The 3-pillar principle: How the Swiss pension model works

The 1st and 2nd Pillars: Pension provision by state and employment

Everyone who lives or works in Switzerland is required to make compulsory payments to the first pillar. It consists of retirement and survivors' insurance and disability insurance. Supplementary benefits (EL) are also included. The first pillar secures the minimum subsistence level and is paid to women aged 64 and men who are over 65. It is built on solidarity - the young pay for old people, high earners for low earners - and is financed through a pay-as-you-go process. This means that current pensions are paid out of current income.

The second pillar is formed by occupational retirement, survivors' and disability benefits (BVG) and statutory accident insurance (UVG). Within the 3-pillar principle, it is obligatory for all employees who earn an AHV-liable income of more than CHF 21'330 per year (as of 2020). Death and disability are insured from the age of 17 years, age benefits from 24 years. Paying into the pension fund ensures the maintenance of the accustomed standard of living. The numerous possibilities to reduce tax payments by means of the second pillar also help, as it is financed through a funded system.

3rd pillar: Private provision is essential in the 3-pillar concept

The third pillar is private provision. The principle provides for an optional supplementary allowance in order to close the pension gap in old age. Despite the optimal use of the payments from the first and second pillar, they account for only about 70 percent of the previous income. To close the gap, home ownership and assets from the third pillar are necessary.

For private provision, the three-pillar principle in Switzerland is further distinguished in two forms: Pillar 3a represents the tied pension provision, Pillar 3b the free pensions. Both forms are self-financed by way of a capital funding, but differ in their tax treatment and the flexibility in which you can access the paid-up capital. In addition, the amount of the deposit is subject to restrictions.

One advantage of the linked provision is the tax privileges. For example, the contributions paid into the pillar 3a can be deducted from the taxable income. Interest is also tax-exempt. However, the pillar 3a is only reserved for employees and can only be filled with the statutory maximum amount per year. In addition, the capital can only be paid out 5 years before the pensioner reaches the pensionable age at the earliest. An exception is an advance withdrawal for the purchase of residential property.

The free provision includes reserves in the form of bank accounts, savings, life insurance, securities, fund shares, etc. Column 3b does not offer tax privileges, but it is not subject to comparable legal requirements. Depending on the chosen pension product and the terms of the contract, you can freely access your capital. There are also no legal restrictions on the number of deposits to the 3b pillar.