Last update: 06.10.2024 15:25
Does a Pillar 3a transfer to the pension fund work? Can I increase my pension this way? We are asked this question time and again, often by part-time employees. They have a low pension from the pension fund, but money in pillar 3a. We take a look at what is possible, whether it makes sense and what the consequences are.
Yes, you can put 3a money into your pension fund. This allows you to reduce gaps in the second pillar. Such gaps can arise from part-time work, periods of training, divorce or a change from a BVG-only plan to a better plan with a new employer. A transfer has various consequences that you need to check and weigh up.
Does it make sense to transfer pillar 3a to the pension fund?
Whether a transfer makes sense must be considered on a case-by-case basis. The personal situation, benefit level and financial situation of the pension fund (PF) as well as the tax consequences should be taken into account.
Influence of the personal situation
How long do you think you’ll live? If you believe you’ll live a long time, you might get a good deal. Your pillar 3a capital will then become a pension until your death. However, if your life expectancy is short, it is better for your heirs to receive the capital.
In principle, a pension fund purchase leads to a higher pension. (Remember: capital * conversion rate = pension). However, a purchase also means that the pension is later taxed as income. In contrast, with 3a capital only the current income is taxed later. But perhaps it is more important to you that you receive a guaranteed pension payment from the PF pension?
A purchase can also lead to higher benefits in the event of death or disability. This can be important if you want to protect a spouse or family. Will these benefits also increase with the purchase? A glance at the pension fund regulations will tell you that. It also answers the question of what happens to your purchase in the event of your death: does it go back to your heirs or does it go to the PF?
After all, with pillar 3a you can decide much more flexibly how you invest your money (for example, with a high equity allocation) and who receives the money in the event of your death. This is determined by the order of beneficiaries. You are more flexible with pillar 3a. And if you have a partner and your pension fund has no benefits for unmarried people, your heirs will have more of your money if you leave it in pillar 3a.
Influence of the quality and financial situation of the pension fund
You also need to compare the income from the PF with the interest you receive on your pillar 3a assets. The capital in the second pillar yields a much higher return than the credit balance in a pillar 3a account. This is evident in the BVG minimum interest rate (currently 1.25 %, as of 2024), which is higher than the interest rate on most 3a accounts. On the other hand, the return on a pillar 3a with securities, especially with high equity ratios, is higher in the long term than the interest credits that many pension funds offer their insured persons. Is a pension fund purchase worthwhile? That depends to a large extent on how good the benefits of your fund are and how financially sound it is. Buying into a pension fund with insufficient cover? You should really think twice.
What are the tax consequences of a Pillar 3a transfer to the pension fund?
In terms of taxes, there are three cases. They differ in terms of how far you are from the normal retirement age (women: 64, men: 65, as of 2022). In most cases, a Pillar 3a transfer to the pension fund is tax-neutral. So if you transfer money from pension pot “Three” to pension pot “Two”, this has no immediate tax consequences. This is because the pension assets do not increase across both pots. But let’s take a closer look at the three cases.
Tax-neutral transfer of pillar 3a until age 59 / 60 with early withdrawal
You can transfer 3a entitlements to a pension fund or another 3a contract up to 5 years BEFORE your normal retirement age (Art. 3 para. 2 lit. b BVV3). You do not pay tax on the transfer. In this way, you turn your pillar 3a capital into a recurring PF pension.
Our tip: transfer is only possible if there is a pension gap
Two conditions must be met. Firstly, there must be a pension gap in the pension fund: you have purchase potential. Only then is a transfer possible. Secondly, your 3a assets may not and cannot be divided up. A 3a partial withdrawal is only possible if it closes the pension gap completely. In this special case, the remaining amount remains in the existing pillar 3a account.
Let’s look at this using an example. Maria has a purchase potential of CHF 11,000 and CHF 6,000 in pillar 3a assets. She can transfer her pillar 3a account in full. Laura has a gap of 11,000 francs. However, she has CHF 15,000 in pillar 3a. Laura makes a partial withdrawal of CHF 11,000 from pillar 3a. The remaining CHF 4,000 remains in her pillar 3a account.
Optimize taxes from age 59/60 with a purchase
Now it’s getting exciting. If you have less than 5 years left until your normal retirement age of 64/65, i.e. if you are a woman (man) and have reached your 59th (60th) birthday, you can already withdraw your pillar 3a in full. So what, tell me something new. And? Here’s the trick: you can use the money to buy into the pension fund in a tax-efficient way – if you have the potential to buy in.
