A comprehensive guide to help you avoid the mistakes I made and grow your wealth

In order for you fully understand pillar3b in the Swiss pension system, you first need to understand the overall pension system, how does it work, how much pension you will receive upon retirement. Refer to my article <Simple Explanation of Pension Fund in Switzerland> for a comprehensive explanation. Then you can look at what are the gaps you need to fill if it is not enough for you. There are 2 options to increase your pension with additional benefits, pillar 3a, and pillar 3b. To understand pillar 3a and how you can create wealth with it, you can refer to my earlier article <How to Create Wealth with Your Pillar 3a>. This article will be dedicated to explaining how you can create wealth with your pillar 3b.

What Is Pillar 3b

Pillar 3b is one of the 3 pillar pension system in Switzerland under the voluntary pillar 3. Unlike the first 2 which are compulsory depends on your situation, it is fully voluntary to contribute to the third pillar. Pillar 3b is used for saving for your future retirement and/or protect your family and loved ones in events of accident or death, then there will be a payout through the insurance. There is no restriction on the beneficiary in pillar 3b life insurance and it is a good option for the not married couples.

Similar to 3a, you can choose either bank or insurance solutions for 3b. But unlike 3a which has many limitations, 3b has more choice freedom:

Unique Features of Pillar 3b:

• no yearly contribution limit.

• no tax advantage from your contributed money in the year.

• Tax advantage at payout. The amount you receive at payout is tax-free. Because you already paid tax on your contributed money before. Even the payout amount is with a profit, it is all tax-free.

• Life insurance 3b can assign anyone as the beneficiary.

• It can be used for indirect amortization when purchasing homes. a pillar 3b mixed insurance product can act as a collateral for the bank. Then you would benefit from the difference between the investment gain vs. interest rate. And at the same time, your interest remains the same as you haven’t actually payback yet. So it is tax-deductible. You will have a larger tax-deductible amount versus direct amortization.

• You can choose when to payout, even before retirement age.

For Whom:

Often times life insurance is bundled with an investment plan. This solution is suitable for people who have certain needs, for example:

• want to protect their family from financial burden in the event of disability and death. (You can also only buy life insurance only)

• want to protect someone who is not a direct family member thus he or she can designate the beneficiary to want to prepare for retirement and having an additional income. (you can also just buy life insurance only)

• want to use 3b for indirect amortization and benefit from the low-interest rate vs. investment return if invested in a fond. This can be combined with your pillar 3a for a bigger indirect amortization amount.

• want to benefit from the zero tax at payout. (conditions may vary depends on canton)

• want to benefit from low insurance premiums while at a younger age. ( this applies to whole life premium, that it charges the same even you get older.)

Different 3b products have different terms and conditions. It is very important to understand all the details before signing a fixed long term contract. There are life insurance investment plans that allow you to withdraw before maturity without an additional penalty. So it is not always that you have to stick it to 30,40 years. Again, read the details in the contract and consult various companies before signing.

Depends on where you live in Switzerland, tax regulations also differ. Hence for the complete evaluation of tax benefits, please consult an expert.

What I think:

From my own point of view, I like these 4 aspects of pillar 3b:

Indirect amortization: imagine I buy a home in Switzerland, with the current interest rate of around 0.8%. And I expect my annual investment return of 3.5% over the next 15 years. Why 15? Because you need to pay back the second mortgage in Switzerland within 15 years. Instead of paying back the interest to the bank every month, I invest the money through 3b. My gain is 2.7% per year. And because I didn’t pay back interest, my total interest amount also remains the same year after year. This amount is tax-deductible.

On the other hand, if I use direct amortization, I reduce the interest year on year. The tax-deductible amount is decreasing, and I pay a bit more tax. And also I would have a 2.7% opportunity cost per year. The same thinking goes to pillar 3a indirect amortization.

Tax benefit: to simplify the explanation and not taken cantonal tax regulation into consideration. I pay x% tax on CHF X which I put into pillar 3b. But after some years, X might turn into X(1+30%), given a total 30% return over the period of whatever years. But I did pay tax on the X(1+30%) amount, only on the X.

Insurance: we all hope for the best, but you can never predict what will happen in life. So having a shield for me and my family is important. And I can only pay a fixed premium amount over the next decades even I get older. This depends on which insurance you get from which company. Another aspect of insurance is that when the company goes bankrupt, my invested money is protected. If I put the money into the market, I could lose all.

Flexible payout: pillar 3a has a stringent payout requirement, while 3b is flexible. Depends on which 3b product you buy, you can choose the early payout.

What You Should Do

With any investment, it comes with risks. With any commitment, it comes with sacrifices. By understanding the system and combining it with your own situation, you are already making a step towards better financials. I share with you what I know here, I am not an expert, but if you decide to take action, I advise you to do more research and consult people. In the end, how you do with your money is personal. There is no universal framework.

If you have additional information or tips or comments for the other readers on this topic, feel free to leave them in the comments. I am sure people will benefit from it.

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Books and tool I recommend:

The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk

Intelligent Investor

MONEY Master the Game: 7 Simple Steps to Financial Freedom

Investment tool: VIAC