How to use the 3a Third Pillar with your mortgage

The use of pillar 3a to provide for home ownership

The pillar 3a of retirement planning offers the possibility to use the saved capital for the purchase or financing of a home. This blog post explains the rules, opportunities and risks of this form of retirement planning and explains the special features of Pillar 3a.

 

Pillar 3a: Save taxes and provide for the future

Pillar 3a is a private, voluntary pension plan in which money is regularly paid into an account, custody account or pension policy. The saved capital, including returns, is paid out at retirement age. It serves as a supplement to the mandatory pension pillars AHV and pension fund, which cover about 60% of earned income. Pillar 3a closes this financial gap and makes it possible to maintain the accustomed standard of living in retirement.

Pillar 3a and its special features

Pillar 3a is a tied form of pension plan in which the saved capital can usually only be withdrawn 5 years before the regular retirement age. This contrasts with free pension provision with pillar 3b, where savers can dispose of their money at any time.
The state supports the tied pension form of pillar 3a with tax relief. The amounts paid in can be deducted from taxable income, resulting in temporary tax savings. When the 3a pension assets are withdrawn (whether early or at retirement age), capital withdrawal tax is due. The tax rate varies depending on the canton, but is in any case lower than the income tax rate.
The withdrawal of pension assets and income are taxed independently of each other, and the tax progression is applied separately. The more pension money is withdrawn in a year, the higher the tax rate for the capital withdrawal. However, there is no risk of moving into a higher income tax bracket and suddenly having to pay tax on the entire income at a higher rate.

The use of pillar 3a for home ownership

One of the main exceptions for an early Pillar 3a withdrawal is that the money can be used to buy, renovate, refurbish or pay off an existing mortgage on owner-occupied residential property.

Advantages of an early withdrawal

• An early withdrawal offers the advantage of having more liquid assets available to reach the required 20% equity, reduce the mortgage and lower the interest burden. When deciding how much 3a retirement money to put into a home, the following two calculations must be considered:
• The more equity contributed, the less borrowing required and mortgage interest paid.
• The less mortgage interest paid, the lower the deductible amount from taxable income, resulting in higher tax payments.

Legal provisions for early withdrawal

The following provisions apply to early Pillar 3a withdrawals:

• Early withdrawals are only possible every 5 years.
• Partial withdrawals are only allowed up to 5 years before the normal retirement age (men: 65 years, women: 65 years). After that, only the entire assets can be withdrawn at once.
• The assets withdrawn are subject to taxation (capital withdrawal tax).
• Repayments are not possible, in contrast to the 2nd pillar (pension fund).

Pledging as an alternative to early withdrawal:

Instead of having the pension assets paid out for home ownership, it is also possible to pledge them. In this case, the credit balance remains on the pension account and savings contributions continue to be paid in. In this way, the credit balance can continue to generate interest income or appreciation. However, the mortgage lender has the right to access the credit balance if the interest and amortizations cannot be paid.
Often the pledged credit balance is also accepted as collateral for a 2nd mortgage. A 2nd mortgage is required if the borrowing requirement exceeds approximately 65% of the fair market value of the property. The 2nd mortgage must usually be repaid within 15 years or upon retirement at the latest. However, by pledging the Pillar 3a, less or no amortization may be required. In this case, the lender will want to continue to access the balance in the future if property values remain constant, even if interest and amortization have been paid.
The pledge serves as additional security for the mortgage lender. As a result, better terms are usually granted on the mortgage. Some lenders even treat the pledged 3a credit as equity and are willing to finance residential property beyond the usual 80% of the market value.

Advance withdrawal vs. pledging – An overview

Advance withdrawal:

• Lower interest burden -> less deductible interest -> higher taxes.
• More equity -> lower mortgage -> lower interest burden
• No repayment possible – Only the annual maximum amount can still be paid in.
• Reduction of retirement assets
• Early burden due to capital withdrawal tax

Pledge:

• More debt capital -> more deductible interest -> lower taxes
• Possibly higher leverage (even above 80%)
• More borrowed capital -> higher interest burden -> higher affordability hurdle
• Less or no amortization of the 2nd mortgage
• Risk of pledge realization
• Retirement assets remain intact for the time being (possibly amortization upon retirement)
• More debt capital -> more deductible interest -> lower taxes
• Continuous interest/value increase of pension capital
• Continued insurance coverage, if applicable
• No payout means no taxation for the time being

Concluding decision to use 3rd pillar for home ownership

If you are unsure whether and how you should use your pension capital to finance a home, it is advisable to contact the independent experts at HYPOHAUS. We can help you with this and many other questions relating to mortgages and pension provision.