Dilemna with my 3a Pillar

[Julianek]

Hello everybody, I am currently struggling because i don’t know what to do with my 3a.
Some context :
-I arrived in Switzerland in February 2016. A little bit later, a seller recommended by a friend contacted me and proposed me a life insurance as a 3a pillar. At the time, i did not know what where the different possibilities for a 3a ( for instance that i could have invested in funds instead), and i thought it was always a good idea to save money, so i signed.I think I have made a mistake. Furthermore, at that time i agreed to pay the maximum contribution possible per year (6768 CHF, or 564 CHF per month).

-I would add that as a foreigner ( I am French), and earning less that 120k CHF per year, i am subjected to the withholding tax. So I am not even sure that my 3rd pillar will make me save taxes this year (and possibly in the following years too).

-In between, with my wife we decided that in around ten years we will retire and go living in her home country (Poland).
This make me tickle regarding my insurance because i fully expect that i will be harshly penalized when i cash out my 3rd pillar after only ten years.

Finally, today i read the assurance policy once again, and i realized that at retirement age, the guaranteed capital is less than my total contributions. I find it a big price to pay for money blocked for 35 years.

So I am seriously considering stopping to pay the insurance premiums, and renounce to the sunk costs ( the seven months I already paid this year) and instead invest this money myself. That would be a loss of around 4512 CHF. But I fear to lose much more if I stay in this contract.

What would you do? Is this a good idea to renounce to this life insurance?
Thanks in advance,

Julianek.

[MiriKi]

Hi @Julianek,
There was a recent post about the exact same problem, see here: forum.mustachianpost.com/t/bad-investment-choices-let-others-learn-from-your-fails-mistakes/

I don’t have an (educated) opinion about whether you should void your contract and take the loss.

However, rest assured that you can claim back the tax corresponding to the 6768 CHF (depending on your Canton, around 1200 CHF). You just need to fill in a form before March 2017 (the deadline is strict, my experience comes from Kanton Luzern).

[Julianek]

Hi Miriki,

Thanks for your answer! I am sorry i missed that post, the issues are indeed almost identical.
It is good to know that i can claim the tax deduction, i will definitely look into that!
However, nugget’s post makes me think that Life insurance in a third pillar is definitely not a good idea: Let us see if it is worth to bite the sour pill and void the contract.

[nugget]

Hey Julianek,
thanks for sharing this!
My opinion is clearly against life insurances as you could read in my other posts, and based on my personal findings i strongly speak against life insurances as a form of saving money. you have to separate the saving money part from the insurance part, as they are pretty different but sold as one unit. And maybe, you actually want the insurance part of it, that depends on your and your family’s situation. THings like death insurance.

There are three points where i judge from that your advisor is very bad:

1. Taxes: the worst thing is to not have multiple 3a accounts, but put everything in one contract. Your advisor would have earnen no less if he gave you 5 separate contracts with one fifth of the sum each, granting you serious tax savingswhen recieving the stash… see Mr.RIP’s tax tables for withdrawing money.

2. Investing: putting all money in one life insurance is the opposite of good diversification.

3. Mobility & retirement: supposing you informed him about your plans and that in 10 years you are far away from the age of 65, it is not very appealing to be foced to pay a low-return savings plan that locks away your money until 65.

I am personally at the same point. only that i already paid 12kCHF from which i will get back half in the next months. the rest is all the fees that will applay all during the run time of the contract. you see this shady piece of business… still, with this loss, i will make much more money at 65 when putting the remaining money into an ETF portfolio now.

So my advice, have a very good look into the contract, check what it offers besides stash buildup. if you think you need any of it, educate yourself on the according market. make a thorough excel calculation (id gladly help you) and decide based on an educated mind! and dont’t rush decisions, you have time until the next premium is due to make up your mind.

consider that 3a per se must not be that bad - there is other stuff than life insurances that do not have horrific fees when leaving switzerland and taking the funds with you. check out the Swisscanto and VZ solutions discussed here and here

[nugget]

by the way, i had to actively ask the company to get me the numbers on what fraction of the premium goes into the stash, what is insurance, what is cost. this is not neccessarily contained in the contract.

[Julianek]

Thanks everybody for all of your inputs!
First of all, i have found the document i need to fill to claim my refund of Quellensteuer (the 2016 version should come soon) https://www.steueramt.zh.ch/dam/finanzdirektion/ksta/quellensteuer/fuer_arbeitgebende_arbeitnehmende/quellensteuer_formulare_steuerpflichtige/antrag_neuveranlagung_v3_2016.pdf.spooler.download.1457615626486.pdf/antrag_neuveranlagung_v3_2016.pdf

@nugget :
Thanks for your advices. I have looked once again at my contract, it is made of three parts (plus fees) :
-the stash building part,
-the death insurance part
-an insurance that will pay me a rent if i have a accident preventing me of earning money. Normally this is already in the first pillar, but I need to contribute at least three years to the first pillar to benefit from it, which is not the case yet.

The more I look into it, the less the death insurance part looks appealing : the amount my family would receive in the case i would die is almost equal to my calculated net worth in 1.5 years. So I just have to not die in the next 18 months and my family would receive this amount anyway.

