Swiss Tax Regime for Contributions and Benefits under Pillar 3a (OPP 3)

According to Article 82 of the Federal Act on Occupational Old Age, Survivors’, and Disability Pension Plans (LPP/BVG), employees and self-employed individuals have the opportunity to deduct contributions that are exclusively and irrevocably allocated to recognized forms of retirement savings, equivalent to occupational pensions. These forms are part of individual retirement savings, specifically tied individual retirement savings, commonly known as “Pillar 3a.” Recognized forms of retirement savings include tied pension insurance contracts with insurance institutions and tied pension agreements concluded with bank foundations (Article 1, paragraph 1 of the Ordinance on Admissible Tax Deductions for Contributions to Recognized Forms of Retirement Savings (OPP 3)).

Only those receiving income or replacement income from gainful employment subject to AHV/IV contributions can subscribe to a tied pension plan. Cross-border commuters residing abroad but employed by a Swiss company can also establish a Pillar 3a, regardless of whether they can deduct their contributions in Switzerland.

If the pension holder can justify their gainful employment, they are entitled to deduct contributions for up to five years after reaching the legal AHV retirement age. This proof of gainful employment must be provided annually by the pension holder (see Professional Pension Bulletin No. 103 from the Federal Social Insurance Office). Beyond the age of 70 for women (AVS 21) and 70 for men, the right to deduction ceases, even if income subject to AHV/IV continues to be received.

In the event of life, the pension holder remains the primary beneficiary. In the event of death, the benefits go to the surviving spouse or registered partner. If these do not exist, the beneficiaries are direct descendants and individuals whom the deceased significantly supported, or the person who shared an uninterrupted living community with them for at least five years before death, or the one responsible for the needs of one or more common children. The pension holder may modify this order of beneficiaries and define the extent of their rights. In the absence of these beneficiaries, benefits are allocated to parents, siblings, and then other heirs, with the pension holder able to reorganize this order and specify each party’s rights.

Deduction of Contributions

According to Article 33, paragraph 1, letter e of the Federal Act of December 14, 1990, on Direct Federal Tax (LIFD), and in connection with Article 7 OPP 3, employees and the self-employed can deduct from their taxes contributions made to recognized forms of retirement savings, within a defined limit. For the self-employed, these contributions are always considered private expenses, preventing them from being recorded as expenses in the income statement. The amount of the allowable deduction corresponds to the maximum deductible contributions for tied pension savings; any excess contribution is not deductible and is considered savings. Income generated by these excess amounts is subject to ordinary taxation.

Article 7 OPP 3 also limits deductions to premiums for possible complementary risk pension insurance or supplements for advance payments (Art. 1, para. 3, 2nd sentence, OPP 3). Any deduction requires the taxpayer to be gainfully employed. In case of a temporary interruption of this activity (military service, unemployment, illness, etc.), the right to deduction is maintained. However, if gainful employment ends, contributions can no longer be made, even if the AHV retirement age has not yet been reached (e.g., in the case of early retirement, cessation of activity due to maternity, or complete disability without residual earning capacity).

The benefits of a pension insurance in case of waiver of premium payments are not considered income for the pension holder, as they cannot dispose of them, and these benefits, therefore, cannot be deducted.

Multiple Pension Accounts or Policies

A pension holder may enter into several tied pension contracts with various insurance institutions or bank foundations. A separate contract must be established for each account or pension policy. However, the total annual contributions must not exceed the deduction ceiling set in Article 7, paragraph 1, OPP 3.

Higher Limit Amount

According to Article 7, paragraph 1, OPP 3, contributions made to recognized forms of retirement savings are deductible each year up to 8% (let. a) or 40% (let. b) of the upper limit amount defined in Article 8, paragraph 1, LPP/BVG. This amount corresponds to the annual salary cap subject to insurance under the 2nd pillar. The Federal Council may adjust this upper limit amount based on AHV pensions and general wage developments, as indicated in Article 9 LPP/BVG. The Federal Tax Administration (FTA) regularly publishes updates on the upper limit amount and deduction ceiling according to Article 7, paragraph 1, OPP 3 in a circular letter.

Deduction for Taxpayers Affiliated with an Occupational Pension Institution (2nd Pillar)

Under Article 7, paragraph 1, letter a, OPP 3, employees and the self-employed affiliated with the 2nd pillar can deduct contributions made to recognized forms of retirement savings up to 8% of the upper limit amount for the relevant year. This deduction is available to all gainfully employed taxpayers, whether they are compulsorily or optionally affiliated. Each spouse or registered partner engaged in gainful employment can claim this deduction, regardless of whether the pension contract is in their name. The maximum deduction amount for each spouse or registered partner depends solely on their affiliation with occupational pensions, and the deduction is only granted if the spouse or registered partner declares income subject to AHV/IV in their tax return.

