Axa 3a contract - should I close?

Hello,

I signed a Smartflex pension 3a contract with AXA (https://www.axa.ch/en/private-customers/offers/pensions-assets/pillar3-private-pension-provision/smartflex-pension-plan.html) almost 2 years ago. I invested in the “Global” fund with 40% of my capital at a fee of 0.5% per year. At the moment, I have less than CHF 10k in this 3rd pillar, but I’m committed to this contract until 2060.

For the past week, I’ve been in a panic because I’ve read a lot of messages on this forum and this blog saying that this Smartflex product is a scam and that I should stop the contract.

I don’t understand what I have to lose apart from the 0.5% annual fee, and perhaps the fund’s performance, which isn’t as good as others. I know that many people on this forum have the mindset of maximizing their gains, but this contract offers me some security in the event of incapacity to gain. I have no intention of investing 100% of my capital in the stock market. I want to keep 60% of the capital as security.

Is this contract really bad for my investor profile?
What risks do I run by continuing with this contract?

Thank you for your help.

Welcome on the forum. Those questions have been asked countless times, I invite you to try the search feature. Nevertheless:

While I do not know the specifics of AXA Smartflex, generally speaking 3rd pillar contract with insurance companies are not good products. And this for many reasons:

  • Expensive insurance premiums. Your policy is a combined product: some of the premiums is used to pay a life insurance, the other part is invested according to your strategy. Most of the time if you compare premiums for a standalone life insurance (i.e, outside 3a) with the same benefits you will see you are paying inflated premiums. It basically means there is probably much less invested that what you would expect, check the surrender value (Rückkaufswert / Valeur de rachat) on your last statement (or ask for it).

  • Hidden fees Most of the time there are more fees that what you expect, e.g., buy-in and redemption fees (often ~2-2.5% both ways), internal fees of the fund (TER), etc. on top of the stated management fee.

  • Low performing funds They usually lure customers in very young funds with high theoretical past performance. Why? because it is easy to build of fund which would have performed well when you know past returns. Good returns on a graph always sell well. However, past performance is NOT an indicator of future performance.

  • And others.

There is no one-fits-all strategy when it comes to keeping your contract or closing it. Ask for the surrender value of your current policy and check expected benefits/returns of alternatives (e.g., 3rd pillar @ finpension / VIAC with, if your situation requires, a standalone life insurance)

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I managed to get on the path for disentangling myself from this a couple of weeks back. Will terminate it from the new year and transfer to Finpension.

The points against the insurance 3a are:

  • You are tied to this until you’re 65
  • there is no flexibility in how much you can add, and when - you can reduce monthly contributions (or annual equivalent) to 150-200/month, but otherwise you HAVE to keep paying. This could put you in trouble if you want to take a break, with a bank or VIAC/Finpension you can pay as much and whenever you like
  • if touch wood you have a health condition (like I do) they can prevent you from paying the yearly maximum if/when it is increased - big opportunity cost
  • the life insurance part is eating a good 15% off your money per year, which is lost forever, they do not explain this in the contracts unless you ask for it. For a test, see the difference between what you know you’ve paid, your portfolio value, and the surrender value, what I expect you’ll find is that your portfolio value is ~80% of what you paid in (REGARDLESS of how the market went, because the underlying funds are mostly TERRIBLE), and your surrender value is ~55% of what you paid in. This number is not going to get substantially better unless you’re nearing retirement - I mean you will lose ~45% of your contributions if you leave early.
  • to expand on the point above about the funds: there’s no flexibility in what you can use. I am/was with Swisslife and saw a 1.3% gain in my portfolio while the global market (eg VT) did 14% this year, this is an insane opportunity cost
  • so in summary, they take ~15% of your pension contributions every year which you can never recover, that’s money not saved and not invested (but you DO get tax benefit for it), and they take ~45% if you leave before you’re 5 years from retirement
  • you can get cheaper and better dedicated life and/or disability insurance, and better invested pension
  • if you want the tax benefit of 3A and exactly 0.0% risk put it in the bank with 1% interest, this is also better than 3A with life insurance.

