Buying back into the 3rd pillar: a new opportunity to improve private pension provision

Against a backdrop of ageing demographics and pension reforms, the Federal Council has introduced a new option for Swiss citizens: buying back into the 3rd pillar to fill potential pension gaps. This measure offers a new lever for asset managers to help their clients achieve greater financial security in retirement.

Alban Chaudet Pension Specialist, Edmond de Rothschild (Suisse) S.A.

Buying into the 3rd pillar allows policyholders to correct any gaps in cover linked to lower salary periods that may have had an impact on their pension provision. Buying additional contributions allows them to fill these gaps and increase their retirement assets, while enjoying the associated tax benefits. Each purchase is deducted from taxable income, significantly reducing income tax. What's more, the money deposited in the 3rd pillar is not subject to wealth tax. So it's a powerful and effective way of encouraging people to save for retirement directly by reducing their tax burden.

It is important to stress that, although these buy-backs offer a number of advantages, they are not entirely free of constraints. Certain criteria must be met. For example, purchases can only be made under the so-called ‘3rd pillar A’ linked pension insurance scheme, and may not exceed a certain amount based on the annual ceilings defined by law. In addition, the first possible gaps to be filled will be calculated from this new year 2025 and can therefore be purchased from the following year. Finally, the deadline for buying back a year will be limited to ten years, and insured persons will have to be able to prove that they were subject to AVS contributions in that year.

Few people involved

Although this reform offers new possibilities, it is essential to stress that, in practice, this new lever will affect a limited number of people. In order to benefit from additional purchases under the 3rd pillar, insured persons must already have maximised the annual contribution ceiling (in 2025, 20% of qualifying income, maximum CHF 7,258 for an employed person and CHF 36,288 for a self-employed person who is not affiliated to the 2nd pillar). This means that people who have had partial incomes, or those who have interrupted their careers for reasons of parenthood or who have low incomes, which are precisely those who could benefit most from this reform, are very often excluded from it. Indeed, these groups have not been able to optimise their 3rd pillar contributions because of short periods of work or insufficient income. As a result, although the aim of this reform is to meet the needs of policyholders who have encountered difficulties in accumulating their savings capital for their future retirement, there is a risk that it will not benefit those who need it most.

Implications for asset managers

Asset managers will therefore need to pay close attention to these conditions to ensure that redemptions are carried out in accordance with the rules, so that they can be sure of offering their clients an informed recommendation. Integrating this new approach will require a detailed analysis of the tax situation and an anticipation of the impact of these redemptions on the future performance of the portfolio. It is also crucial to consider the impact of new purchases in the 3rd pillar in relation to other elements of the pension system, in particular the first and second pillars. Indeed, if policyholders choose to make additional purchases in their 3rd pillar, this could influence the way they approach 2nd pillar purchases. However, it is possible that some policyholders will choose to concentrate their purchase efforts in the 3rd pillar for reasons of diversification and freedom in the choice of investment strategy, thereby reducing the amounts allocated to the 2nd pillar. Finally, it is important to remember that the performance distributed to members under the 2nd pillar depends in particular on the ratio between the number of people in work and the number of pensioners, and therefore on the reserves that the pension fund will have to build up in order to be able to maintain its commitments, a factor over which the member has no influence.

It will therefore be interesting to see how this measure is adopted by the Swiss population next year and what impact it will have on retirement planning. Against this backdrop, it becomes all the more important to work with specialists and a banking partner who offer these options and who will be able to guide your clients through the intricacies of this reform, in order to maximise the tax benefits and optimise their long-term pension strategy.

Biography

Alban Chaudet is Pension Specialist at Edmond de Rothschild (Suisse) S.A.
He is an IAF-certified financial adviser and holder of a Swiss Federal Certificate in Employee Benefits.