Deduction for taxpayers not affiliated with an occupational pension institution (2nd pillar)

In accordance with Article 7, paragraph 1, letter b, of the OPP 3, employees and self-employed individuals who are not affiliated with the 2nd pillar can deduct contributions actually made to recognized forms of pension savings, up to 20% of their income from gainful employment, but no more than 40% of the upper limit amount.

Any deduction requires the taxpayer to be gainfully employed, which excludes deductions when this activity results in a loss. In the case of a temporary interruption of activity (military service, maternity, unemployment, illness, etc.), the right to the deduction persists, provided that AHV/IV contributions are paid on income from gainful employment or replacement income during the relevant year.

Income from gainful employment includes all income derived from self-employed or salaried activities, whether primary or secondary, as declared in the tax return. For salaried income, this refers to gross salary after deduction of AHV/IV/APG/AC contributions; for self-employed income, it refers to the balance of the profit and loss account after tax adjustments and deduction of personal contributions to AHV/IV/APG, excluding contributions to recognized pension forms. Income also includes profits from capital gains on business assets. Contributions that could not be deducted due to insufficient income cannot be carried forward to subsequent years.

Self-employed individuals who close their accounting year at the end of the calendar year must also pay their Pillar 3a contribution before the end of the calendar year if they wish to deduct it for the corresponding tax year. Retroactive payments for additional contributions are not allowed.

Special cases:

a) Collaboration in the spouse’s business:

In cases of collaboration in the professional activity or business of a spouse, it is generally accepted that such collaboration does not exceed the help that spouses owe each other, making it ineligible to establish a Pillar 3a for the collaborating spouse. To qualify for the deduction, spouses must prove the existence of an employment contract beyond the scope of mutual assistance, and AHV contributions must be deducted from the collaborating spouse’s income and recorded in their name.

b)Self-employed with secondary income subject to occupational pension (2nd pillar):

A self-employed individual with secondary salaried activity for which they are affiliated with the 2nd pillar can only benefit from the deduction provided for in Article 7, paragraph 1, letter a, of the OPP 3 (see Federal Court ruling of June 15, 1990, in the case of T.A., published in the Archives of Swiss Tax Law, vol. 60, p. 321). According to Article 1j, paragraph 1 of the Ordinance on Occupational Old Age, Survivors’ and Disability Pension Plans (OPP 2), a self-employed individual can be exempted from compulsory insurance for their secondary activity. Once exempted, they are no longer affiliated with an occupational pension institution and can therefore claim the “large” Pillar 3a deduction according to Article 7, paragraph 1, letter b, of the OPP 3.

c) Recipients of an AI pension:

Recipients of a disability pension from the federal disability insurance who earn income from gainful employment, within their residual work capacity, can establish a Pillar 3a.

d) Taxpayers subject to withholding tax:

The calculation of the withholding tax scale does not take into account individual deductions such as contributions to Pillar 3a. Taxpayers subject to withholding tax who have made these contributions can, until the end of March of the following year, request a decision from the tax authority regarding their liability and its extent (Art. 137, para. 1, LIFD). This decision can be contested to include the deduction of contributions made to Pillar 3a (see Art. 2, let. e of the Ordinance on Withholding Tax).

e) Contributions to Pillar 3a upon cessation of gainful activity:

During the calendar year in which the insured ceases gainful activity, they can pay the full contribution in accordance with Article 7, paragraph 4, OPP 3. After this period, bank foundations and insurance institutions can no longer accept contributions.

f) Taxpayers engaged in gainful activity after reaching AHV retirement age:

If the pension holder no longer pays contributions to an occupational pension institution because they have already reached the ordinary AHV retirement age and receive a pension (passive affiliation), but continue to engage in gainful employment, they can contribute to Pillar 3a for up to five years after AHV retirement age, up to 20% of their income from gainful employment, but no more than 40% of the upper limit amount defined in Article 8, paragraph 1, LPP/BVG. However, if the pension holder is still affiliated with an occupational pension institution (even if they no longer contribute), they can contribute annually to Pillar 3a up to 8% of the upper limit amount set in Article 8, paragraph 1, LPP/BVG.

g) Calculation of deduction in case of change of activity (from dependent to self-employed or vice versa):

During the period when the taxpayer engages in salaried activity, if they are affiliated with a pension fund, they can contribute a maximum of the amount provided for in Article 7, paragraph 1, letter a, of the OPP 3. During the period when they engage in activity without affiliation to a pension fund, they can contribute up to 20% of their income from gainful employment, provided that their accounting is closed at the end of the year. For that year, the total contributions (including payments to the “small” Pillar 3a) must not exceed the upper limit of the deduction amount defined in Article 7, paragraph 1, letter b, OPP 3 (40% of the upper limit set in Art. 8, para. 1, LPP/BVG). The same applies in case of affiliation to a pension institution if the taxpayer starts salaried employment during the year.

