The Swiss Parliament, in a visionary approach, has opened a new path to strengthen your financial foresight. From now on, catch up on missed payments in the pillar 3a and benefit from significant tax advantages is within reach.
The exact date of entry into force of this measure is yet to be confirmed, but the anticipation is palpable. The advantages of this new opportunity are multiple, ranging from better equity in pension provision for all, to considerable tax gains. Anyone with gaps in their past contributions, including freelancers and young people at the start of their careers, will be able to benefit from it.
What is pillar 3a redemption and why is it important?
The purchase in pillar 3a is a new measure (not yet available) which allows the Swiss to fill the gaps in their past contributions to their private pension. This possibility is particularly important because it offers several advantages that we will explore in the next section.
The Swiss Parliament has recognized the crucial importance of the 3rd pillar for the financial security of Swiss citizens. By authorizing retroactive redemptions, it allows individuals to catch up on missed Pillar 3a payments and deduct them from their taxes, an option that was not previously available. Any payment after December 31 of the previous year was impossible.
Date from which you can redeem your 3rd pillar A
The precise date from which redemptions will be possible is not yet known. However, given that the last modification date of November 22, 2023 and the consultation continues until March 6, 2024, it can be assumed that the possibility of repurchase would become effective after this consultation period and once the regulatory amendments are finalized and adopted.
The advantages of the retroactive redemption right in pillar 3a
The right to retroactive redemption in pillar 3a offers several advantages for your pension plan, such as:
- Catching up on missed payments : This right allows individuals to compensate for missed pillar 3a payments. Previously, it was impossible to make a payment after December 31 of the previous year, but now individuals can catch up on these contributions.
- Tax benefits : Retroactive payments into pillar 3a can be deducted from taxes. This offers a considerable tax benefit and can be calculated specifically for each individual using a tax savings calculator. The federal tax loss is estimated at 100 million CHF.
- Expanded accessibility : This measure is aimed at everyone, including those who have not been able to contribute in the past, such as the self-employed or stay-at-home mothers without AVS income. It therefore allows for greater fairness in retirement provision.
- Supplement to retirement income : Pillar 3a is gaining importance in the face of legal pension provision, which only covers 60% of current income at the time of retirement, while financial needs do not decrease drastically. The purchase in pillar 3a helps to fill the pension gap.
- Flexibility and limits : Redemptions are possible every five years and are limited to an amount of CHF 35,280.
Who can benefit from the buyout in pillar 3a?
Repurchase in pillar 3a is accessible to any type of person who has missed payments in the past:
- Self-employed people and stay-at-home mothers : People without AVS income, such as the self-employed or stay-at-home mothers, who were previously unable to contribute, can also benefit from the buyback.
- Those who did not prioritize foresight in their youth : People who have not made payments or who have “forgotten” to contribute at certain points in their life can use this option to improve their retirement provision.
- Young professionals : Young people at the start of their careers who have not yet started saving for their retirement can also benefit from this measure.
- People who have experienced periods without income : Those who have experienced periods without AVS income, such as periods of time off to raise children, can also benefit from the buyback.
- Anyone authorized to contribute to pillar 3a : In general, to be able to make a purchase, you must be authorized to pay contributions to pillar 3a, that is to say, have income subject to AVS in Switzerland.
- Persons having paid the ordinary annual contribution for the year of redemption : The redemption is also open to those who have paid their ordinary contribution for the current year.
The tax impact of the redemption in pillar 3a
The tax impact of the redemption in pillar 3a is considerable and offers several benefits. First, the payments made for the redemption are tax deductible, which allows people making up their missed contributions to reduce their taxable income and, consequently, their tax burden.
Additionally, there is a limit set for the buyout amount, known as the “grand deduction”, which was 35,280 Swiss francs in 2023. This limit ensures that tax benefits remain reasonable. Furthermore, the introduction of this measure should lead to a reduction in tax revenue (around 100 million) for direct federal tax, affecting the cantons and the Confederation. This suggests that although individuals benefit fiscally, there could be knock-on effects for the state budget.
It should also be noted that this measure seems particularly beneficial for households with a high annual taxable income, because they are more inclined to take full advantage of the maximum tax deduction.
How and when to make a purchase in pillar 3a?
Here are the steps for a 3rd pillar redemption:
- Eligibility conditions : To be eligible for redemption in pillar 3a, you must be authorized to pay contributions in this pillar. This generally means having an income subject to AVS in Switzerland. In addition, you must have paid the entire ordinary annual contribution for the year of redemption.
- Redemption procedure : Redemptions in pillar 3a are made according to the principle of self-declaration. The new regulatory provisions guarantee the legality of redemptions, and the financial institutions involved must provide a certificate for subsequent monitoring of redemptions and compliance control by the tax authorities.
- Consultation with experts : Given the complexity of tax and pension matters, it is recommended to consult pension specialists, such as Finwise Assurance, to obtain personalized advice and to ensure that all legal and regulatory requirements are respected.
Points to consider before withdrawing funds from the 3rd pillar a
Some additional advice before moving on to purchasing your 3rd pillar!
If funds have been deposited in the 3rd pillar A through redemptions, they cannot be withdrawn in the form of capital for a period of three years. It is therefore crucial to check whether redemptions have been made over the past three years before considering a withdrawal.
From a tax point of view, a consolidated approach to pension assets prevails. This means that if you make a redemption in the 3rd pillar A, you must also take into account the funds from your 2nd pillar to avoid tax problems, especially if you plan to withdraw funds from your 2nd pillar in the form of capital before the end of the three-year blocking period.
For people subject to the tax on exemption from the obligation to serve, pension assets withdrawn early, for example for the acquisition of housing, may be subject to an additional tax of 3%. It is important to consider this tax when withdrawing contingency funds.
Recommended reading
Difference between 3rd pillar A and B to make the right choice
3rd pillar B: a good idea for your savings?