As early as possible is well-intentioned, but not necessarily well done
Many long-established providers of 3a solutions make the suggestion that you should start paying into pillar 3a as early as possible. They make this recommendation based on a simple calculation: if you pay in earlier, you save longer and benefit from compound interest for longer. This calculation is correct, but in our opinion it is too simple.
There are good reasons why you should not pay into the third pillar at the age of 18. And you should definitely not take out a 3a insurance policy at this age. As a rule, you don’t have any risks that need to be insured because you don’t have a family (yet), so you’re much better off with an account or securities solution.
So when should you start with pillar 3a?
Money in a pillar 3a is tied up
Payments into the third pillar are not freely available, but are tied. They can be drawn no earlier than five years before retirement.
There are exceptions to this rule. In the following cases, the 3a credit can be drawn earlier:
- When you want to buy residential property.
- When you become self-employed.
- When you definitely leave Switzerland and emigrate.
However, if you are doing education or training, you cannot draw the third pillar. Nor can it be used for a trip around the world. And you certainly can’t finance your first car with the third pillar either.
As you can see. If you want to start with the third pillar, you should only do so with money that you do not expect to need for a long time.
Deposit brings the most if you pay a lot of taxes
Paying into the third pillar is most exciting when you pay a lot of taxes. After all, the advantage of paying into pillar 3a is precisely that you can save taxes. On the other hand, if you earn little, you probably pay little tax anyway. So you can also save less taxes.
This does not mean that it is not interesting to pay into a pillar 3a even if you have a low income, but the benefit is not the same as if you earn a lot.
In addition, you pay a tax when you withdraw from the third pillar. This tax is usually much lower than the tax you can save by paying it in. But it is still important to be aware of this.
Shares in the 3rd pillar are more interesting than in free assets
One reason why it is interesting to start paying into the third pillar early is as follows: The third pillar assets do not have to be declared in the tax return. Accordingly, the income such as dividends and interest earned with the 3a assets is also not taxable.
This consideration is particularly important if you plan to invest your third pillar in securities funds. Because you no longer get any interest on 3a accounts anyway.
While we’re on the subject of providing transparent information about the advantages and disadvantages of the third pillar, let us add this: If you earn a capital gain in the third pillar, it is taxable when you receive it, unlike in free assets. This is because a capital gains tax is paid on the entire third pillar payout. However, this is significantly lower than the tax on income, which is why the third pillar is generally still worthwhile.
Conclusion: If you have the money, as early as possible, otherwise it depends
In summary, yes, if you have it, it is indeed worth paying into the third pillar as early as possible.
At 18, you have a very long investment horizon of over 40 years until ordinary retirement. When an investment has such a long time, you can take more investment risks than you could with a short investment horizon in free assets.
But if you earn little and save little, it is questionable whether the money in the third pillar is in the right place. There are good reasons for this, too, but you have to be aware that you won’t be able to access the money again so quickly.
Difference between pillar 3a and pillar 3b
Until now, when we talked about the third pillar, we always meant pillar 3a. However, there are providers who also talk about pillar 3b. Insurance companies in particular are using the good reputation of the 3rd pillar to catch customers.
However, pillar 3b insurances do not differ from other insurances without the 3b designation. 3b insurances are not privileged for tax purposes.