Distribution and Taxation of Benefits

Tied pension savings are exclusively intended for the accumulation of retirement savings, thus only offering potential rights. Therefore, Pillar 3a retirement benefits can only be paid out five years before the ordinary AHV retirement age at the earliest (Art. 3, para. 1, OPP 3). It is prohibited to set a maturity date beyond 70 years for women (AVS 21) and 70 years for men in pension contracts. Likewise, subscribing to a new pension contract after this age is not allowed. Expectation rights terminate no later than five years after the legal AVS retirement age, requiring a payment that triggers the taxation of benefits. If the pension holder ceases gainful employment after AHV retirement age but before 70 years (for women) or 70 years (for men), Pillar 3a accounts or policies must be liquidated, triggering the taxation of benefits.

Capital benefits from tied pension savings are subject to separate taxation from the rest of the income, in accordance with Article 22, paragraph 1, LIFD and Article 38 LIFD. They are taxed at a unique annual rate, based on one-fifth of the scales defined in Article 36 LIFD. Withholding tax becomes due upon termination of the pension contract, and it can be paid either by direct payment or by declaration (Federal Withholding Tax Act LIA). Income generated by the pension assets is also subject to withholding tax, according to Article 4, paragraph 1, letter d, LIA.

Early Withdrawal

Early withdrawal of benefits is only permitted in specific cases, as defined by Article 3, paragraphs 2 and 3, OPP 3. This also includes interest, profit-sharing, and similar benefits, which can only be paid out together with pension benefits and cannot be offset against due contributions. The entire benefit amount is taxable according to Article 22, paragraph 1, LIFD in connection with Article 38 LIFD, regardless of whether part of the contributions was funded by the insurance institution in case of a premium payment waiver. The pension holder is responsible for paying tax on the full benefit amount.

According to Article 3, paragraph 2, letter b, OPP 3, early withdrawal of retirement benefits is possible if they are transferred to another recognized form of pension savings. This requires the complete termination of the relevant account or pension policy and the establishment of a new contract with another bank or insurance institution. In this case, no certification is required. The pension holder cannot split the pension assets to create new accounts or take out new policies (Pillar 3a).

When a pension holder makes a partial withdrawal within five years before reaching AHV retirement age, it marks the end of their pension accumulation. The first withdrawal terminates the expectancy status of their entire pension assets. From that moment, the total capital accumulated in the account or policy, including interest, becomes taxable. After a partial withdrawal, the account or policy must be settled, and the remaining capital transferred to a freely accessible account. Insurance benefits are generally subject to withholding tax, according to Article 7 LIA (with exceptions provided in Article 8 LIA). The tax payment can be made either by payment or declaration, including the gross benefit and interest in the declared amount.

Early Withdrawal for Home Ownership (EPL)

Article 3, paragraph 3, OPP 3 permits early withdrawal of retirement benefits for:

– the purchase or construction of a home for personal use,

– the acquisition of ownership shares in a home for personal use,

– or the repayment of mortgage loans.

An early withdrawal can only be requested once every five years. Unlike the 2nd pillar, it is not possible to repay this early withdrawal within the framework of Pillar 3a. Additionally, the pension holder may pledge their right to benefits or the amount of their vested benefits, in accordance with Articles 8 to 10 of the Ordinance on the Promotion of Home Ownership (OEPL), applied by analogy. The concepts of “home ownership,” “participations,” and “personal needs” are defined in Articles 2 to 4 OEPL. Only the early withdrawal is taxable at the time of withdrawal, according to Article 22, paragraph 1, LIFD and Article 38 LIFD. If spouses wish to withdraw part of their Pillar 3a assets to repay a mortgage or to acquire a home, both must be owners or co-owners.

An early withdrawal under the EPL framework is only possible until the age specified in Article 3, paragraph 1, OPP 3. After this age, only the full withdrawal of tied pension benefits is allowed, regardless of the intended use, resulting in the taxation of the entire benefit.

