Pillar 3a equity funds: How to separate the wheat from the chaff

Are you interested in investing your Pillar 3a in equity funds? Then we congratulate you. Because there are still many 3a savers who have not realised what they will miss out over time if they do not invest their pillar 3a.

Good and low-priced equity funds for pillar 3a

If you are looking for a good securities solution for your Pillar 3a, we recommend that you look at independent comparisons. Comparisons are always independent if the person making the comparison meets the following conditions:

• He has no offer of his own that he “exclusively” recommends to you.
• He does not receive an issuing commission if you choose his offer (often the case with insurance companies with commissions of up to 5 %).
• He lists all relevant offers on the market. You can quickly find out what these are with a little googling.

The Handelszeitung recently published such a comparison of 3a funds. These are the funds that performed best:

Do it with conviction!

If you want to invest your pillar 3a in shares, you should do it with conviction. There is no point if you get cold feet at the next possible price slump and have your 3a custody account liquidated again because you expected something else.

Yes, equity funds fluctuate, and sometimes they do it really strongly. After the outbreak of the Corona pandemic in February 2020, 100 percent equity funds lost around 30 percent of their value within one month. So 10,000 francs melted down to 7,000 francs in a short time.

Anyone who has a problem with this should keep their hands off securities. The low interest rates on 3a accounts should also not be the primary reason why one wants to invest the pillar 3a. One should do it out of conviction, because one knows about the advantages of 3a equity funds.

Advantages of 3a equity funds for pillar 3a

1. very long investment horizon

In the 3rd pillar, you have time. If you start with pillar 3a at the age of 18, you have incredibly 48 years until ordinary retirement. In addition, pillar 3a can be extended by five years if you work beyond the normal retirement age. Then it is even 53 years. In other words, more than half a century.

In contrast, in your private wealth you never really know if or when you will need the money you have saved. Maybe you have to buy a new car sooner than expected. Or you want to do further training. Then you might need the money you have put aside. So the investment horizon is much shorter than in pension provision.

The advantage of the very long investment horizon is obvious: it allows you to survive crises unscathed even if you own 3a equity funds.

2. tax-free dividends

Pillar 3a is tax-free. Those who invest Pillar 3a in shares benefit from tax-free dividends year after year.

Since this advantage is often underestimated, we will make an example to illustrate:

• One-off payment of 6,883 Swiss francs
• Average 3 % return per year
• 1.8 % dividend yield per year
• Marginal tax rate of 20 % on income (tax savings)

This shows that the savings from tax-free dividends even exceeds the tax deduction of 1,366.60 francs (20 % of 6,883 rancs) over time.

Cumulative tax savings in CHF thanks to tax-free dividends

3. compound interest effect

If you invest your Pillar 3a in equity funds, you benefit from the compound interest effect. Within pension funds dividends are usually reinvested and and not paid out.

In the following example, we show you how large the compound interest effect is over time. This is based on the following assumptions:

• One-off payment of 6,883 Swiss francs
• Average return of 3 % per year

Compound interest effect on a 3a deposit in CHF

There is no right time to invest

Once you have understood the advantages of a 3a deposit with equity funds, the only thing that remains is the timing of the investment. Perhaps you have 50,000 francs in a 3a account and don’t dare invest it all in shares at once.

You have the following options now:

• You wait for the right time to invest
  The problem with this approach is that you only ever know the right time to invest in retrospect. No one can tell you in advance how the markets will develop. Of course, you can wait until the markets have corrected. But no one can tell you whether it will be cheaper then than now and how long you will have to wait for the correction. Moreover, the question arises whether you want to invest so much time and follow the markets for years. And even if the correction is here, it is a pure lottery to choose the right time. You may be too early and still take a large part of the price slide, or you may be too late again because the markets are already rising again.
• You invest staggered
  You can do this by choosing a provider with whom you can gradually increase the share proportion. This gives you a sense of control and smoothes the cost price of the fund shares.
• You leave the investment timing to chance
  You invest because you have looked into the subject now. You invest because you have paid into pillar 3a now. You always invest now. This has the advantage that you don’t have to worry about the investment timing. You leave it to chance. If you always invest faithfully according to this principle, luck and bad luck will balance each other out over time. You may invest at the worst possible time, but the probability is small. As a rule, you will always find a more or less good time in retrospect. But because you invest your pillar 3a out of conviction and pay it in year after year, this is not so important.