Taxation and tax deductibility of the 3rd pillar

The 3rd pillar is part of the Swiss pension system. It enables you to supplement your retirement income by saving throughout your working life. It also allows you to benefit from tax advantages based on a number of criteria. Would you like to learn more about the 3rd pillar and the tax deduction? Then this article should provide you with some answers.

By opening a linked pension provision contract, which is also known as 3rd pillar 3A, you benefit from tax advantages. Payments made over the course of the year are deductible from your taxable income, enabling you to lighten your 3rd pillar tax calculation and benefit from a lower-than-expected tax rate. Since these tax deductions are managed at federal level, they apply irrespective of the Swiss region in which you live.

Nevertheless, you should respect the legally-imposed payment ceilings for pension contracts. In 2024, you can pay up to CHF 7,056 a year into your 3rd pillar if you are gainfully employed and affiliated to a pension fund. If you don't have a 2nd pillar and are self-employed, you have the option of contributing up to 20% of your net income, up to a maximum of 35,280 francs a year.

Be aware that should you wish to continue working until 5 years after retirement age, you will still be able to take advantage of the tax deduction for your 3rd pillar.

With 3rd pillar 3B, or free pension provision, you can also obtain attractive tax deductions. However, unlike tied pension provision, taxation of 3rd pillar 3A is governed at cantonal level. Your tax savings therefore depend on where you live. When it comes to taxation, the cantons of Geneva and Fribourg are the most attractive.

Depending on your family situation (for example, if you're married with children) and the amount you pay in each year, you may qualify for an attractive tax deduction. If not, you may be better off with a tied pension plan. To find out, contact the tax authorities in your canton, who will be able to calculate your 3rd pillar tax.

For the entire period of your linked pension contract, you do not have to pay wealth tax. If, on the other hand, you have taken out an unrestricted pension plan, you must declare the surrender value of your pension savings to your tax authorities. This corresponds to the sum made available to you by your insurance company, which is taxed as part of your 3rd pillar. As for the interest generated by your retirement savings, it is not taxable, nor are any surpluses paid by your insurance company.

As for the taxation of your 3rd pillar when you withdraw your capital, this again depends on the retirement savings contract you have chosen. A reduced rate, independent of your other income, applies in the case of a linked pension plan. In this case, tax is calculated on the basis of your personal situation and the amount of your savings. Conversely, if you decide to withdraw the capital from your unrestricted pension plan, you will not be subject to any tax.

If you are a cross-border commuter, you may well decide to take out a 3rd pillar to improve your retirement. This complements the 1st and 2nd pillars, which are part of the compulsory pension system in Switzerland. However, it's important to point out that, from the beginning of 2021, cross-border commuters will no longer be able to take out individual pension contracts as easily as before. Also, in order to benefit from a tax deduction with their 3rd pillar and reduced taxes, they must obtain quasi-resident status. To achieve this, 90% of their household income, including salaries, rental income and any investments, must be taxed in Switzerland. The cantons of Geneva and Fribourg are the only ones in French-speaking Switzerland to grant this status, since the others are not covered by the withholding tax.

So, taking the example of a cross-border worker in Geneva, his employers are entitled to deduct taxes directly from his salary.

As the laws governing cross-border pension provision are constantly evolving, it makes sense to keep up to date with the latest developments.

To easily calculate your 3rd pillar tax, simply deduct the amount of your savings over the year from your taxable income, and apply the tax rate that applies to you. In this way, you'll be able to see more easily whether a tied pension contract will enable you to make significant tax savings, and whether it is worthwhile in terms of your personal situation.

It's also important to think about calculating the amount of tax on the withdrawal of your 3rd pillar capital, so that you can see more clearly for your pension provision. As it's not always easy to do this, given the complexity of the Swiss tax system, a number of simulators are available online. These are completely free of charge, and the data provided remains confidential. In general, you are simply asked to fill in the following details on the form: