2nd Pillar - choose contribution %

Banks, Insurances & Third Pillar
1

Hi all,
I need some help deciding the monthly contributions I want to make to the 2nd pillar, in my specific situation. I am aware of the measily returns of pillar 2 in comparison to a cost optimized ETF portfolio at IB (VT), however it might make sense to max out contributions as I want to buy a house in 3 years, potentially cashing out some money from the 2nd pillar, therefore saving on taxes.

Here the facts:

  • my employer offers to ability to choose monthly contributions between 9%, 13% and 15%
  • in any case, they will pay 6.5%, I pay the rest of the contribution.
  • they guarantee 1.0% interest on savings, although the average interest rate paid out over the last 5 years was 2.55%.
  • I live in Zug and pay relatively low taxes (24.5% marginal tax rate)
  • I max out pillar 3a (VIAC) on a yearly basis
  • have the verbal agreement that I can buy a single family home in 2024 (CHF 1.35M total investment)

My current assumption is that it’s probably the smartest decision to max out contributions, as the tax savings will be larger than self-investing the difference into VT (given I cash out in 3 years to buy the house I mentioned). There is also the risk that I’m not able to buy said house if the deal falls trough, and I end up with more capital in pillar 2 which does not generate good returns. What would you do?

2

First, the money you pay in to 2nd pillar cannot be used for buying property for 3 years. So check with your pension fund.

But of course you can take money which are already there, so you can pay in if you want your 2nd pillar not too low.

3

I’m not considering an extra buy-in, precisely because of the 3 year rule. For now I’m just trying to decide the monthly contribution %, as my employer gives the option to choose between three models.

4

And this brings us back to the question of current and desired assets allocation, pardon my Boglian.

5

If you want to buy RE in the next couple of years, you shouldn’t be fully invested in stocks anyway. I think chosing the 15% option makes sense. Your net tax profit should be around 20%. Which is a pretty good yield.

7

thanks, that makes sense and confirms my assumptions.

8

Thinking a step further, how does one decide on the most cost efficient way of financing RE?

Property is 1.35M, predict to have roughly 500k in cash/investments, 165k in 2nd pillar, 55k in 3rd pillar available. Due to “Tragbarkeit” between my fiancée and me, we need to bring in at least 30% capital.

Use 2nd/3rd pillar or rather cash?

9

That’s my concern too btw. I’m thinking about buying a house in 3-4 years, but if prices keep increasing like that, I’ll probably stay in my flat.

So it would make sense for me to chose the highest controbution option too and then withdraw the whole 2nd pillar once I buy the house. As long as you have 10% liquid assets (cash, stocks, 3rd pillar), you can withdraw any amount of the 2nd pillar.

But as I’m not sure, I’m still on the lowest contribution option to maximize IBKR investments.

10

Taking out 3rd pillar doesn’t make much sense from my point of view, as it is probably your most efficient investment.

Taking out 2nd pillar makes sense, but again, you should know how much money you want to have left there after you take some. Once you took out some from 2nd pillar, you don’t get tax deductions for paying into 2nd pillar. So if you want to profit from 2nd pillar inpayments, do it now.

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11

Well, you can also pay in addition to your regular contribution.

Oh, not if you are going to cash out soon, then the tax deduction is going to be reversed.

12

You can atleast get a refund on the taxes you paid. It’s not that much, but at least something.

@kane
I agree that the 3rd pillar is your most efficient investment. Similiar returns to VT in IBKR, but no taxes on dividends. This offsets the higher fees easily.

So in your case I would take 10% from cash/investments and the rest from your 2nd pillar.

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13

Is this an option or an obligation? If it is an option this is interesting that somebody is willing to forgo any potential gains from RE in the coming years…(unless compensated for the option)…

Another option could also be to take a Lombard against your shares so you stay invested. Based on current levels assuming you have dividend distributing ETFs the dividends should cover at least portion of the costs. But of course this entails even more leverage with possibilities of margin calls so extra caution may be warranted…

14

I suggest to look for the funds with the lowest opportunity cost (alternative use of money). For example if your 3 pillar is in 100% equities if you withrdaw that it will “cost” average ~7% over the long term. If your 2nd pillar is earning (say) 1% it would be cheaper to use that. Note it may also be possible to pledge 2 or 3 pillar so that they can keep working for you.

