Introduction
In today’s article we will briefly look at how to choose the best third pillar, comparing the various options available. I will try to be as factual as possible, even citing outside sources as insights, and share my strategy at the moment. Let’s get started.
What is it and why take out a third pillar a
If you are not yet familiar with the Swiss pension system and do not even know what I am talking about, I refer you to the article where I explain how the Swiss pension system works:
In short, Pillar III A is that portion (the third, in fact) of the old-age provision in the Swiss system, this is voluntary: the voluntary contributions paid annually are deductible from taxable income for the calculation of annual taxes, and in addition (with some exceptions) the accumulated capital is tied up until retirement age.
The maximum annual amount deductible from taxable income paid into the Pillar A third account for an employee is 7’056CHF in 2024. This value increases with inflation and is updated every two years.
Where you can take out a third pillar a
1. Banks
Almost all Swiss banks offer the option of opening a Pillar A third account. Banks are required to have the client fill out a questionnaire that determines his risk aversion and goals. Simply put, if the client cannot sleep at night because he is afraid of losing money with market trends, the majority portion of his Pillar III A will not be invested in stocks because they are volatile. Because of these results, the advisor works out a specific allocation, which can range from 100 percent equities to 100 percent bonds.
Upside points:
- There is an institution that the client can physically go to, requesting an interview with an advisor.
- The security of having one’s savings in a Swiss bank.
- The costs are lower than with the third pillar insurance product (we will see later).
- The third pillar taken out in a bank can be much more easily accepted as a deposit or collateral for a future mortgage loan, at the same bank, for the purchase of a home.
- No regular deposit obligation. The customer is not required to pay a certain amount monthly or annually agreed upon at the origin of the contract; instead, he is free to pay as much as he wants, when he wants, within the 7’056CHF limit.
Downside points:
- Costs are higher than the third pillar fintech product (see below). Costs associated with the funds used (perhaps owned by the bank itself) are higher than with fintech products and sometimes not very transparent.
- There is not as much freedom of choice of where, how, to invest one’s savings: e.g. Swiss, European, global, sustainable equity, ec. Whereas in fintech companies there is the possibility.
- Many advisors (not all of course) use psychological tricks and sales techniques to convince a client to enter into these kinds of contracts.
The Swiss television has also analyzed the bank third pillar option as well as the fintech, I’ll leave the original video here (in italian):
Bank and Fintech third pillar A analysis.
2. Insurance companies
The second product available for Pillar A is insurance. Now it is important to make an important distinction at the outset. Swiss insurances offer two types of third pillar A products: the first is a pension-only product (i.e., designed only for retirement), while the second product is a mixed product where life insurance and pension are combined: that is, the client pays premiums (sums of money) monthly or annually that go to cover life insurance and at the same time also his third pillar A. In this section I will discuss both products.
Upside points: …
Downside points for the single pension product and the mixed product:
- Obligation to pay a certain amount of money monthly or annually: if not done a penalty is triggered.
- The amount of money paid annually is fixed until the end of the contract and does not increase every two years according to new federal guidelines.
- Non-transparent management costs: it is very difficult to find the management cost (in %) on the invested assets written down. Many times, the actual return on investment is negative, i.e. in simple terms it means you will have less money than you have paid in over the years or certainly less than you would have with other products such as banking or fintech.
- Many advisors (not all of course) use psychological tricks or sales techniques to convince a client to take out this type of contract.
Specific downside points for the mixed product (pension + life insurance):
It is a product that is poor as both life insurance and retirement planning. This is perhaps the biggest and most important unfavorable point. Simply put, it means that you lose money if you take out this mixed product, compared to taking out life insurance on its own and a third pillar A elsewhere. The swiss television, in collaboration with Mr. RIP (a former software engineer at Google and a great popularizer on the subject of finance) analyzed the mixed third pillar insurance policies of a young couple and found quite a deception. I’ll leave the video below (in ITA), as well as Mr. RIP’s article (in ENG):
Mr. RIP article about the insurance third pillar A (ENG):
3. Fintech
A third type of Pillar A is becoming increasingly successful in recent years: it is a product provided by fintech companies. A fintech company is a company that combines the financial world (fin-) with the technological world (-tech) creating a product that is intuitive and easily understood by the masses. In the case of Pillar 3 A these Swiss companies provide the ability to open an account, deposit and invest one’s savings, just as in the other two cases seen before.
Upside points:
- It is the cheapest option; no entry fee and transparent and negligible management cost (0.39% or 0.4% on total assets).
- Very high customization of the investment strategy: in addition to deciding which instruments to invest in (stocks, bonds, real estate, cash) you can also decide in which region of the world (Switzerland, Europe, World) and if you care about the environment there is also the possibility of investing in sustainable companies.
- Ease of termination and contracting: no termination penalty.
- No payment obligation. The user can independently decide how much money and when to deposit it.
- Some fintech companies (such as Viac) also provide small disability or death insurance or the option of taking out a subsidized mortgage loan (Viac) free of charge.
- Very user-friendly interface to keep an eye on the progress of one’s third pillar A at all times.
Downside points:
- There is no physical presence on the ground; this means that it is not possible to have an on-site consultation with a consultant from this type of company. However, this is done specifically to reduce costs for the benefit of the user.
Companies I recommend:
Finpension and Viac. They are the two leaders in the landscape of fintech companies for Pillar A in Switzerland. Another player that is emerging is Truewealth, which proclaims a 0% management fee that however at the end of the day is 0.4%.
Finpension is the cheapest of all with a 0.39% management fee, while Viac is at 0.4%.
My strategy
My personal strategy at the moment is to invest with Finpension for the following reasons:
- Finpension is the least expensive.
- You can invest 99% of the capital (while in Viac it is 97%)
- No foreign exchange fees for foreign currency fund purchases.
- More customization: you can create your own investment strategy by choosing from a list of different ETFs for stocks, bonds, real estate.
- I also do not plan to buy a house in the future and therefore do not need a subsidized mortgage loan (Viac).
My investment strategy is to invest 100% equity globally for two reasons:
- 100% equity to get as much return as possible and given my age (under 30) and low risk aversion for me is the best choice.
- World and not European or Swiss because it is important to diversify as much as possible, also based on Markowitz’s theory (CAPM) of market portfolio.
Referral code Finpension:
If you are interested in opening a Finpension account, just enter the following code when registering and you will get 25 CHF:
9HWHTI
Investment strategy based on age and risk aversion
As explained earlier, it is crucial that the person before investing in a third pillar A (unless he or she is already experienced) completes a questionnaire that measures his or her risk aversion (i.e., to the ups and downs of the markets and the possibility of losing money) and determines long-term goals. This type of questionnaire is also present when independently opening a third pillar A with Finpension or Viac. Based on the results, the application in this case will give you an investment recommendation, which I recommend following but in any case, is customizable.
Creating multiples portfolios to reduce withdrawal taxes
The last interesting point to know is the possibility, within for example a third pillar A with Finpension or Viac, to create up to five investment portfolios. In this way you divide your third pillar A into several smaller “accounts,” that is, for example, if you have five accounts, each year you will transfer one-fifth of the maximum amount for each account (in 2024: 7056 / 5 = 1411.2CHF). This structure is useful because the law allows you to withdraw up to five years before retirement age, and because the fees payable when withdrawing the capital on Pillar 3 A, increase as the amount increases. So, if an investor withdraws in five stages, one chunk at a time from his or her third Pillar A, he or she will pay less tax than another investor who withdraws all the invested assets at once (at retirement age).
Beware, some cantons in Switzerland consider this to be a kind of tax avoidance and place limits on the number of accounts one can open such as Vaud (maximum three) while others place no limits. It is important to inform yourself.
My strategy in this regard:
I have created five portfolios with Finpension, all with the same investment strategy explained earlier, precisely to make the most of this peculiarity of the law.
Conclusion
In this article, which is longer than usual, I have tried to summarize the characteristics of the various third pillar A products, describe the best and the worst, and show what my strategy is in this regard. I hope you enjoyed the article and now you are clearer about which third pillar A you will invest your money in and what mistakes not to make. See you in the next article, Bye!
