Subsequent Pillar 3a Purchases – Filling the Contribution Gaps

The newly enacted 2025 Pillar 3a purchase rules mark a significant shift in Switzerland’s retirement savings landscape, allowing employees to fill contribution gaps and enhance their financial security. While these changes offer new opportunities for tax savings and flexibility, they come with limitations and administrative challenges. This article explores the new provisions, their implications for taxpayers, and how they compare to the original Ettlin Motion, providing insights for effective retirement planning.

What is Pillar 3a and why is it important?

Switzerland’s social security system is rooted in its three-pillar model, which creates a multi-layer protection system for its residents through state support (Pillar 1), occupational pensions (Pillar 2), and private savings (Pillar 3a and 3b).

The first two pillars – state pensions (AHV) and occupational pension schemes (BVG) – provide a baseline of income for retirement. However, for many this is insufficient to maintain their desired quality of life during old age. They can therefore optionally contribute to Pillar 3a; a voluntary, tax-privileged private savings plan that allows individuals to supplement their retirement income.

The annual contributions to Pillar 3a are deductible from taxable income, which incentivizes individuals to save for retirement. However, there is a limit to the tax-free contributions you can make to Pillar 3a. As of 2025, the maximum annual contributions are:

• Employees with a second pillar occupational pension (BVG): CHF 7,258 (the “small contribution” limit).

• Self-employed individuals without a second pillar: 20% of net income up to a maximum of CHF 36,288 (the “large contribution” limit).

While the contributions to Pillar 3a are tax-deductible, there is a single flat-rate tax on capital withdrawals which vary depending on the canton and the amount of the withdrawal.

Note, individuals who surpass the contribution limits to Pillar 3a can then make use of Pillar 3b, a more flexible savings option without annual contribution limits, but for which the contributions are not tax deductible. The benefit is that there is no maximum contribution limit as well as no flat tax for withdrawing the capital from Pillar 3b savings.

Background to the new Pillar 3a provisions of 2025

While the tax benefits of Pillar 3a make it an attractive retirement savings tool, the system previously lacked flexibility for those who were unable to contribute the maximum amount due to various life circumstances like studying, starting their own business, family leave, or any number of financial challenges.

Seeing these issues, Council of States member Erich Ettlin put forward a motion on 19 June 2019 (dubbed the “Ettlin Motion”) which proposed introducing the option to make catch-up payments into Pillar 3a (known as “purchases”). The goal of the motion was to allow individuals to fill contribution gaps from earlier years, ensuring they wouldn’t permanently lose the opportunity to save for retirement and benefit from the associated tax deductions.

From 1^st January 2025, as a result of the Ettlin Motion, new rules have finally been enacted enabling subsequent Pillar 3a purchases. However, when the motion was debated and refined in Parliament, certain elements were scaled back to address concerns about lost tax revenue and administrative complexity. The result is a more restrictive and conservative version of the original proposal.

While the final provisions allow for greater flexibility than before, they fall short of the vision originally put forward by Ettlin. Later, we will explore in greater detail how the enacted rules differ from those proposed in the Ettlin Motion.

The specifics: What are the new rules for subsequent Pillar 3a purchases?

The new provisions for Pillar 3a introduce the possibility of making catch-up contributions to address gaps in prior years. In other words, anyone who does not contribute the maximum amount in a year or over multiple years has the ability make up that shortfall by contributing extra later (subsequent Pillar 3a purchase).

However, these contributions come with specific conditions and limitations:

1. Retroactive payments

From 2025 onward, individuals can fill gaps in their Pillar 3a contributions for up to 10 years prior to the purchase year. For example, if an individual (who is also contributing to an occupational pension scheme) fails to contribute the full CHF 7,258 to Pillar 3a in 2025, they can make up for this shortfall in subsequent years up until 2035.

However, only gaps created from 2025 onward are eligible for catch-up contributions. Missed contributions before this date remain permanently inaccessible. In other words, an individual cannot now in 2025 make up for a missed payment in 2023. In that sense, 2026 will be the first year in which it is possible to make a Pillar 3a subsequent purchase (for missed contributions in 2025).

2. Eligibility criteria

One critical limitation is that retroactive contributions are only permitted for years in which the individual was actually entitled to contribute to Pillar 3a but did not do so (or at least not to the maximum amount possible) for various circumstances. This requires having had income subject to AHV contributions in the year in question. Gaps cannot be filled for years without qualifying income such as unpaid sabbaticals for example.

For example: Mr. X quits his job at the beginning of 2025 and embarks on a two-year round-the-world trip, during which he earns no income subject to AHV. As a result, he cannot make any additional contributions later to cover the missed Säule 3a payments for 2025 and 2026, because he was not considered gainfully employed during his sabbatical.

3. Annual contribution limits

Pillar 3a purchases are limited to the small contribution limit (CHF 7,258 in 2025) for both employees with a second pillar and those without. Additionally, individuals can only make a catch-up purchase after paying the maximum ordinary contribution for the year. In other words:

• Employees with a second pillar can pay a maximum of twice the small contribution limit of CHF 7,258 per year (CHF 7,258 as their ordinary contribution and a maximum additional purchase of CHF 7,258 to cover any contribution gaps in prior years).
• Self-employed individuals without a second pillar must first pay the regular “large contribution” (20% of earnings up to CHF 36,288) before making any catch-up contributions. These are also capped at the “small contribution” limit.

4. Addressing multiple gaps

In one year, individuals can make catch-up contributions to address multiple gaps simultaneously, but once a particular gap year has been partially or fully addressed, it cannot be purchased again in the future (i.e., a single gap cannot be spread over multiple years).

Example:

Suppose an employee doesn’t contribute the maximum of CHF 7,258 in 2025, 2026, and 2027, leaving gaps of CHF 6,000, CHF 4,000, and CHF 5,000 respectively. This results in a total contribution gap of CHF 15,000 that can be purchased in later years.

In 2028, the maximum amount that can be purchased towards covering this gap is the small contribution limit of CHF 7,258. This would fully cover the gap of CHF 6,000 from 2025 and partially cover the gap of CHF 4,000 from 2026 (CHF 1,258 towards the gap). Assuming this is done, there would still be CHF 2,742 of the 2026 gap remaining; however, no further purchases can be made towards covering this gap after it has been partially covered, so the rest is forfeited.

This illustrates how important it is to carefully plan Pillar 3a purchases to maximize the amount of additional tax-free contributions you can make. From a tax planning perspective, in the above scenario it would make more sense to only make a purchase of CHF 6,000 in 2028 to fully cover the 2025 gap but leave the entire 2026 gap for purchase in the following year.

5. Administrative requirements

According to the new rules, taxpayers wishing to make a subsequent purchase into Pillar 3a must demonstrate their eligibility and comply with various regulations, such as providing certain details to their Pillar 3a institution in advance. Institutions will likely bear the burden of verifying individual calculations and ensuring compliance with these rules.

How do the enacted rules differ from those put forward in the Ettlin Motion?

The new provisions diverge significantly from the original proposal put forward by Councillor of States Erich Ettlin in 2019. These differences reflect compromises made to balance flexibility in retirement savings with the need to protect public tax revenue.

1. Frequency of purchases

• Ettlin Motion: Proposed that catch-up contributions (purchases) be allowed every five years to ease the administrative burden and keep tax losses within reasonable limits. There was no mention of limiting partial coverage of specific gap years in such a way that they can’t be spread over multiple purchases.
• Final Rules: Permit purchases annually, provided eligibility criteria are met. Does not permit a single gap to be spread over multiple purchases.

2. Scope of retroactive payments

• Ettlin Motion: In order to help people with gaps in their employment, the original motion proposed allowing retroactive payments for any year since the age of 25, even if the individual had no income during those years.
• Final Rules: Restrict payments to years with AHV-subject income.

3. Contribution caps

• Ettlin Motion: Suggested permitting larger contributions, up to the “large contribution” limit. This makes sense given that the proposed purchase frequency was once every five years.
• Final Rules: Limit all retroactive payments to the “small contribution” cap, regardless of employment status.

4. Pre-2025 gaps

• Ettlin Motion: Allowed individuals to fill gaps for any eligible year, regardless of when it occurred (e.g., if the original motion had been passed, individuals would now be allowed to fill previous gaps which occurred prior to 2025.
• Final Rules: Only contribution gaps created from 2025 onward can be filled in subsequent years. This creates an imbalance whereby older employees nearing retirement have less scope to benefit from the new provisions.

5. Administrative burden

• Motion: Advocated for simple calculations based on the standard 3a Federal Social Insurance Office (BSV) table.
• Final Rules: Introduce case-by-case verification and stricter controls, increasing administrative complexity. This additional hurdle may deter taxpayers from making use of the optional purchases, thereby watering down the effectiveness of the new rules in encouraging individual retirement provision.

Tax benefits and financial implications

Additional scope for individual tax savings

One of the primary advantages of retroactive contributions is their ability to reduce taxable income. Depending on the circumstances, the tax savings can be substantial, providing a dual incentive to save for retirement and minimize tax liabilities.

Who benefits most from the changes?

The provisions are especially beneficial for:

• Employees who miss contributions due to various personal and financial circumstances, but can later “catch up” and thereby still have the opportunity to maximize their Pillar 3a tax deductions.
• Younger workers, as the provisions are forward-looking and don’t allow retroactive purchases for missed contributions before 2025. This means older workers are less likely to benefit from the changes.
• Higher-income earners with disposable income who can strategically fill gaps and maximize their tax deductions.

It is worth noting that the restrictive eligibility criteria limit benefits for individuals who lack AHV-subject income during gap years or whose financial situations prevent them from making large enough purchases (e.g., they may not be able to fully cover a gap year, and are then not able to spread it over multiple purchases).

Predicted reduction in federal and cantonal tax revenue

The new provisions are likely to enhance personal retirement provision by making it easier for taxpayers to contribute the maximum to Pillar 3a. This is undoubtedly positive for the society at large and can mean a greater proportion of financially stable retirees.

However, this tax benefit comes at a cost to the federal, cantonal, and municipal governments. The Federal Council estimates annual tax revenue losses of up to CHF 600 million, including:

• CHF 100–150 million in reduced direct federal tax revenue.
• CHF 200–450 million in reduced cantonal and municipal income tax revenue.

What are the practical difficulties and considerations?

Despite the potential tax benefits of the new purchase provisions, the greater complexity involved poses challenges to taxpayers and may reduce the extent to which the opportunity is utilized.

Greater administrative burden

To make subsequent catch-up contributions, taxpayers will have to carefully track their contribution history, calculate gaps in contributions, and coordinate purchases along with submitting the required details. In turn, institutions will have to verify the eligibility and proper compliance of taxpayers which will increase administrative costs.  

Strategic timing of purchases

Individuals must plan their Pillar 3a purchases strategically, by balancing their current financial capacity with future tax optimization, as well as optimizing the amount of the purchase to avoid partial coverage of gaps (which would exclude them from full coverage in later years).

Probable increased taxation on capital withdrawals

In addition to the above challenges, discussions about increasing the taxation of Pillar 3a withdrawals could dampen enthusiasm for these new measures. Taxpayers will have to more seriously weigh future tax implications against immediate benefits.

The verdict: Will the new purchase rules successfully encourage retirement provision?

The new Pillar 3a purchase rules introduce greater flexibility, allowing taxpayers to fill contribution gaps and optimize tax savings, thereby encouraging more consistent retirement saving. However, restrictive eligibility criteria, low caps on retroactive contributions, and administrative complexity may limit their effectiveness. High-income earners and younger workers stand to benefit most, while those with intermittent incomes or older individuals with pre-2025 gaps are less likely to gain from the changes.

Compared to the original Ettlin Motion, the enacted rules are more conservative, prioritizing tax revenue protection over inclusivity and simplicity. While progress has been made, broader eligibility and simplified processes may be needed to make the provisions more inclusive and impactful in strengthening retirement provision across all demographics.