Regular contributions to pillar 3a: the way to ensure a carefree retirement

Regularity pays off

Regardless of the amount of the annual contributions, it is worth investing in retirement savings at an early stage even for young people like Sophie. The money paid in doesn’t have to stay in your 3a account until you retire. You can use the retirement savings to buy a home or set up your own business, for example. It doesn’t matter if it’s CHF 50, CHF 100 or if possible even the maximum of CHF 588 (2023/2024) per month you pay in. With any saving plan, the key to success is that the contributions keep coming.

Even small amounts are worthwhile

Contributions to pillar 3 are a good way of saving money and reducing your tax bill. If your budget is modest, it’s often sensible to start with small amounts and then increase them when you can afford it. There is no annual minimum amount you have to contribute to pillar 3 at a bank. Today, Sophie can easily afford to pay in CHF 50 per month from her annual salary. That works out at CHF 600 per year, before you even think about interest and any return she might make from investing in retirement funds.

Benefit from interest and returns

The US businessman John D. Rockefeller once said: “It’s better to spend one day a month thinking about your money than the whole month working for it.” He is famous for being the first billionaire ever, so he should know. What this means for retirement saving is that with good planning and the right investments, you can often achieve more with your savings than the actual contributions. Needless to say though, the monthly contributions to pillar 3 still play a central role in achieving your savings objectives. 

Let’s go back to the example of Sophie:

As things stand today, from her first contribution up until retirement Sophie could contribute to pillar 3 for 38 years. If she pays in CHF 50 per month, that comes to CHF 22,800 over the entire period. Bank CIC (Switzerland) Ltd. is currently paying interest of 1.40% on the 3a retirement account, one of the best rates in Switzerland, so over 38 years she will earn a total of CHF 7,257* in interest. That’s a return of just under 32% for Sophie, without her having to do anything. And that’s before taking the tax saving into account. 

If Sophie were to invest her money in retirement funds instead of putting it in a 3a account, her opportunities for return would be even higher. Assuming an average expected annual return of 6% on a pure equity fund, Sophie’s retirement savings at age 65 would not be CHF 30,057* but CHF 84,192.* So she would receive over CHF 54,000 more return than the CHF 22,800 she actually paid in over the years at CHF 50 per month.

Contributing early is worth it

The rising cost of living and increasing life expectancy are resulting in greater financial needs in old age. It is worth starting to contribute to pillar 3a at an early stage so as to be ideally prepared and enjoy more financial security and flexibility in retirement. Even if the amounts are small, the effect of compound interest makes every franc you pay in valuable. Clearly, with good planning and the right investments, you can achieve more than just the savings alone. The example of Sophie demonstrates that regular contributions and smart investments can make your retirement savings grow substantially, with potentially higher returns than on standard savings accounts. As the saying goes: slow and steady wins the race.

Please also note our six tips on pillar 3a.

*https://www.moneyland.ch/en/compound-interest-calculator