Cash Withdrawal Following Self-Employment

A cash withdrawal of tied pension assets is possible when starting self-employment or in the event of a change in self-employment, but only within the year following the start of the activity or change. The entire asset must be withdrawn, and the pension contract must be terminated; partial withdrawal is not permitted.

Buyback of Contribution Years in Occupational Pension Using Pillar 3a Funds

An early withdrawal of Pillar 3a retirement benefits is allowed if the pension contract is terminated and the pension holder uses the benefit to buy back contribution years in a tax-exempt occupational pension institution. The transfer of the assets must be made directly from the tied pension institution to the occupational pension institution. This transfer has no tax implications, and there is no need to report this payment to the FTA. Moreover, the buyback amount is not deductible and therefore does not require certification.

Repayment of EPL Funds with Tied Pension Funds

The reasons for early withdrawal provided by the OPP 3 do not authorize the repayment of EPL funds with tied pension funds. An early EPL repayment does not constitute a buyback within the meaning of Article 3, paragraph 2, letter b, OPP 3. Tied pension funds cannot be used to fill a gap created by an EPL early withdrawal. The repayment must be made with funds not tied to pension objectives. Thus, a direct transfer of Pillar 3a funds to the 2nd pillar to repay an EPL early withdrawal is prohibited.

Transfer of 2nd Pillar Retirement Assets to Pillar 3a

Benefits paid by an occupational pension institution (2nd pillar) or a vested benefits institution cannot be transferred to Pillar 3a. This would amount to a buyback of contribution years, which is not allowed within the framework of Pillar 3a. Benefits from occupational pensions are fully taxable, and contributions to Pillar 3a are only deductible up to the upper limit amount. Single premiums exceeding this amount and the simultaneous payment of contributions for several years are not allowed.

Certification Obligation

According to Articles 8 OPP 3 and 129, paragraph 1, letter b, LIFD, insurance institutions and bank foundations must provide pension holders with certifications regarding contributions and benefits paid. Under the LIA, the pension institution must report the benefits paid to the Federal Tax Administration (FTA) via Form 563 “Declaration of Capital Benefits” or Form 565 “Declaration of Pensions.” These forms can be ordered from the AFC or via the internet.

The insurance institution that provided benefits following a premium payment waiver must mention this under “Remarks,” specifying the amount of the benefits. Under this same section, it must also mention any reimbursement of contributions or excess payments made at the request of the tax authorities, specifying the date and amount of the reimbursement.

Consequences of Non-Compliant Payments

For the Policyholder

Amounts exceeding the deduction limit set by Article 7, paragraph 1, OPP 3 cannot be deposited into accounts or invested in pension insurance. This restriction on contributions also limits tax advantages, particularly regarding income tax, wealth tax, and withholding tax. Funds deposited within the authorized limits benefit from wealth tax exemption, and their returns are not subject to withholding tax. In cases where these limits are exceeded, the tax authority will require the taxpayer to recover the excess amount from the pension institution. Only the nominal excess amount will be refunded, without any generated interest. During taxation, the non-deductible portion of the amount is added to the income, and if a refund is necessary, to the taxpayer’s wealth. Those who do not claim the refund of the excess amount risk tax reassessment and penalties, as future declarations might not include the excess amounts and their returns.

Regarding pension insurance policies, only the savings portion of the overall premium is refundable. The premium related to risk insurance cannot be recovered, as at the time of taxation, the risk was already covered, and the premium was thus due. If the risk insurance premium exceeds the maximum deduction allowed by Article 7 OPP 3, an immediate revision of the risk insurance is required.

For Insurance Institutions and Bank Foundations

Bank foundations that receive amounts exceeding those eligible for tax deductions within the framework of tied individual pension savings lose their right to tax exemption (Art. 6 OPP 3), as the funds received are no longer exclusively dedicated to pension savings as defined by OPP 3.

Securities Investments and Withholding Tax Refund Claims 

A bank foundation that has opened a securities account in the name of the policyholder can request the refund of withholding tax deducted from the returns on these securities.

My Swiss Company SA – Fiduciary in Switzerland offers personalized support to entrepreneurs and their employees regarding Pillar 3a pension and insurance solutions. With in-depth expertise, My Swiss Company SA helps entrepreneurs optimize their financial planning and maximize the tax benefits associated with Pillar 3a contributions. For employees, the fiduciary provides tailored advice to select the best pension options, taking into account their personal and professional situations. My Swiss Company SA also ensures meticulous follow-up to guarantee compliance with current regulations and to avoid any tax risks associated with non-compliant contributions.

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