We should all know that we can reduce our income tax by contributing into a 3rd Pillar Pension and we can also use the 3rd Pillar as a pledge against our mortgage or to pay directly for our home.
But what are the criteria for selecting the institution for your plan.
MINIMISE WITHOLDING TAX. Most pension foundations will be based at the head office of the sponsoring company, in many cases this will be Zurich. A withdrawal on emigration (from Switzerland) is subject to tax in the Canton of the pension foundation, so choice of the foundation should be in the lowest taxed Canton.
MAXIMISE CASH DEPOSIT RATE. In October 2011 the range of interest rates available to 3rd Pillar depositors was 2.375% - 1.50%. For those ultra conservative savers obviously the foundation should provide the highest interest rates. Please note that since the Swiss Central Bank has decided that the Swiss Franc should track the Euro, interest rates have fallen substantially.
INVESTOR PROTECTION. Whilst the authorities provide for a CHF 100,000 depositor protection plan, the ability to spread your deposits across several banks allows for greater protection against individual failure of an institution. Those with accounts at one of the two biggest Swiss banks may be very alarmed about the need for previous and potentially future bail-outs and massive fraud.
ABILITY TO TAX PLAN. For those expecting to take their pension in Switzerland, opening several 3rd Pillar accounts allows for staggered withdrawal to a time when tax payable would be at a minimum.
DIVERSIFICATION OF INVESTMENT STRATEGY. Most Swiss institutions will only allow you to invest in their own funds. Many of these funds use the same managers and research teams for each fund. Usually the performance of one fund is indicative of performance of any other fund within the family, subject to greater exposure to equities. If you are disappointed in the performance of your funds your only option is to transfer your money to another institution, with a similar range of funds. If you wish to access some of the best managers this is difficult as they only accept institutional size deposits. Diversification over several different managers requires going through an independent.
COSTS. Some foundation funds can charge up-to 3% entry fees, punitive administrative fees and, account management fees of up-to 1.4%, over the management fees of the individual funds. Selection of the foundation should be made to ensure value for the product.
SERVICE. Being able to have direct access to the people regularly making the investment decisions on your behalf is an advantage when you wish to ensure that they fully understand your requirements. The ability to have all your 3rd pillar accounts with the same manager also provides for easier administration, change of strategy and development of relationship.
DISCLOSURE: Steven J Cohen CFA, is regulated under the provisions of Swiss Financial Authority (FINMA) to act as an independent consultant on 3rd Pillar and vested 2nd Pillar pensions.