Dear Mr. Aggett,
My wife (31) and I (30) live in Bern. We have a joint taxable income of 80,000 francs. We would like to start a family and dream of buying a place of our own in around 10 years’ time. My wife thinks we should build up our savings through pillar 3a, but that means our money will be tied up. We also wonder whether a bank or insurance solution would make sense. What do you advise?
Daniel M., Bern
Dear Mr. M.,
Accumulating pillar 3a savings is always a smart move, as you can deduct the deposits directly from your taxable income. During the accrual phase, the interest income and savings are tax exempt. Individuals with a pension fund can make a maximum annual contribution of 6,739 francs (in 2014) to pillar 3a. If you pay in this amount each year, based on your current income, you will reduce your tax bill by around 1,600 francs a year. Over a period of 10 years that adds up to tax savings of almost 16,000 francs!
You have the choice between a pillar 3a account with preferential interest (UBS Fisca account), a pillar 3a fund whose value fluctuates with the financial markets (UBS Fisca custody account with UBS Vitainvest Investment Funds), or an insurance solution. Compared with a savings account (0.05 percent annual interest), a pillar 3a account (1 percent annual interest) generates much better returns. Given your longer-term investment horizon, if you are prepared to take on more risk, a pillar 3a custody account could also be interesting, allowing you to invest in funds with an equity exposure of up to 50 percent - thus enhancing your return opportunities.
Bank or insurance
Insurance solutions combine risk protection (death) with a guaranteed retirement sum. To ensure the capital is actually paid out, you have to pay the premiums over the entire insurance term, whereas a banking solution lets you take a payment break if required. Of course, you can include a waiver of premium clause in your insurance policy that kicks in if you are unable to earn due to illness or accident - but this will cost you extra.
No matter which pillar 3a solution you choose, the savings generally remain blocked until retirement age. But they do protect your family, as they will be paid out in the event of your death. You can also make a withdrawal if you become disabled. A point of special interest to you: 3a savings can be accessed to finance home ownership. You can close a bank account free of charge. Cancelling a 3a insurance policy, on the other hand, usually involves considerable losses, as in the early years, the acquisition commission will be deducted.
Smart tax savings
If you save towards a home of your own with a pillar 3a account, in 10 years you will have set aside around 70,000 francs - in addition to the tax savings. If that capital were to be paid out, tax of around 2,400 francs would become due. Leaving you with just over 68,000 francs - more than you would have with a savings account.
Any amounts you withdraw from pillar 3a are taxed separately from your other income at a special rate. However, they are still subject to tax progression. If you don’t plan on using your pillar 3a to finance home ownership, it could make sense to open a second 3a account. This allows you to make staggered withdrawals and thus break the progression.