This is how it works. Pillar 3a withdrawals are taxed at the reduced rate for pension benefits, just like any other pension withdrawal. The amount of tax varies depending on the canton, e.g. around 5 % in Bern. You then buy into your pension fund with the withdrawn capital. You deduct the purchase amount as a large deduction from your income tax. This usually results in a pretty decent tax saving. 🤑
Our tip: note the blocking period for purchases
You may not withdraw any capital for three years after a pension fund purchase. If you do not observe the deadline, you will have to pay the tax saved later. The blocking period begins on the day of the PF purchase and ends three years later. This means that only two full tax years are affected by the blocking period. You should therefore plan carefully whether and when you want to withdraw a lump sum or PF pension.
The tax office could argue “tax evasion” and deny you the tax deduction. In the meantime, however, there is a federal court ruling on this. According to this, it is not “unusual, inappropriate or peculiar if the taxpayer opts for the more tax-efficient payment and purchase mechanism instead”.
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Pension fund purchase: Zurich blocking period brings tax deduction until the end
A purchase into the pension fund is subject to a blocking period for your lump-sum withdrawal. Find out how you can make effective use of the three-year rule and benefit from special tax advantages in Zurich.
In principle, you are free to organize your financial circumstances as you wish.
However, from a tax perspective, your freedom of structuring is limited where it is tantamount to circumventing tax law.
According to current case law, such a tax avoidance exists if three conditions apply:
(1) the chosen legal arrangement appears unusual, inappropriate or outlandish, or in any case completely inappropriate to the economic circumstances
(2) it was taken improperly and only in order to save taxes that would otherwise be owed,
(3) the chosen procedure actually leads to a considerable tax saving, provided it would be accepted by the tax authorities.
If tax avoidance is actually taking place, taxation will be based on an appropriate legal arrangement.
Tax avoidance only comes into question in very exceptional situations, namely if the legal arrangement you have chosen goes beyond what is economically reasonable.
Source: Federal Supreme Court ruling 2C_652/2018 of May 14, 2020, section 4.2.1
Our tip: Avoid the accusation of tax avoidance
A withdrawal and subsequent tax-effective purchase are permitted and must be accepted by the cantonal tax authorities. Irrespective of this, a transfer should fit into your overall pension concept. Then it will be difficult for the tax authorities to argue with tax avoidance. If you only make the purchase one year after withdrawing your pillar 3a and have enough money for the purchase, the procedure is legitimate. Then the accusation of tax avoidance collapses.
Optimize taxes from age 64/65 with an ordinary pillar 3a withdrawal
If you can prove that you are working beyond the normal retirement age, you have two options. You can either make a tax-neutral transfer from pillar 3a to the pension fund (as you did before age 59/60). Or you can take advantage of the path paved by the Federal Supreme Court ruling and buy into the pension fund with your pillar 3a assets in a tax-effective manner.
Special case: Can I repay my home ownership subsidy (WEF) with pillar 3a?
You can withdraw money from your pension fund to promote home ownership (WEF). This raises the question: Can I repay the WEF withdrawals with pillar 3a? The Federal Tax Administration has issued a clear NO to this. A repayment of the WEF advance withdrawal is not a purchase. Pillar 3a assets may therefore not be transferred in order to repay a WEF advance withdrawal. Instead, the WEF amount must be repaid to the pension fund from other, free savings.
Special case: Is a pillar 3a transfer to a vested benefits account possible?
Here too, the answer is no. You cannot transfer pillar 3a assets to a vested benefits account and “buy in” there. This is also quite logical. This is because you can think of vested benefits assets as your temporarily parked pension fund assets that have not yet been transferred to your new employer’s new pension fund. Vested benefits accounts themselves have no purchase potential. This is because the purchase potential is based on the benefits of your pension fund and your previous payments into the occupational benefits scheme and not the amount of assets currently in your vested benefits account.
Summary of pillar 3a transfer to the pension fund
A transfer of pillar 3a money to the pension fund is possible under certain conditions. It can be sensible and very attractive from a pension and financial optimization perspective. Whether this is possible and sensible in individual cases really has to be examined on a case-by-case basis. To do this, you need to look in particular at the factors of age, life planning, personal pension situation, financial situation of the pension fund and your life expectancy. Regardless of this, start building up your pension provision for later as early as possible – you won’t make a mistake.
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