3rd pillar Switzerland and Mortgages

 Basel, 23.05.2024

Using Funds from Pillar 3a for Home Ownership in Switzerland

If you lack the necessary equity to purchase your own property in Switzerland, you can utilize funds from Pillar 3a for home ownership. This article explains how this is possible and what to consider when pledging or withdrawing funds from Pillar 3a.

Withdrawing or Pledging Funds from Pillar 3a for Home Ownership

As part of the home ownership promotion scheme (WEF), you can use retirement savings for your home. At least 20 percent of the property’s purchase price must come from personal funds, and the tied private pension, Pillar 3a, can help meet this requirement.

You can use funds from Pillar 3a for:

• Financing owner-occupied residential property
• Renovating or remodeling your home
• Amortizing an existing mortgage

For home ownership, you can either withdraw funds in advance or pledge them. Every five years, Pillar 3a can be accessed as part of the home ownership promotion. Spouses or registered partners are considered separately, as they each have independent rights to their capital.

Legal Regulations for Withdrawing Funds from Pillar 3a

The law allows withdrawing funds from Pillar 3a not only for home ownership promotion but also when starting a new business, emigrating, purchasing additional pension benefits, or receiving a disability pension. You can make partial withdrawals from Pillar 3a up to five years before reaching the reference age. After that, you must withdraw the entire amount at once from the retirement account or depot. You can continue making regular contributions up to the legal maximum amount, whether you choose advance withdrawal or pledging. Note that taxes are levied on the withdrawn funds.

Early Withdrawal from Pillar 3a

An early withdrawal of funds from Pillar 3a increases your available equity for purchasing property. Unlike the 2nd pillar (pension fund), there is no minimum amount for early withdrawal, which can be done either partially or in full. You can use the withdrawn funds to cover the required equity when taking out a mortgage. Increasing equity in this way can lower the mortgage amount, resulting in lower mortgage interest rates. However, a smaller mortgage also means fewer tax deductions.

Using Pillar 3a Funds for Home Ownership

You can use funds from Pillar 3a as liquid assets to meet the obligatory 20 percent equity requirement. Those who have additional capital in Pillar 3a can further increase their equity and reduce their mortgage.

Tax Aspects of Withdrawing Pillar 3a Funds

When you withdraw funds from Pillar 3a, they are taxed at a reduced rate and separately from other income. All withdrawals made within a year are aggregated, including those from spouses or registered partners in most cantons. The taxation of pension funds varies significantly between cantons, with taxes being up to three times higher in some cantons than in others.

After withdrawing funds from Pillar 3a, unlike the 2nd pillar, you cannot repay them. You can still only make annual contributions up to the legal maximum amount. In 2023, this amount is CHF 7,056. Employees not affiliated with a pension fund can contribute up to 20 percent of their net income, or a maximum of CHF 35,280 (as of 2023) per year. The more money you withdraw from the tied private pension, the smaller the accumulated savings for retirement will be.

Withdrawing Pillar 3a Funds in Marriage

Spouses can independently use their 3rd pillar pension funds for home ownership. To withdraw funds from Pillar 3a, the property must be jointly owned by the spouses or they both must be co-owners of the owner-occupied home. Spouses can spread their withdrawals over different years, potentially benefiting from tax advantages depending on the canton.

Pledging Pillar 3a Funds

When you pledge Pillar 3a funds, the capital is not paid out but instead pledged to the bank as collateral for a mortgage. Pledging enables additional borrowing capacity. Due to the higher mortgage, more interest charges accrue, which you can deduct from taxes.

The funds from Pillar 3a remain in the account or depot and are available upon retirement. The pledged pension funds improve your creditworthiness and provide security for the lending bank. They are only accessed in the event of a foreclosure if you can no longer make mortgage interest payments.

By carefully considering these options and understanding the associated tax and financial implications, you can make an informed decision on using Pillar 3a funds for your home ownership goals.