As with pension funds, Pillar 3a should also offer the option of closing financial gaps through purchases in the future. But how exactly should this be done? Opinions differ on this.
“Young old people” take up modern sports such as stand-up paddling – many also want new ways of planning for their retirement.
In the future, gaps in tax-privileged private pension provision (pillar 3a) should be able to be closed through subsequent purchases. This was decided by the Federal Council in its meeting on November 22nd and sent corresponding changes to the ordinance for consultation, which will last until March 6th, 2024.
The Federal Council’s proposal is based on a motion by Council of States member Erich Ettlin from 2019, but differs significantly from it in parts. While supporters of Pillar 3a purchases are disappointed with the changes, critics continue to question the sense of such subsequent payments.
Pay maximum amount retroactively
According to the Federal Council’s proposal, the following conditions should apply:
- Anyone who has not paid the maximum amount into Pillar 3a in a year will be able to make up for this by making purchases retroactively for up to ten years in the future. However, this will only apply to the years after the amendment to the regulation comes into force, not – as proposed in the motion – to the years before. If the changes come into force at the beginning of 2025, a person will be able to close a gap in Pillar 3a by making a purchase for the first time from 2026.
- The purchase amount is a maximum of one annual contribution plus the so-called “small tax deduction”. This year, this amounts to 7,056 francs and is intended for insured persons who are members of a pension fund. Together with the current annual amount, this is no more than two annual contributions, i.e. 14,112 francs. The Ettlin motion provided for a purchase every five years, but then with the “large tax deduction” of currently 35,280 francs. This applies to self-employed persons without a pension fund.
- Closing an annual contribution gap is only possible with a single purchase, not with multiple purchases. A contribution gap from 2025 cannot therefore be closed over the years 2026, 2027 and 2028.
- In order to close gaps, a person must prove that they had earned income subject to AHV contributions in the relevant contribution year. If they did not work or worked too little in the relevant year, they cannot make a purchase in Pillar 3a.
Disappointment over proposal for Pillar 3a purchases
Erich Ettlin, a member of the Council of States from the center-right, said he had received a lot of feedback from citizens since the Federal Council’s announcement. “I had to tell many of them that purchases in Pillar 3a would not be possible for them if the proposal was implemented as it was.” After all, no purchases were planned for gaps in Pillar 3a that had arisen in recent years. This had caused disappointment among many, said Ettlin.
The Federal Council is probably being so cautious because it fears tax losses, says the Council of States. The Federal Council’s statement states that annual revenue shortfalls of between 100 and 150 million francs are to be expected. On the one hand, it is argued that there is a risk of high tax losses, but at the same time there is constant talk of many people not being able to afford purchases in Pillar 3a – that is a contradiction, says Ettlin.
In his view, the state should be happy when people save for their old age, as this will mean they can stand on their own two feet financially in retirement and will not be dependent on state support. People, however, have a lot of trust in Pillar 3a, as they are saving for themselves and there is no redistribution like in the AHV and occupational pension schemes.
Representatives of the Swiss Pension Association (VVS), which represents the interests of Pillar 3a and vested benefits foundations, also criticize the proposal. “The Federal Council has sent a draft implementation that differs greatly from the Ettlin motion for consultation,” says Nils Aggett, President of the VVS. The Ettlin motion was well thought out, but the Federal Council’s proposal negates many of its advantages.
“Closing older gaps” – like with the pension fund
“The Federal Council’s proposal in this form is of little use to those aged 30 to 50 today,” says Aggett. “It should be possible to make retroactive payments for previous years from the time it comes into force, as was provided for in the Ettlin motion.” Finally, it is also possible to close older gaps in the pension fund.
The VVS representative is also annoyed that a person who wants to buy into Pillar 3a must prove that they have an income subject to AHV for the year in question. This plays no role when calculating gaps in the pension fund, and it is “a mystery” to him why this should be any different in Pillar 3a. People who have not worked for a while or have only worked part-time, or who came to Switzerland late, cannot close their gaps in Pillar 3a. “But these are precisely the people for whom purchases in Pillar 3a would make sense,” says Aggett.
In any case, the Federal Council’s model makes purchases in Pillar 3a unnecessarily complicated and administratively expensive. “In theory, you always have to keep a shadow account of which year you were employed and which year you were not,” says Aggett. “The Federal Council’s proposal means that you need various forms to buy into Pillar 3a. This creates additional hurdles.”
As surveys show, many people have gaps in their Pillar 3a contributions. According to the Federal Council’s statement, only 10 percent of taxpayers claim the maximum annual deduction for tax-privileged pension provision in Pillar 3a. At the same time, studies show that private pension provision is becoming increasingly important if people want to maintain their standard of living in old age.
Shortages in tax revenue feared
But there is also a lot of criticism of the proposal in general. It only benefits people with high incomes, the Swiss SP said in a communiqué. The proposal would lead to massive tax losses, which would affect the entire population.
The Federal Council’s statement also contains critical tones. Purchases in Pillar 3a would “particularly benefit those households that earn a taxable income of over 100,000 francs per year,” it says. The potential loss of tax revenue is also prominently mentioned.
There have been no purchases in Pillar 3a so far, so there can be no gaps, according to official sources. Many people cannot afford the annual contributions for Pillar 3a, so they cannot buy in. By allowing large purchases in Pillar 3a, the general public is supporting a professional group that does not really need help with retirement provision. In addition, most insured people have potential to buy in their pension fund and can initially make full use of this. The proposal creates competition between the second and third pillars, which could be to the detriment of occupational pension provision.
Ettlin counters that his motion for purchases in Pillar 3a is primarily intended for the middle class, not just the wealthy. He is thinking, for example, of a couple over the age of fifty who have raised children and in which both partners are working more. Then there is often more money available to top up private pension provision. This mostly affects women who have made major sacrifices in their employment in order to look after children. “The Federal Council’s proposal for the motion is better than nothing, but many people are disappointed by it,” says Ettlin.