Do you have possibilities to “buyback” years by your company?
I mean, I started in 2018 in a pretty big company with a good 2nd pillar.
On the yearly sheet, it’s written that I started in 2017 'cause I did a “buyback” for 1 year.
This allowed me to reduce my taxes and increase the amount of my pension.
Sorry, what is actually your post about? You want to talk about it? Are you hesitating to buy more?
Yes. I wish I’d started buying back earlier to benefit from reducing my marginal tax rate, but I just started to buy back this year.
Yes, I am “buying-back” 20-25k every year. My tax bill is therefore +/- 5k lower. Not sure this is recommended for younger people (I am > 50).
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I thought I was replying to an old post, but it looks like someone split it into a new topic.
I don’t know if it’s recommended, but I think that as soon as we will be done with our house, I will continue to buyback… It reduce my taxes and my pensionfund is quite good. Even if the 2nd pilar with evolve till my 60s, I can always take it to buy an other house (as long I use it as my primary property).
When you say ‘done with house’ do you mean mortgage? If so, maybe you can evalutate if it is advantageous to pay into pension first and then withdraw later to pay off the mortgage.
I mean done with the refurb. Till then I need to be able to withdraw some money from the 2nd pillar
In case you’re not aware, after prior withdrawal from pillar 2, future buybacks are not income tax deductible until you’ve paid back the full amount that you withdrew. However, you do get a refund for the capital withdrawal taxes you paid.
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So I got the message from my pension fund that I can buy back pension funds up to around CHF 22’000.
Do I see it correctly that I have the following options if I want to invest e.g. CHF 10’000 this year:
- Buy back into the pension fund (2a) of my employer
- Invest into 3rd pillar (e.g. through VIAC or finpension)
- Invest privately (e.g. into world index through Degiro)
Until now, I only know the following things:
- Option 3 > Option 2 >> Option 1 with regard to fees
- Option 3 > Option 2 >>> Option 1 with regard to investing in high return assets
- Option 2 > Option 3 in terms of tax benefits
What I’m not sure about:
- What are the ways that Option 1 is superior to Option 2? Additional tax benefits?
- As I understand it both can be deducted from your gross income (up to CHF 7056 in case of 3a).
- But maybe there’s a different tax I have to pay when 2a contributions are paid out vs. if 3a are paid out?
- Is there something wrong or something missing in the way I see the situation?
Who said that? What would be a long term growth rate, like 2-3% nominal?
The main advantage is that you can deduct more than 3a limit. Most advantages of second pillar buy back is due to tax savings. That’s why the sooner you take money out after a buy back, the higher is your return.
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Generally, Option 1 gives you a more stable return, you don’t have the market risk, at least not short term. There’s even a minimum return guaranteed. I got safe 2.5% on average the last 10 years. No way to replicate that with option 2 or 3 without taking additional risk.
Either way, option 2 is capped per year. Option 1 has limits, too. Buy-in of 22’000 is quite low, but that could be a good sign. But even then, you could combine option 2 (for flexibility how to invest) and the rest in 1 (for additional tax savings and stable returns).
EDIT:
- No difference on taxation. Capital withdrawals of option 1 and 2 are taxed the same
- Option 1 give you the option to withdraw or get a pension. Option 2 has to be withdrawn
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No one. I was just entertaining the possibility that it’s superior in some aspects. Such as the ones pointed out by @Brndete (thank you!).
Options 1 and 2 mostly can’t be seized in case of bankruptcy (they may if they’ve been pledged for a real estate purchase). Option 1, when taken as a pension and not wealth, is the only option that comes in form of income and not wealth so can allow more flexibility if your assets/income are otherwise seized.
They may be harder to protect in case of divorce, though (in most situations, they would be split 50/50 between the spouses).
Taxwise, option 1 allows a split between pension and distribution that can help optimization. Option 2 usually allows for the use of several accounts, splitting the tax bill.
If less than the max 3a amount is invested each year, then option 2 can mostly be turned into option 1 by buying back into the second pillar using 3rd pillar funds.
In my opinion, option 1 only beats option 2 if one retires at normal (early) retirement age, when getting the pension is an option. Otherwise, I’d always use option 2 over option 1. Since it’s possible to make buybacks in the second pillar using 3rd pillar funds, I’d always max my 3a contributions before considering buying into the pension fund unless I wanted to make a conservative investment and the risk adjusted returns on my pension fund could be expected to beat my 3a risk adjusted returns.
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Also if you want to save up for property, start a business or leave the country. Or want a fixed-income kind of income.
Me too and I am using all 3 options. The amount for option 2 (pillar 3a) is “lost” when you don’t use it in a given year. The other options roll over, meaning you can still use it later if there’s not enough cash this year
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If you would like to buy back more, you can say that you would like to retire early at 58.
This will strongly increase the potential buy back amount.
I strongly advise to use the 3a first.
I would like to sanity-check something. I’ve heard before that 2nd pillar buy-backs are best done later in life.
But in the following situation, would it make sense to do a buyback early on?
- Pillar 3a maxed out every year
- Second pillar is a “1e” plan that is invested 98% in stocks with fairly low-fee index funds
- Marginal tax rate is as high as it could be in Switzerland
- No real-estate purchase planned in the next 3 years
In that situation, if I am allowed to pay CHF Xk (< 100k) into the second pillar (1e plan), does it make sense to use all of that capacity now?
Assuming the marginal tax rate stays maxed out even when deducting those CHF Xk, is there any advantage to spreading the buyback over several years?
(On that point, my intuition is that doing only 1 buyback would allow to use the 2nd pillar for real estate sooner).
In your example 1E becomes more or less akin to 3a and hence all the benefits of 3a apply to 1E
The part that is a bit more complex is the certainty of continuing with same employer. Let me try to explain what I mean. There are three scenarios possible
Case 1 -: You continue to work with employer for 10-15 years horizon
Case 2 -: you change employers but the next employer also have 1E plans
Case 3 -: you change employer but next employer doesn’t have 1E plans and you will need to move funds to standard 2nd pillar
Case 1 & Case 2 are not really an issue because as said 1E works very similar to 3a . So based on your asset allocation strategy, you can allocate.
Case 3 -: it becomes a problem if you end up changing your job at the time of bear market. In that case , you will be forced to liquidate your assets and move to a very different fund where asset allocation is not under your control. And this can result in significant losses too depending on timing of the event.
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Since your income is very high. Indeed there is no value in spreading the contributions because key benefit for spreading contributions is maximising tax benefits . In fact it would be beneficial because the three year lock in period starts from the time of last voluntary contribution
Only other point to consider is your risk tolerance of going all in.
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I would go for it, unless you want to use it for any other investment or spending.
No
Out of curiosity, why do you only have 100k limit with a income well into the highest rate? Or is only part of that employment income?