Topping up your pillar 3a early in the year, is it worth it?

The beginning of the year is a great time to give your private pensions a boost and set yourself up for the time to come. An increasing number of people contribute to the pillar 3a in Switzerland, but there are clear differences between women and men.

Women save while men invest. For example, according to the research by the Swiss Association for Pensions (Verband für Vorsorge) 2021, women have a with 30.2% a significantly lower proportion of securities in their Pillar 3a assets than men (37.2%).

Regardless of whether you save or invest, you often hear advice that everyone who has a pillar 3a should top it up at the beginning of the year instead of contributing in stages or waiting until the end of December. We wanted to know what's behind this recommendation and how much of a difference timing your contributions over the year really makes. To get to the bottom of it, we calculated a small model.

Our simplified assumptions:

• Duration 12 months
• Maximum contribution for employees 2022 of 6,883 CHF
• Investment in securities with a monthly return of 0.5% (6% per year)
• Fees (on deposit amounts) of 0.5%

The simplified calculation revealed:

💸 If you paid in the entire amount in January, you would have made a return of +424.35 francs by the end of the year

💸 If you staggered your contributions monthly with 573.58 francs each month, you would have +227.67 francs after one year, i.e. you pay 2.86% in return for the flexibility. Or to put it another way: with staggered payments you only would have had half the return than if you payed everything in January. 

💸 If you have your pillar 3a in a savings account, then you get more interest if you pay in earlier, but due to the low interest environment the amounts are negligibly small. In our calculation, we assumed an interest rate of 0.09% which accounted for 6.20 CHF in interest over the 12 months.

As you can see from the calculations, an earlier deposit can be worthwhile, especially if you have invested your pillar 3a in securities. However, our model is greatly simplified, does not take into account unforeseen events such as war or strong fluctuations and is calculated with attractive costs.

The described effect also occurs with a lesser degree, if you do not contribute the full maximal amount, but for example only have of it.

The most helpful approach really depends on your personal situation, preferences but also on your strategy for your pillar 3a:

📌 If you have your pillar 3a in a savings account and the interest rates are still very low, then the difference between topping up in January, staggering your payments or leaving it all to December is not so significant. If interest rates rise, then paying  in as much as possible at the beginning of the year is a sound option as your money will have more time to earn interest.

📌 If you have your pillar 3a invested in securities, then it can be worth paying in early in the year, but your money can also be subject to fluctuations over the year. However, given the usually very long investment period for Pillar 3a, the short-term annual fluctuations may not be that significant.

📌 If you make staggered deposits in pillar 3a invested in securities, e.g. every month, then you benefit from the average price effect, but your money also has less time to work. An alternative to monthly staggering could be, to stagger in larger tranches of 3-4 payments that you make earlier in the year.

There is no general one fits all magic recipe, since none of us has a magic ball to predict the future. With rising interest rates on saving accounts you are well served with an early contribution. If you are investing and want to benefit from average pricing, note that your pillar 3a has already a staggered approach to invest on an annual basis since you make annual contributions. So staggering within the year on top might be helpful, but not essential. 

👉🏻 How do you contribute to your pillar 3a? One-off payment, staggered, leave it until December? Do you have a savings account or invest in securities? Drop aus a note over mail or a comment on social media!