Change of employer after a long time at a place with minimum contribution, where you ended up convincing yourself that taxable free assets are a better way to build wealth -considering the whole package was fair, and to mitigate pillar 2 risk -some see it doomed.
now you have an open opportunity to leverage a performing pension system, with 1e and all, and you have several hundreds K buy-in opportunity to close the gap.
On one hand it looks great especially in terms of tax optimization, on the other hand not counting on it and managing free assets has done great until now, and it’s a change of strategy/allocation.
What’s your opinion ? Debate will help even if it is very personal IMHO. Thanks
It depends on a lot of factors. I went all-in on Pillar 2 over the last few years. I plan to continue this year and next year it will be full and I will be unable to make further voluntary payments.
Reasons:
Tax savings, it makes sense to reduce if you have high marginal taxes
Wealth taxes. I live in a high wealth tax canton, so reducing wealth tax helps a lot
AHV. I plan to retire early soon and will need to make AHV payments based on wealth, so reducing taxable wealth will reduce my AHV payment
Safe CHF return. While 1-3% may not be much, it is more than my mortgage, tax free and can form the bond component of my portfolio.
Deferred for later expenses. Although you can’t access it until later in life, that is OK!. I have taxable accounts for spending in pre-retirement age. I need money post-retirement age, so the pension amounts are allocated to that.
Flexibility. Although amounts are locked away until retirement age, you can take some out already a few years earlier. On top of that I can take some out to repay mortgage. I can also take it all out if I become self-employed and start a business. Or if I leave the country. So in case of real need, there are options.
One part in the mix. I also own my own home and have investment property. So part of my living costs are hedged and an income stream is inflation protected. Each different part of the portfolio has its role to play so look at how the Pillar 2 fits within your overall plan.
Marginal tax rate. Look at your marginal tax profile, try to spread out contributions over your working lifetime in a way that maximizes the reduction in marginal tax.
I’ll have about 45% of my investment portfolio in pension upon early retirement.
What is your tax rate and marginal tax rate before after buys-in? I am curious what people consider the inflection point or ranges where it makes sense. And wealth tax?
FYI - I have done buys-in last few years but only 20-30k per year with my wife in total. Post buys-in I am around 25% overall tax rate and marginal 30-32% I believe
I just have the feeling to give away the money to someone else and lose control over it.
20 years of NOT contributing above minimal threshold and getting good reasons for that each time a paper about how the system will eventually crash (not that I had a choice, apart from changing job), it’s quite a change of software if I choose this path.
For my situation (canton, kids, marital status), income level >90k is 25% tax >120k is at 30%+ and quickly ramps up to 40%+.
I reduced down to 17%, but this is not efficient. The problem is I didn’t start early enough to reduce top-slice marginal income, now I run out of time before early retirement and have to make huge contributions which has less income tax saving.
You have to look at your own personal situation to see what level of contribution makes sense - there’s no fixed rule. Just make sure you don’t run out of time like me. I did minimum pension payments (even asking company to reduce my standard contributin) and no voluntary contributions until I realised too late that I needed to change strategy.
To put in perspective, in my first year of voluntary contribution, I increased my pension pot by 50%. Next year another 50% on top of that. This year should be +33%. Next and last year should be +20%.
1e is a pretty sweet deal if you can maintain the portfolio allocation you would do in a taxable account. Return-wise I think the math is quite clear, you can compare the return on tax optimization (marginal income tax rate minus the expected marginal pension withdrawal tax rate) vs the extra costs of getting your stocks ran by 1e, but the 1e will likely come ahead in this one if your marginal income tax rate ~40%.
I think the most concrete risk for you is the probability of ending up with a different employer and a fund that does not allow 1e, you will be forced to move all your funds into that fund (being unemployed should be enough I think as you can just use a vested benefits account that allows all-stocks). So you should quantify this risk and its impact for your personal situation
There is also the risk of legislature changes (increases withdrawal tax rate, etc.) but I’ve no idea how to quantify that.
The biggest variable in the equation is changes to the way in which lump-sum withdrawals are taxed. The Federal Council wants to move to standard income tax rates, which would be a major change from the current tax regime (segregated taxation at a preferential rate).
To be safe, I recommend using the regime proposed by the Federal Council for tax calculations. That is, use the standard income tax rates to calculate possible tax savings by making voluntary contributions.
Another point not addressed (or maybe it’s obvious): how long your money would be locked in a pension fund (while you are employed) and how long in a pension system (considering possible transfer to a vested benefits foundation)?
can you share more details? Will the lump sum be just taxed as income? Doesn’t it basically cancel almost fully the tax advantage, as one would normally withdraw a very significant sum when they retire for example, for which the average tax rate would basically equal to the max marginal tax rate
It’s not the same progression as regular income (I think you need 10M to hit the top bucket). Also will depend on what cantons do as cantonal tax is often higher.
missed opportunity gains of investing. 10 years before retirement, pension fund buy-ins are probably a no-brainer. 20 years before retirement, the potential advantage of investing the cash and the compounding earnings most likely outweigh one-time tax gains.
Would you care to elaborate? E.g. what interest was returned to members in the last 5 years, what percentage is the employer contributing, how healthy is the pension fund (coverage ratio), etc.
You highlight something important. Also liquidity may / or may not be triggered earlier if leaving CH and/or buying RE before retirement age, but you’d better have a clear outlook of your retirement/withdrawal plan before you plan some buy-in, which requires a lot of anticipation.
The gist of it though is that the Federal Council wants to align taxation of lump-sum withdrawals from the 2nd and 3rd pillars with the taxation of pensions from the 2nd pillar.
Under the current tax regime, lump-sum withdrawals are taxed separately at a special, lower tax rate. Pensions, on the other hand, are subject to income tax.
Exactly how and what the final outcome will look like is yet to be seen. But I would certainly recommend making any future calculations using the assumption that withdrawals will be taxed as income (income tax rates). If it doesn’t happen, more power to you.
There will still be some tax benefit, depending on the situation, as assets would still be freed from wealth tax and dividends/interest from income tax while they are in the pillar 2/pillar 3a. But the tax benefit would be significantly lower.
I’m not sure if and how the proposal would effect withholding tax for withdrawals on account of leaving Switzerland.
Thanks for the explanation! According to the link@nabalzbhf posted, the federal tax on 1M withdrawal for a single would go from 2.3% to 4.3% - while it’s a huge increase in relative terms, feels like 2 percentage points it’s not too big of a difference in terms of tradeoffs of making voluntarily contributions when the marginal income tax rate is ~40% k. I guess it depends also if cantonal increases are coming but I did not understand that from the links
Just to clarify, they don’t want to tax a 1m withdrawal like 1m income, or even on top of other income. They want to tax the one-time withdrawal more similar to receiving 20 years of 50k pension. Not sure whether if or how it will include the income you’d get out of that 1m, we’ll see.
ZH for example uses the same rates as for income, but calculated separately from other income. And the withdrawal is divided by 20. So it’s still a preferential treatment, but not preferential marginal rates.
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
