e. the tax burden increases disproportionately as the tax base increases. “Paying in smartly” is therefore not entirely trivial.

The first question is how much you would like to pay in this year – in total via the 2nd and 3rd pillars. To answer this question, you should consider how much money you would like to save in total or pay into the 2nd and 3rd pillars by the time you retire. You then distribute this savings sum over the remaining years of employment in such a way that your taxable income is as even as possible each year. Due to tax progression, you will pay less tax if your income remains stable than if it fluctuates strongly.

Once you have determined the amount to be paid in, the next question is whether you should invest the money in your pension fund or your 3rd pillar. If you have a pure interest-only account solution in pillar 3a, the interest comparison illustrated above speaks more in favor of paying the capital into pillar 2. If you have chosen an individual securities or insurance solution in pillar 3a, there is no general answer as to whether you should pay into the 2nd or 3rd pillar first. This decision depends in particular on the investment strategy of the securities solution and, of course, the implementation costs.

Finally, a note on two pitfalls:

1. Purchases into the pension fund may not be withdrawn as a lump sum within three years (Art. 79b para. 3 BVG).
2. If you suffer a disability or death before retirement, purchases into the 2nd pillar will not be reimbursed – unless your pension fund has made provision for reimbursement in its regulations. We recommend clarifying this point with your pension fund in advance.