People here like to call it a scam, I consider this an exaggeration. It would be a scam if they run away with our money, it works for some people, just not people who want to invest their pension. As pension investment vehicles they are absolutely terrible. You can do better.

Thank you for all these information.

Do you know if this is possible to get out of this contract before 3 years ?
I’ve only been on this contract for 21 months, but I saw somewhere that you have to do 3 years to get out of it. Is this correct?

Of course I don’t know the specifics for your contract, but I do know that my contract is worded in a deliberately opaque and obscure and misleading way. For example my own contract stated that “you can terminate at any time” and one paragraph below (literally) it said “you can only terminate if one of the legally stipulated reasons arise” (the 5 reasons for 3A: buying a house, leaving CH etc). That was clearly untrue - going to prison for murder is probably more lenient that that! - and I confirmed with the broker, what it meant was that you can terminate at any time but only take your full surrender value if one of the 5 reasons arise.
The surrender value had a ladder but it was only shown to me as an example by the broker, so it has exactly zero weight, the surrender value is calculated using NASA-level mathematics aimed at basically giving you a meager portion of your contributions back. What the contract did say was that terminating within 12 months of starting meant I’d lose all the principal (that’s probably already been paid to the broker upfront).

I think I have the same conditions as you. How much did you lose?

Logging into the portal I see that from 2*6883 (=13766 contributed) my surrender value is currently sitting just shy of 8000, so that’s a good 41% lost. That’s what I can transfer to another provider, and will do soon. Once your money is in the 3A system it stays there, but you knew that already, you can always move it to another provider (even a bank for 1% interest).
Opportunity costs, draconian serial killer level imprisonment contract terms, pathetically poor investment performance, hidden fees (they have to give you a detailed breakdown of costs if you ask, but won’t do it if you don’t because it’d probably be too sobering), poor life/disability insurance. Objectively could be called a legal scam.

P.S. what clued me to my mistake was that my first premium was 6883, in 2023 the 3A limit went up to 7056, however my premium was still 6883. I asked to contribute the maximum but the insurance refused due to a health condition I have and said “let’s revisit in 2024”, this struck me as an opportunity cost both in terms of tax savings and investment and prompted me to do more digging. I will admit I have been skeptical around the hate these products get around here, because I have some opinions on the ultra-efficient FIRE mentality, but the more digging I did the more I realised I could be doing a lot better in a dedicated invested 3A. I still maintain that these can work reasonably for some people, mostly those who are more risk averse.
P.S.2 perhaps the key aspect which should have put me off if how hard these insurance 3As are pushed to all newcomers in Switzerland, meaning there’s real profit to be made for the sellers, and when all these consultations and information sessions and FedEx are free then WE are the product. My own phone was ringing off the hook to get a 3A, once I did it stopped. We are new here, likely with good jobs and big motivation to do well, perhaps from lower level countries (so trust anything Swiss - I mean who wouldn’t trust a major Swiss insurance company?).

P.S.3 you say in your original post that you want to keep 60% of your money as cash, that’s a valid statement that works for you, in that case why not keep all as cash in a 3A with a bank and do investments outside of that if it makes you sleep better knowing that you have clearly split your risky from your safe options? The bank has no fees, it gives you a totally predictable interest, and you submit the certificate of contribution for the tax benefit. If you want the insurance part, 3A insurance is also subpar: if I die today mine promises to pay my wife and kids my total contribution as if I contributed until I was 65, that’s 149k CHF. A proper life insurance would pay 500k for 500/year. I didn’t research options for the disability insurance part, but they are promising to continue contributing to my 3A until I am 65 if I get disabled and can’t work. Sounds meh to be honest because it’s not something I or anyone else can benefit from anytime soon.

Personally I believe that passive investing in broadly diversified, cheap ETFs is less risky in the long term than anything else because you beat inflation and can catch amazing years (like 2023, for example, where the S&P500 did nearly +20%).