Of course you need to make a sense check on your overall leverage and asset allocation

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15

Here too, the 3-year rule will apply to the voluntary portion. The compulsory contribution is 7%, 10%, or 15% (depending on your age) split equally between you and your employer. If, for example, your pension fund/employer gives you the option of contributing 15% instead of 10%, the excess 5% is a voluntary contribution. As such, the 3-year rule will generally apply to benefits accumulated from that 5%.

This is a simplified example, as some pension funds have fairly complex structures for combining and dividing compulsory and voluntary benefits. But it clarifies the point that making voluntary contributions is not normally a useful strategy if you plan to withdraw all your benefits in the near future.

If, on the other hand, you want to use your pension fund for the “bond” portion of your portfolio, having the option of making higher contributions could be beneficial.

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16

There’s something I don’t understand: if you choose 15% and they still pay 6.5%, wouldn’t your employer be paying less than the 50% share mandated by law?

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17

The 50% mandated by law only applies to the compulsory contribution, not the voluntary portion. Some employers pay more as an employee benefit.

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18

We have a verbal agreement with the current owner that he sells us the house in 2024 for 900k. He is the neighbor of my in-laws and knows my fiancée’s family 20+ years and would like to sell us his house to make sure it goes to good hands, as he does not have kids who want it. We’ll then invest another 450k in renovating it. I realize this is a once in a lifetime opportunity, as the property is easily worth 300-400k more in it’s current state in comparison to what he offered it to us (870m2 plot, 180m2 living space, 15min from Zug, canton AG). I will try to get this deal into a written agreement (probably a “limitiertes vorkaufsrecht”), however do not want to pushy with the current owner, since it’s all hanging on his goodwill.

My 3rd pillar is VIAC Global 100, so yes fully in equities. Would probably want to keep it there, if possible.

Do you have a view on pledged vs. withdrawal for 2nd pillar? Is there any major downside to that? Historical performance was 2.55% for my PK, so more then the interest costs of a 10Y fixed mortgage. My pension fund does not reduce insurance services when pledged, and allows 100% of the value to be pledged.

I don’t think this is the case, but I will enquire with my pension fund.

19

correct, I’m in the 7% BVG age bracket, where my employer has to contribute 3.5%, but they voluntarily already pay more, i.e. 6.5%

20

I would always go with pledging instead of withdrawing if possible. You save on withdrawal taxes and like you said: better to have 2.5%/year taxfree with the assets in the pension fund than saving 1%/year or less on interest. The issue is: if you bring in 10% cash and pledge the rest, your mortgage will be 90%. So they will ask for a much higher salary.

Lets assume you buy something for 1 million, have 100k in cash and 200k in your pension fund. As pledging your pension fund isn’t regarded as amortisation, you’ll end up amortisizing from 90% down to 66.6% instead of 80% down to 66.6% within 15 years. So to compare the “Tragbarkeit”:

Withdrawing 100k from pension fund

  • 40k interest
  • 8.9k amortisation
  • 10k maintenance

Pleding your pension fund

  • 45k interest
  • 15.6k amortisation
  • 10k maintenance

So you’ll need 212k salary instead of 177k to get the mortgage (I ignored assets and other factors that might be considered by the bank).

You already mentioned that they request 30% assets in order to get the mortgage. So pledging probably won’t be even an option for you.

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21

@Cortana Interesting, I always thought that you have to take the loan down to 66.6% of the value of the house + any additional collateral. Based on my understanding and using the figures from your example, if you have not pledged anything you should bring down the loan to 666k but if you have pledged 200k then you should bring the loan down to CHF 792k (66.6% of CHF 1m+200k), or I am missing something?