Many people are aware that payments into pillar 3a can be deducted from their taxes. But there are other tax advantages that are just as important and that many people are not aware of. In this article on the tax advantages of pillar 3a, we also look at these other tax advantages.
The tax advantages apply equally to voluntary buy-ins to the pension fund.
- Deduction from taxable income
- No wealth tax on pension assets
- No income tax on interest and dividends
1. deduction from taxable income
Payments into pillar 3a can be deducted from taxable income in the tax return. The income that you have to pay tax on is reduced by the deductions.
How much tax you can save by paying into pillar 3a depends on two factors:
- How much you earn: The higher your income, the more worthwhile it is for you to pay into a pension scheme. This is because income tax is progressive. The higher your income, the more you have to pay to the state and, conversely, the more you can save if you reduce your income by paying into a pension scheme.
- Where you live: The second factor that determines the potential tax savings is where you live. If you live in a low-tax location, your tax savings will be lower than in a high-tax location. Logical, isn’t it?
Up to 48 % tax savings on the maximum amount of CHF 7,056
The following table shows the tax savings in the cantonal capitals in relation to the maximum permitted deposit of CHF 7,056 (2024). The tax savings on the deposit amount range from 10 to 48 per cent.
| Steuerbares Einkommen in CHF | 50'000 | 75'000 | 100'000 | 150'000 | 200'000 | 250'000 | |
|---|---|---|---|---|---|---|---|
| AG | Aarau | 21% | 24% | 28% | 34% | 37% | 37% |
| AI | Appenzell | 17% | 18% | 21% | 25% | 27% | 26% |
| AR | Herisau | 22% | 25% | 29% | 34% | 37% | 37% |
| BE | Bern | 24% | 27% | 33% | 39% | 43% | 43% |
| BL | Liestal | 26% | 30% | 35% | 41% | 43% | 44% |
| BS | Basel | 25% | 26% | 29% | 34% | 36% | 43% |
| FR | Fribourg | 26% | 30% | 33% | 42% | 44% | 38% |
| GE | Genève | 31% | 32% | 36% | 42% | 46% | 46% |
| GL | Glarus | 19% | 22% | 25% | 31% | 35% | 35% |
| GR | Chur | 24% | 25% | 28% | 34% | 36% | 36% |
| JU | Delémont | 24% | 28% | 34% | 39% | 41% | 42% |
| LU | Luzern | 21% | 21% | 25% | 30% | 34% | 34% |
| NE | Neuchâtel | 28% | 31% | 36% | 43% | 46% | 41% |
| NW | Stans | 18% | 19% | 22% | 28% | 27% | 27% |
| OW | Sarnen | 17% | 17% | 20% | 25% | 27% | 27% |
| SG | St. Gallen | 24% | 29% | 32% | 37% | 39% | 39% |
| SH | Schaffhausen | 20% | 24% | 28% | 35% | 37% | 33% |
| SO | Solothurn | 25% | 27% | 31% | 37% | 39% | 39% |
| SZ | Schwyz | 15% | 17% | 20% | 25% | 27% | 30% |
| TG | Frauenfeld | 22% | 22% | 27% | 31% | 35% | 35% |
| TI | Bellinzona | 23% | 26% | 31% | 36% | 39% | 41% |
| UR | Altdorf | 18% | 18% | 22% | 26% | 28% | 28% |
| VD | Lausanne | 24% | 28% | 35% | 42% | 46% | 48% |
| VS | Sion | 21% | 27% | 36% | 44% | 39% | 39% |
| ZG | Zug | 10% | 17% | 23% | 23% | 25% | 25% |
| ZH | Zürich | 18% | 22% | 27% | 36% | 41% | 41% |
Assumption: single, reformed, without children (source: Federal Tax Administration)
The comparison takes into account both cantonal and municipal taxes as well as direct federal tax.
2. no wealth tax on pension assets
But that’s not all. Pension assets have another advantage. They do not have to be declared in the tax return. They are therefore not counted as taxable assets.
With an average wealth tax rate in Switzerland of 0.5 %, the savings over 30 years amount to a whopping 14 per cent.
| Year | Asset development in pension provision | Asset development in free assets | Advantage of provision |
| 1 | 100’000 | 100’000 | |
| 2 | 100’000 | 99’500 | +500 |
| 3 | 100’000 | 99’003 | +998 |
| 4 | 100’000 | 98’507 | +1’493 |
| 5 | 100’000 | 98’015 | 1’985 |
| 6 | 100’000 | 97’525 | +2’475 |
| 7 | 100’000 | 97’037 | +2’963 |
| 8 | 100’000 | 96’552 | +3’448 |
| 9 | 100’000 | 96’069 | +3’931 |
| 10 | 100’000 | 95’589 | +4’411 |
| 11 | 100’000 | 95’111 | +4’889 |
| 12 | 100’000 | 94’635 | +5’365 |
| 13 | 100’000 | 94’162 | +5’838 |
| 14 | 100’000 | 93’691 | +6’309 |
| 15 | 100’000 | 93’223 | +6’777 |
| 16 | 100’000 | 92’757 | +7’243 |
| 17 | 100’000 | 92’293 | +7’707 |
| 18 | 100’000 | 91’832 | +8’168 |
| 19 | 100’000 | 91’372 | +8’628 |
| 20 | 100’000 | 90’916 | +9’084 |
| 21 | 100’000 | 90’461 | +9’539 |
| 22 | 100’000 | 90’009 | +9’991 |
| 23 | 100’000 | 89’559 | +10’441 |
| 24 | 100’000 | 89’111 | +10’889 |
| 25 | 100’000 | 88’665 | +11’335 |
| 26 | 100’000 | 88’222 | +11’778 |
| 27 | 100’000 | 87’781 | +12’219 |
| 28 | 100’000 | 87’342 | +12’658 |
| 29 | 100’000 | 86’905 | +13’095 |
| 30 | 100’000 | 86’471 | +13’529 |
3. no income tax on dividends and interest
Because pension assets do not have to be declared in the tax return, the dividends and interest earned are also not taxable. They are therefore not added to taxable income, as is the case with dividends and interest on free assets.
