My wife and I (average age 33.5, SD 2.1; one Swiss, one not) have a fairly good combined income—roughly 300k–400k gross. We are expecting a baby shortly and, of course, don’t know if we will be able to maintain this income level long-term. We are therefore trying to “make hay while the sun shines” and put away money for the future now.
My pension fund is lackluster, so I only make a small four-digit buy-in yearly as a minor diversification measure. My wife, however, has access to one of the better Pillar 2 plans; therefore, we are focusing on making large yearly buy-ins there in the high five figures.
My question relates to how we view the current BVG pension regime and the metaphorical wall we expect it to eventually hit. My projection is that 10 years down the road, my wife’s Pillar 2 could account for 50% of our net worth. This means the potential for “exits” from the system to be closed represents a significant risk for us.
I’ve convinced myself that the WEF (home ownership withdrawal) clause is a reliable way out. If things start looking rocky, we can always pay off our high six-figure mortgage using this 2nd Pillar. I am (at least for the moment) non-Swiss and therefore find it unlikely that I would be unable to withdraw my own Pillar 2 if we leave the country. For my wife, as a Swiss citizen, I worry it could be different.
The changes to the taxation of lump-sum withdrawals currently underway seem to be the latest “kicking of the can,” and it clearly won’t be the last. I understand that, at the end of the day, it’s a risk we take. I would nevertheless appreciate the views of others and any interesting perspectives or interpretations of these risks.
Personally I don’t expect massive changes, yes there’s going to be some increase of the progression at the federal level, but it’s a small fraction of the tax due.
If you’re worried about it, IMO as long as taxation is mostly cantonal, there’s going to be competition and cantons like Zug are unlikely to want to raise taxes. So if you can change residence, you’re fine.
Being able to withdraw the non-mandatory part when moving to EU would also likely be hard to change.
And if your worry is about sustainability of pillar2 in general, most pension funds are fairly balanced those days.
Yeah sure tax changes seem to be fixed now. Luckily we live in a tax-sensible canton. I’m not so worried about the taxes. With a WEF withdrawal, and then a vested benefits split, we should be able to reduce the tax burden significantly and leverage the progression effects.
What is more concerning is a scenario where, for example, Säule 1 + 2 are rolled into one… I have a couple of swiss colleagues who seem to have a fairly good “feeling” for the swiss consensus, and when one of them mentioned the other day that “surely they will roll them into one”, it took me back a little!
Of course the beauty of the swiss system is the people’s iniative. This of course means that at any point we could have a change that would have massive implications for us if we go in heavy on pillar 2 buy-ins.
Wouldn’t that be somewhat opposite to the direction of most countries wrt pension? (Esp given the demographics challenges in Europe, isn’t PAYGO system becoming less relevant? Eg benefits/amounts are shrinking over time, or switching to a capitalized model)
… the beauty of the Swiss system . For me after the 13th AHV rente… anything is possible! Hence I really just want to manage the risk here and wonder if others are perhaps preferencing taxable investments
Perhaps concretely, as concrete questions seem to get better answers
In my shoes for the next 3-4 years should I: go all in yearly Pillar 2 payments to bring the tax down to point of diminishing returns, or accept a higher tax burden and buy more VT?
Note:
its a top-notch pillar 2, not many disadvantages vs equities (other than aforementioned risks).
if wife wants to stop working would go 100% equity finpension
I think it’s very personal, personally (and there’s other examples on the forum), I trust the stability enough to have done large buy-ins.
Currently I’m not doing many of them but mostly because of asset allocation targets, with access to a 1e I’d probably move most of my income above max marginal tax rate as buy-in.
Thanks for the feedback. We (unfortunately?!?) have the added complexity that we live in a flat tax canton… So for gemeinde and canton there is no max marginal…. Its just max, max max max, 0…. Makes the whole decision making process annoying honestly…
What does the effective rate looks like? 20%? Indeed with a low flat tax, it might not be as attractive as it is in places like ZH with progressive taxation
Around there yes. I mean the reasons for living here are not just tax. As I said in this case though, it is tough to know where to stop with the buy-in. This year we’re having house work done, so can come down to almost zero combined with the buy-ins.
Following years are trickier… I can practically go as hard in on the buy-in as I want to… Only progressivity comes from federal tax.
I would highly question such a prediction. Being Swiss myself I don’t see this happen in the short-to-mid term future. 13th AHV is more money into an existing system, no fundamental change.
Yes, some pension funds now offer 7% interest for the past years. This makes it almost equal to an investment in VT. I personally don’t see anything wrong with some buy-ins into pension fund. Maybe do it in a staggered way and keep some buy-in potential until shortly before FIRE.
The AHV as a whole is a massive wealth transfer. 13th AHV simply increased this transfer.
Of course, there is already a socializing aspect of the 2nd pillar in the sense that pensions are guaranteed even if the investment return is bad and that there is a minimum return requirement for pension funds.These are known flaws, unfortunately the Swiss didn’t seem willing to fix some of the 2nd pillar shortcomings. But I don’t think that the 2nd pillar will get much worse than the current situation.
You mention living in one of the best cantons tax wise. You mention wanting to FIRE in 10y and leaving Switzerland.
Are you sure you want to buy into 2nd pillar considering:
you won’t reduce that much your taxes
you will tie your money and you will have less control over it
nobody knows which new shenanigans are coming to milk your nicely accumulated pot
you will not able to withdraw it so easily AND you will probably have to pay a huge tax if you withdraw it while abroad (to my understanding some countries could tax it very unfavourably)
IF you were in Geneva or Vaud with >40% marginal tax rate AND high wealth tax, AND you wanted to FIRE in Switzerland I would maybe consider it.
But not in your situation. Good luck and congrats!
I mean perhaps it is not clear to all how the flat tax rates work. There are very large „default deductions“. So one only actually pays the flat tax rate from a fairly large income. The taxable income is 100-150k less than the gross before the Einkauf deduction.
with a high 5 figure buy in a year I reduce our tax burden by ~60%. So I mean it definately pays off tax wise, since it’s comparable to equities in terms of performance.
Regarding taxation after withdrawal. I’m a non EFTA citizen, and my understanding is that if we’re clever with timing I can avoid paying tax in my home country where we would like to FIRE to.
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. For me after the 13th AHV rente… anything is possible! Hence I really just want to manage the risk here and wonder if others are perhaps preferencing taxable investments
