Pillar3a and Misconceptions

Even though pillar3a provides a lot of benefits, such as tax-deductible, can be used for funding a company, purchasing homes, and of course for your retirement. There are ONLY less than one-third of the working population has a pillar3a account! Why?

1. Most people don’t know what is pillar3a hence they have misconceptions about it. They think it is like pillar1 or pillar 2 contribution, that their money is managed by some other organizations which they have no control of. They think they don’t receive everything they contributed, the money is used to pay for those who are retired now.

2. Most people think once they put money in the pillar3a account, they can not get the money out when they need it. They have to wait till they retire.

3. Most people think the pillar3a contribution is CHF6826 per year, and it is too much for them to commit.

Are some of the statements the same as what you think pillar3a is? Probably.

But they are not true.

1. Money contributed to the pillar3a account is tax-deductible. Depending on where you live in Switzerland and your income level, you can save even CHF800 to CHF1000 or more on income tax.

2. You can use your pillar3a money for buying property. In Switzerland, the downpayment is 20% of the house value, and you can use your pillar2 and pillar3a to pay part of the downpayment. You can use the money if you set up your own business or move abroad permanently. You can also withdraw your savings if you are unable to work and you draw full invalidity benefit. Even when you withdraw the money when you retire, the tax is much lower than what you would have paid for income tax.

3. You can contribute a maximum of CHF6826 as of 2020. But you don’t have to. You can contribute CHF1000, 2000, or any amount which is less than CHF6826. You can do a monthly deposit or lump sum.

There is a lot more information about pillar3a in my other article <How to Create Wealth with Your Pillar 3a>. I highly recommend you to read that one.

If you understand what pillar3a can do for you, here is how you can grow it to $1,000,000 till you retire.

Grow Your Money In Two Folds

Let’s make a simple example to help you understand the process.

Peter started working in Switzerland at age of 25 with a yearly net income of CHF86,000. Assuming he makes the same yearly salary till he is 65.

He is single, with no kids.

He contributes the maximum amount to pillar3a and uses the money to invest in ETFs which gives him an average return of 7% per year, which is a quite reasonable return.

Peter retires at age of 65.

In a year he pays CHF9800 income tax.

If he did not have pillar3a, with the same situation, he would have to pay CHF11,594 as income tax. He pays CHF1794 more tax than scenario 1.

Grow Pillar3a to $1,000,000

Now, here is the exciting part.

With pillar3a, Peter has two parts of investable money compared to if he does not have pillar3a.

1. Pillar 3a — CHF 6826

2. Tax saved — CHF1794

Step 1. He invests CHF6826 in ETFs with an annual average return of 7% per year through his pillar3a account till he is 65.

When he is 65, he would have $1,362,709,27 in his account.

Step 2. He invests CHF1794 in ETFs with an annual average return of 7% per year through his own brokerage account till he is 65.

When he is 65, he would have $258,145.39 in his brokerage account.

So the total value from his investments as a result of contributing to pillar3a would give him $1,720,854.66

Even if you are not like Peter, you start at age of 30, 35, 40, and so on, you still can grow your pillar3a to a significant amount till you retire.

Understand The Full Picture

Having pillar1 and pillar2 will cover part of your salary when you retire, but it is far from what your salary would be. If you want to have a comfortable lifestyle when you retire, not downgrade your quality of life, it is better to start planning your retirement when you still have time.

Pillar3a is a great vehicle to supplement your retirement income and provide you a safety net with multiple benefits. There are many different ways to invest with pillar3a each has its pros and cons. Find what is the most suitable for you is more important than jump right in.

The pillar3a I use is VIAC, you can buy low cost ETFs and the fees they charge is also very low compared to other solutions. It is an investment path, you can also deposit you money in the account and earn a 0.5% interest rate. I have 3 available promo code for some fee waivers: DCncgTD, ICMWMTC, UCnv0vC.

Related article:

<How to Create Wealth with Your Pillar 3a>

<How to Create Wealth with You Pillar 3b>