Buy-backs in the third pillar: a solution for boosting retirement savings?

As a result of the benefit reduction mechanisms brought about by the 1^st and 2^nd pillar reforms, the constitutional principle (art. 113 al 2 let. A Cst) that insured persons must be able to maintain their standard of living prior to retirement is being undermined. To achieve this objective, payments into pillar 3A are necessary. The AVS covers basic needs, occupational pension provision maintains the previous standard of living, and pillar 3A covers additional needs. Funds paid into 3A will amount to around €140 billion in 2022. In 2020, around half of all people in gainful employment in Switzerland will be contributing to their 3^rd pillar. Only a third of employees (13% of taxpayers) will be able to pay in the maximum amount of CHF 7056 (source: OFS, AFC, BNS).

Increase contributions to the 3a linked pension scheme or authorize purchases in the 3a pillar?

In view of this, an increase in the ceiling is not necessary, given the small proportion of people who contribute the maximum. On the other hand, the possibility of making buy-backs at a later date (the possibility of paying sums that could have been paid in previous years) would make it possible to improve the pension provision of people who were unable to contribute to the 3A linked pension scheme at the start of their working lives, self-employed people who do not have the necessary funds, or people who were unable to make a payment because their income is not subject to AVS (women who were unable to work due to maternity, etc.).

When will it be possible to buy into 3a?

A motion to this effect was tabled by Councillor of States Erich Ettlin on 19.06.2019 (reform adopted by the Council of States and National Council). It should soon be possible to close contribution gaps in pillar 3A by making subsequent purchases. The Federal Council has put out for consultation (deadline : 06 March 2024) an amendment to the Ordinance on tax deductions for contributions to recognized forms of pension provision (BVV3). Gaps in contributions identified after the new rules come into force may be filled by means of purchases. No date for entry into force has yet been set. Following the consultation process, changes to the current draft are entirely possible.

What conditions must be met?

Annual purchases of up to the small 3A contribution (CHF 7,056 in 2024) will be permitted, in addition to ordinary contributions. This possibility will also apply to people who are not affiliated with a pension fund. The purchase potential will be determined on the basis of a table drawn up by the FSIO, from which existing 3A credit balances will have to be deducted. To meet the objective set out in the motion of strengthening individual pension provision for the middle class, the possibility of buying back gaps in the 3A scheme will have to meet three conditions:

1. Buy-back will only be possible every 5 years
2. The redemption amount will be limited to the maximum amount eligible for tax deduction (CHF 35,280.00 in 2024).
3. All early withdrawals made to acquire home ownership will be deducted

Conclusion

In the opinion of the Federal Council, this new option to make subsequent purchases would only benefit a limited group of people. The circle of people who will apply this new deduction is likely to be limited, but the possibility of making purchases in pillar 3A will certainly strengthen the retirement savings of a category of people who, at some point in their lives, did not have the financial means to contribute to the tied 3A pension scheme. Although we regret the fact that the purchase is limited to the gaps left over from the last 10 years, this is a new aspect of tax optimization and financial planning that we will be incorporating into our planning.

Our pension specialists will be happy to provide you with further information. We look forward to hearing from you!

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