Are you saving with pillar 3a? Start the payments at a young age

Logic dictates that more money will accumulate in your pillar 3a with each passing year. However, many people are unaware that, as well as the amount paid in, the profit generated makes a big difference over the years. The return is credited to the total pillar 3a amount each year. Since the total amount is constantly increasing, the profit increases exponentially.

Comparison: start of pillar 3a at age 25 vs. 40

The following chart shows the profit made by paying into a pillar 3a from an early age. Here we show two different deposit patterns:

• Paul pays the full amount into his pillar 3a every year from the age of 25. After 40 years, Paul will have accumulated savings totalling CHF 532 031 (with an assumed return of 3%).
• Leo starts paying the full amount into his pillar 3a at the age of 40. After 25 years, Leo will have a total of CHF 257 257 (here, too, we expect a flat-rate return of 3%).

Overall, Paul, who pays in from the age of 25, does not pay in twice as long, but “only” 15 years longer – 40 years instead of 25 – yet his savings are more than twice as much as Leo’s.

What’s more, this does not include the annual tax benefits of up to CHF 2000 per year.
 

Small pillar 3a payments are still worthwhile

Even if you cannot pay in the maximum amount at a young age, it is still a good idea to start paying into your pillar 3a early. The return ensures that even small amounts paid in early years pay off in the long term.

Thanks to compounding, you can have accumulated a larger balance at the age of 65 with smaller contributions than a person who pays in the same amount but only starts doing so later.

A sample calculation:

• Anna pays CHF 4032 into her pillar 3a for 35 years and ends up with CHF 243 783* with a return of 3%. Anna paid in a total of CHF 141 120 excluding returns.
• Christina pays in the full amount of CHF 7056 for 20 years, after which she has CHF 189 597* with a 3% return. Christina earns just under CHF 55 000 less than Anna, although both have paid in the same amount of CHF 141 120 in total.

*The payments were made at the start of the year.
 

FAQs about pillar 3a

When should I start contributing to my pillar 3a?

As soon as a person becomes gainfully employed in Switzerland and pays AHV/AVS contributions, they can start paying into a pillar 3a.

It is advisable to start paying into a pillar 3a as soon as possible. Even small amounts are worthwhile thanks to the compounding effect.

How much should I contribute to my pillar 3a?

Ideally, you pay in the maximum amount every year. In 2024, this is CHF 7056 for people with a pension fund. The self-employed or people without a pension fund can pay in a maximum of 20% of their net earned income, up to a maximum of CHF 35 280.

Even if you are unable to pay in the maximum amount, it is worth paying into your 3rd pillar. Try to set up a standing order in your online banking or make a bank transfer at the start of the year. Even if it is “only” a small amount of CHF 100 per month, over the long term you can generate considerably more capital thanks to the compounding effect (see sample calculations).

Why does it make sense to have pillar 3a?

Pillar 3a offers many advantages. Firstly, pillar 3a allows you to save for your retirement and accumulate assets. Furthermore, you can deduct the payments you make each year from your taxable income in your tax return and so save on taxes. You can also withdraw the funds you save in your pillar 3a early under certain conditions. This is possible, for example, if you buy a property, become self-employed or emigrate.

^{image source: Unsplash, Priscilla Du Preez}