Taxation of Pillar 3b Annuities: New 2025 Rules

Introduction

As with all income, income derived from pension provision is taxable, in accordance with Article 22 of the Federal Direct Tax Act. This article also sets out the tax treatment applicable to lifetime annuities under Pillar 3b.

To ensure the proper taxation of lifetime annuities, it is necessary to distinguish between the portion attributable to investment gains, which is taxable, and the portion corresponding to the original capital, which is tax-exempt. Until 31 December 2024, the investment return portion was set at a flat rate of 40 percent. Consequently, 40 percent of annuity payments were taxed as ordinary income. Since 1 January 2025, the tax treatment of lifetime annuities has been revised and the 40 percent flat rate abolished.

As a reminder, the general principle is that premiums paid by a taxpayer under Pillar 3b insurance are not deductible from taxable income. However, some cantons apply a more favourable approach, in particular through flat-rate deductions for insurance premiums. These deductions primarily concern health and accident insurance, but depending on cantonal rules, may also include Pillar 3b insurance premiums when the flat-rate limit has not been fully exhausted.

During the term of the insurance contract, no taxable income arises for the taxpayer. Income becomes taxable only at the time of actual payment, that is, upon contract maturity. However, the value of the insurance must be declared in the tax return and is subject to wealth tax.

This article focuses exclusively on the tax treatment of annuity payments.

Definition of a Lifetime Annuity

A lifetime annuity is an insurance contract under which free pension capital is converted into guaranteed lifelong income. Its purpose is primarily to supplement income from social security (AVS) and the mandatory occupational pension scheme (2nd pillar).

The initial capital may be financed either through a lump-sum payment or through periodic insurance premiums. In return, the insurer guarantees to pay the beneficiary periodic annuity payments, the amount of which depends primarily on the accumulated capital, the age at conversion, and technical parameters.

Two types of lifetime annuities may be distinguished:

Immediate lifetime annuity: payment begins as soon as the capital is transferred to the insurer and converted into income.
Deferred lifetime annuity: payment begins at a contractually agreed future date, often at retirement age, after a capital accumulation phase through periodic or lump-sum payments.

It is also important to distinguish between guaranteed annuity payments and surplus distributions. Guaranteed annuity payments represent the fixed, secured portion of the lifetime annuity, while surplus distributions are variable supplements dependent on insurer performance and are never guaranteed.

Reform of Annuity Taxation

Since 1 January 2025, the taxation regime applicable to lifetime annuities has been completely revised. This reform introduces a more flexible model that aligns annuity taxation with investment conditions and offers a more favourable tax outcome for beneficiaries.

The taxable portion of annuity payments is no longer determined at a fixed rate but varies depending on the type of contract and on the reference interest rate set by FINMA at the date of contract conclusion. Surplus distributions are subject to 70 percent taxation.

The taxable portion is now defined based on a formula set out in Article 22(3) FDTA, taking into account the maximum technical interest rate applicable at the time of contract conclusion. This rate remains fixed throughout the contract term. The reform applies retroactively to contracts concluded before 2025.

Thus, for a contract concluded in 2025, the taxable portion of annuity payments amounts to 4 percent – a significantly more favourable rate than the previous 40 percent threshold.

It should also be noted that when pension capital is accumulated through multiple payments, only the rate applicable in the year the contract was concluded applies. Subsequent payments have no impact on determining the taxable portion.

The reform applies to lifetime annuities and to temporary annuities with terms exceeding five years. Temporary annuities with terms shorter than five years are taxed under Article 20(1)(a) FDTA and do not benefit from the more favourable treatment under Article 22.

Conclusion

With this reform, lifetime annuities now benefit from a more flexible and generally more advantageous tax framework. These developments should therefore be integrated into pension planning in order to optimise long-term outcomes.

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