We would also like to quantify this tax benefit and make the following assumptions:
- Annual dividends and interest income of 2 %
- Tax rate of 25 % for free assets
As you can see, these assumptions result in a further significant benefit for pension provision of another 24 per cent.
However, this advantage is only fully realised if you invest in genuine pension funds that reclaim withholding tax on foreign income.
| Year | Asset development in pension provision | Asset development in free assets | Advantage of provision |
| 1 | 100’000 | 100’000 | |
| 2 | 102’000 | 101’500 | +500 |
| 3 | 104’040 | 103’023 | +1’018 |
| 4 | 106’121 | 104’568 | +1’553 |
| 5 | 108’243 | 106’136 | +2’107 |
| 6 | 110’408 | 107’728 | +2’680 |
| 7 | 112’616 | 109’344 | +3’272 |
| 8 | 114’869 | 110’984 | +3’884 |
| 9 | 117’166 | 112’649 | +4’517 |
| 10 | 119’509 | 114’339 | +5’170 |
| 11 | 121’899 | 116’054 | +5’845 |
| 12 | 124’337 | 117’795 | +6’543 |
| 13 | 126’824 | 119’562 | +7’262 |
| 14 | 129’361 | 121’355 | +8’005 |
| 15 | 131’948 | 123’176 | +8’772 |
| 16 | 134’587 | 125’023 | +9’564 |
| 17 | 137’279 | 126’899 | +10’380 |
| 18 | 140’024 | 128’802 | +11’222 |
| 19 | 142’825 | 130’734 | +12’091 |
| 20 | 145’681 | 132’695 | +12’986 |
| 21 | 148’595 | 134’686 | +13’909 |
| 22 | 151’567 | 136’706 | +14’861 |
| 23 | 154’598 | 138’756 | +15’842 |
| 24 | 157’690 | 140’838 | +16’852 |
| 25 | 160’844 | 142’950 | +17’893 |
| 26 | 164’061 | 145’095 | +18’966 |
| 27 | 167’342 | 147’271 | +20’071 |
| 28 | 170’689 | 149’480 | +21’209 |
| 29 | 174’102 | 151’722 | +22’380 |
| 30 | 177’584 | 153’998 | +23’586 |
Reduced tax on the withdrawal of pension assets
Tax is only payable when pension assets are withdrawn. This is a reduced tax, which is lower than income tax. This means that you save more tax when you pay in than you have to pay when you withdraw.
Here are a few calculation examples:
Tax advantage over 10 years:
| Income taxes | |
| Payment 2023-2032 CHF 7,056 each | Tax saved: CHF 19,250 |
| Purchase 2031 (CHF 70,560) | Tax paid: CHF 3,358 |
| Total tax savings | CHF 15’892 |
Tax advantage over 20 years:
| Income taxes | |
| Payment 2023-2042 CHF 7,056 each | Tax saved: CHF 38,500 |
| Purchase 2041 (CHF 141,120) | Tax paid: CHF 7,393 |
| Total tax savings | CHF 31’107 |
Tax advantage over 30 years:
| Income taxes | |
| Payment 2023-2052 CHF 7,056 each | Tax saved: CHF 57,750 |
| Purchase 2051 (CHF 211,680) | Tax paid: CHF 12,413 |
| Total tax savings | CHF 45’337 |
Tax advantage over 40 years:
| Income taxes | |
| Payment 2023-2062 CHF 7,056 each | Tax saved: CHF 77,000 |
| Purchase 2061 (CHF 282,240) | Tax paid: CHF 17,467 |
| Total tax savings | CHF 59’533 |
Assumption: single, reformed, no children, city of Zurich, CHF 100,000 income, withdrawal not in the same year as the pension fund (source: Swiss Federal Tax Administration)
Several 3a accounts for a staggered withdrawal
As the tax on withdrawals is progressive, it is worth accumulating several 3a accounts and withdrawing them in stages. This allows you to significantly reduce the taxes when withdrawing the 3a assets.
Withdrawal before retirement only possible in exceptional cases
Money paid into pillar 3a generally remains tied up until retirement. In the following situations, 3a assets can still be withdrawn if you:
- build or buy your own home,
- become self-employed (as a sole proprietorship without a GmbH or AG) or
- emigrate.
Long investment horizon needs to be utilised
As the money in pillar 3a can only be withdrawn on retirement, most 3a savers have an exceptionally long investment horizon. A long investment horizon enables a securities solution with equities. Crises can be sat out and temporary losses do not have to be realised.
Pillar 3b is not tax deductible
The term “pillar 3b” is also used here and there. However, Pillar 3b is nothing more than free savings with free assets. Pillar 3b insurance policies are also normal insurance policies. They have no tax advantages. Accordingly, 3b assets and the income from them must be declared in the tax return.
Continue reading: