Using your third pillar to buy property: how does it work?

In both cases, the home must be intended for the insured person's own use. This is generally their main residence. A property intended for letting, a second home or undeveloped land is in principle not eligible under this scheme.

The choice between the two options depends mainly on three factors. A withdrawal provides equity, but triggers immediate taxation and reduces retirement savings. A pledge avoids tax when the pledge is created and keeps the capital invested, but it may lead to a larger mortgage and higher interest costs. A combination of the two options may also be considered, subject to the agreement of the bank and the pension institution.

This subject particularly concerns people who wish to buy a main residence in Geneva or the surrounding area, including in the high-end residential segment. Pillar 3a can supplement available savings, but it does not guarantee that a loan will be granted. The bank also examines total equity, the lending value it assigns to the property, income, outgoings and the household's affordability.

What home ownership promotion allows

The home ownership promotion scheme allows retirement savings to be used, under certain conditions, to:

• Buy or build a home.
• Repay a mortgage debt.
• Acquire shares in a housing cooperative.
• Finance certain transactions relating to an owner-occupied home, where the legal conditions and those of the pension institution are met.

For pillar 3a, owner occupation remains the central condition. The third pillar may also be used to finance a stake in home ownership, subject to the conditions applicable to the situation concerned.

Works are not automatically eligible. Before using pillar 3a for a renovation or conversion, check with the pension institution whether the work falls within the permitted scope. Routine maintenance, decoration or comfort improvements should not be assumed eligible without prior confirmation.

A common confusion: the third pillar and the second pillar do not follow the same rules. Age, minimum amounts, restrictions after the age of 50, spousal consent and the consequences of a sale differ depending on the scheme concerned.

How much equity do you really need?

Banks generally require at least 20% equity to finance an owner-occupied home. This threshold is a common benchmark in mortgage lending, but it may be higher depending on the property, the borrower's profile or the gap between the purchase price and the value assigned by the bank.

An additional rule requires at least 10% of the lending value to come from equity that does not derive from an early withdrawal or pledge of the second pillar. Pillar 3a, personal savings, certain securities, a gift or an advance on inheritance may be taken into account, subject to the bank's assessment.

Two concepts should not be confused:

• The purchase value, which is the price agreed with the seller.
• The lending value, which the bank uses to calculate the financing.

Where the purchase price exceeds the lending value assigned by the bank, the difference must generally be financed entirely from equity. The bank may also require that these funds do not come from the second pillar.

This gap can be a significant obstacle in Geneva cases, particularly when the asking price is well above the value assigned by the bank. For an initial indication, see property prices in Geneva by municipality. An online valuation does not, however, replace the bank's valuation of the property.

Worked example

For a flat purchased for CHF 1’200’000:

• Indicative equity at 20%: CHF 240’000.
• Theoretical maximum mortgage at 80%: CHF 960’000.
• Minimum share outside the second pillar: at least 10% of the lending value, i.e. CHF 120’000 if the value assigned equals the purchase price.
• Remaining equity: savings, pillar 3a, gift, advance on inheritance or, subject to acceptance, second pillar.

This example is simplified. Notary fees, land registry fees, any duties, bank charges and works must also be taken into account. The bank may assign a lending value below the purchase price, which then increases the equity required.

Affordability, the other condition

Sufficient equity does not guarantee a mortgage. The bank applies a stress test that generally combines:

• A theoretical mortgage rate above the market rate.
• Amortisation of the debt.
• Maintenance and ancillary costs.
• The household's other financial commitments.

The result is then compared with the borrower's sustainable gross income. For owner-occupied homes, a 33% threshold is frequently used in affordability calculations. FINMA refers in particular to a theoretical rate of 5% and theoretical ancillary costs, but each bank may apply its own method and stricter criteria.

The rate actually offered at the time of purchase is therefore not enough to assess affordability. The rate used for the bank's test is generally a theoretical rate distinct from the market rate.

Early withdrawal from pillar 3a

An early withdrawal involves taking out all or part of the accumulated capital to put it towards the property project. It may be used in particular to:

• Supplement equity.
• Reduce the mortgage amount.
• Repay a mortgage debt.
• Finance certain eligible housing-related transactions.
• Acquire a stake in a housing cooperative.

Actually paying the capital to the bank to repay a mortgage is treated as a withdrawal and is subject to tax on capital benefits. A simple pledge, by contrast, does not trigger this tax as long as no assets are withdrawn or realised.

In a couple, each partner may in principle use their own assets, provided they meet the applicable conditions and finance a home intended for their own needs or those of the household.

Three aspects need to be examined.

Timing

Pillar 3a may be withdrawn before the ordinary retirement age for certain reasons provided by law, including the acquisition of an owner-occupied home. The ordinary pillar 3a payout rules, which generally allow withdrawal at the earliest five years before the AHV/AVS reference age, should not be confused with the specific conditions for early withdrawal under home ownership promotion.

The reference age depends on the date of birth and the applicable transitional rules. The insured person's individual situation should therefore be checked with the pension institution.

Frequency

For the second pillar, an early withdrawal under home ownership promotion may in principle be requested only once every five years.

For pillar 3a, the applicable conditions should be checked with the institution holding the assets before planning several withdrawals for the same property project. Not all second pillar rules should automatically be applied to pillar 3a.

Consent

For the second pillar, the written consent of the spouse or registered partner is required for an early withdrawal or pledge under home ownership promotion.

For pillar 3a, the documents required may vary depending on the institution and the family situation. Check the requirements before submitting the application.

Taxation of the withdrawal in Geneva

A pillar 3a withdrawal is taxed as a pension capital benefit. It is not added to ordinary income: it is taxed separately, according to a specific scale. Geneva applies this principle to capital benefits from both the second and third pillars.

No single rate can be applied to all withdrawals. The tax burden depends in particular on:

• The municipality.
• Marital status.
• The amount withdrawn.
• The tax year.
• Other capital benefits received during the same period.
• Cantonal and municipal tax.
• Direct federal tax.

The Geneva tax authority publishes separate scales for cantonal and municipal tax and for direct federal tax. These must be taken into account to estimate the overall burden.

In Geneva, an early withdrawal for the purchase of a home must be declared and is subject to tax on capital benefits.

Staggering capital benefits can be tax-efficient in some situations, particularly at retirement. For a withdrawal intended for a property purchase, however, the withdrawal conditions should be checked before assuming that splitting it over several years is possible.

Before a substantial withdrawal, ask the cantonal tax authority or a tax adviser for a simulation.

Withdrawal, pledge or combination?

A pledge involves offering pillar 3a to the bank as security without immediately withdrawing the capital. It generally allows the assets to remain invested with the pension institution and avoids tax when the pledge is created.

It can facilitate certain financing structures, but it does not oblige the bank to grant a larger mortgage. The bank continues to examine income, outgoings, lending value and overall affordability.

On the other hand, a pledge may increase the mortgage amount and therefore the interest payable. It also increases the household's financial burden and may expose the borrower to greater risk if the property's value falls.

As long as the pledge is not realised, the assets generally remain in pillar 3a and are not withdrawn from the pension scheme. In the event of payment default and realisation of the pledge, the situation may change. The consequences also depend on the investment vehicle, whether a bank account, a pension fund or an insurance policy.

The choice depends on the expected return on pillar 3a, the cost of the mortgage, taxation, the borrower's age and their retirement objective.

Indirect amortisation should also be considered: instead of reducing the mortgage directly, the borrower can continue paying into a pledged pillar 3a, depending on the structure accepted by the bank. This solution should be compared with direct amortisation, taking account of interest, returns and taxation.

Combining the third pillar with the second pillar

The second pillar can supplement equity under home ownership promotion, but its rules are different:

• The minimum early withdrawal is generally CHF 20’000.
• An early withdrawal may in principle be requested only once every five years.
• After the age of 50, the amount available is limited under the BVG/LPP rules.
• The written consent of the spouse or registered partner is required.
• The withdrawal may reduce retirement, death or disability benefits.
• In the event of a sale, the early withdrawal must in principle be repaid in certain situations, particularly when the sale proceeds are not reinvested in a new owner-occupied home.

After the age of 50, the maximum amount depends in particular on the vested benefit at age 50 and the benefit available at the time of the application.

Vested benefits assets may also be subject to specific rules when used for an owner-occupied home. The conditions must be confirmed with the institution holding the assets.

The CHF 20’000 minimum applies mainly to second pillar early withdrawals. It should not automatically be applied to pillar 3a, whose conditions must be checked with the institution concerned.

Repayment does not work in the same way for both pillars. For pillar 3a, there is in principle no general obligation to repay when the home is sold. However, a pillar 3a withdrawal cannot be repaid in order to recover the tax paid, unlike certain second pillar repayments.

The long-term impact

A withdrawal reduces:

• The capital available at retirement.
• Future returns.
• The diversification of your assets.
• Your ability to finance certain later expenses.

The capital withdrawn leaves the pension wrapper and no longer benefits from the tax treatment specific to pillar 3a.

A pledge generally keeps the capital within the pension wrapper, but increases the mortgage debt. This strategy may become more costly if rates rise or household income falls.

A house or flat does not entirely replace a pension. The property is a real asset, but it is less liquid than an account and generates maintenance, renovation, insurance and tax costs.

Steps to follow in Geneva

Before signing a promise of sale or an purchase offer:

• Request your pillar 3a statement and, if necessary, your BVG/LPP pension certificate from your pension fund.
• Have your budget drawn up with a bank or a mortgage adviser.
• Check the gap between the purchase price and the lending value assigned.
• Request a simulation comparing withdrawal and pledge.
• Calculate the Geneva tax on the proposed withdrawal.
• Review the PPE documents and planned works.
• Budget for acquisition costs and a cash reserve.
• Include the necessary financing conditions in the offer or promise.
• Coordinate the application between the bank, the pillar 3a institution and the notary.
• Ask for the exact payment timeframe before setting the signing date.

Documents usually requested may include:

• An identity document.
• The pillar 3a contract or certificate.
• The draft deed or promise of sale.
• The notary's contact details.
• The financing plan.
• The PPE documents.
• Proof of owner occupation.
• The consent of the spouse or registered partner, where required.

For a cross-border commuter, additional documents may be requested depending on the financial institution, the property concerned, tax residence, the currency of income and the pension structure. Do not assume that the rules applied will be identical to those for a person resident in Switzerland.

The funds follow the instructions of the pension institution and the bank. They are not systematically paid directly to the seller: the flow depends on the procedure, the contract, the notary and the institution concerned.

Processing time varies depending on the completeness of the file, the pension institution, the type of investment and the signing date. Start the process several weeks before the planned signing and check the institution's own rules before committing.

Good practice before using your third pillar

• Keep a reserve for maintenance and unforeseen costs.
• Do not put all your savings into the purchase.
• Compare the total cost of a withdrawal with that of a larger mortgage.
• Request a written tax estimate.
• Assess the effect of the transaction on your retirement.
• Check your death and disability cover, particularly where an insurance product is involved.
• Anticipate PPE works and calls for funds.
• Check that works are eligible before requesting a withdrawal.
• Do not sign any sale document before clarifying the financing, the withdrawal or pledge conditions and the consequences of a bank refusal.
• Seek advice from the bank, the pension institution, the notary or a tax specialist when the case is complex.

Key points

In Switzerland, pillar 3a can contribute to the purchase of a main residence in Geneva through an early withdrawal or a pledge. A withdrawal provides equity, but triggers taxation and reduces retirement savings. A pledge avoids tax when the pledge is created and keeps the capital invested, but it may increase the mortgage debt and interest.

The thresholds of 20% equity and 10% outside the second pillar are important benchmarks, but not the only criteria. Lending value and affordability also play a decisive role. Tax consequences and withdrawal conditions vary according to personal circumstances, the pension institution and the financing structure: an individual simulation is therefore essential before any decision