Before finalizing my decision, i will contact my assurance to have an estimation of how much i can expect if i live Switzerland in 10 years. I don’t expect much, so this should be the “coup de grace”.

I am quite mad at myself because of such a rookie mistake. I’ve been investing for two years already, and I had not informed myself well enough on this 3rd pillar.

Anyway, i will reconsider these 3a investments when my brain will rest. From why I understand, if i don’t go in a third pillar (because i really don’t like having my money blocked), i need to find an investment with a better return that the compounded tax returns that i would have in the next ten years. After having been on a simulator website, with my salary i can expect around 1000CHF tax return per year. That means a total of around 10 kCHF that would have been compounded on an investment support. Well obviously i need to look around to find if better alternatives exist…

I’ll keep you updated about how I will handle this insurance contract!

[Julianek]

Ok so I made a simulation for the pro and cons of having a 3a pillar (not a life insurance) in my conditions.
Here are the hypothesis :
-My 3rd pillar allows me to have a tax refund of 1000 CHF every year.

Scenario A :
I don’t have a 3rd pillar. Every year, i invest 6768 CHF with a yearly return X%. The goal is to find X for which it starts to be advantageous to not have a third pillar.

Scenario B :
I have a third pillar. Each year i invest 6768 CHF in a ETF, for instance the one MP is talking about in one of his article (Swisscanto LPP 3 Index 45 R). The factsheet says that it performed 10% lately, but it also had negative years in the past. With conservatism i will keep a overall yearly return of 5%. It gives me after 10 years a total of 96151 CHF on my pillar.
But i have also received yearly 1000CHF, which I invest at X percent (same as in scenario A).

The result is that a third pillar is better if X is less than 7,65%. At this level the stash in both cases is around 110400 CHF.
If I can find better returns than 7.65%, I don’t need a 3a pillar. Plus i don’t have my money blocked on one or several accounts.

I will keep investigating …

[Julianek]

Some news on this issue :
I Spent the whole week in an email conversation with the client support of the life insurance.
-First email from them : “Don’t worry, if you stop paying in ten years, the value of the contract will already be in the green and you will have won money”. I Insist to have a clear calculation.
-Second email : “Ok, so you will have paid XXX in premium, invested at a 3.5% yield in ten years + YYY in taxes reductions = you will have made this much money”, which of course, is largely positive. But I insist to know the penalties of stopping paying in ten years.
-Third email "Ok you are right, there is indeed a penalty of around CHF 20’000 if you stop your contract in ten years.

There is no need to say that with this lack of transparency and the huge penalties, i stopped immediately to pay the premiums.
Even if the contract had other features (like death an invalidity insurances), the lack of transparency alone made me fly away.

[nugget]

interesting.
my current situation is that I know from the capital stashing part, i want to quit it. however i want to see that i can replace the death and work-unability insurences at somewhat similar expenses with other companies. then i have no reason left to continue.

BTW, how did you get 3.5%???

[Julianek]

Well, for the death insurance, i see it that way :
I don’t know for you but in case i would die, my family would receive an amount of about 180k CHF. I made the calculus that with my current saving rate and net worth, i should have at least 180k CHF total net worth in one year and a half.
The goal of a death insurance is to make sure that your family will not have financial difficulties in case you die. If I die after 18 months, my net worth would go to my family anyway. So they should not have any problem. So this transform the problem into the following : “Let’s not die in the next 18 months”, which is very different from “let’s not die in the next 35 years.” That is a risk i am willing to take.

Regarding the Disability/Work unability insurance, this is more complicated. I know that the first pillar will pay a monthly amount up to 2kCHF depending on how much is the disability to work. But appart from that i don’t find any other insurance that would make supplemental payments (except Life insurances).

Finally, the 3.5% was a “conservative” estimate of how the stash in the life insurance would perform. This estimate was made by the advisor, so there is no need to say that it is very optimistic, and that he never saw a bear market in the last few years…

[nugget]

@death insurance:
of couse we first need to find out our needs. however when i compared the one from the life insurance, i found it much worse than what i find on the market. that was my only point - and i see that you approach this completely different, using your stash for it.

@work unability:
my approach is to say “my current life insurance pays for itself chf 3000/y in case i get disabled” => “how much does the same CHF 3000/year cost on the market?” and i again find better prices in the latter.

therefore i conclude that for all 3 parts (stash buildup, death insurace and work unability insurance) i can get much better solutions on the market, and therefore i am going to cancel this insurance.

@3.5%: you should sit down and check calculate this. I have guaranteed 1.2% in my contract from 2013. this difference is VERY suspicious to me. If this was true, every swiss person would rush to get such a life insurance.

[Grog]

Hi everyone.
Please remember that you have usually a 2nd pillar that in case of death will be giveb to your wife/children. Please look up the condition in my case is only for a wife and I’m not married (but have a child withy partner). So don’t forget this money that usually will reduce the need of a death insurance.
On top of that you can do a Pillar3b risk death insurance which is a very transparent form: annual premium of around 180 chf, that you can take away from income for tax, thus recuperating ~30 bucks (pillar 3b). and around 200’000 chf that go to your loved one in case of death. I have the Generali compact prevista works very well

[Mobius]

@Grog: those numbers look much better than the ones I have currently: I pay 350.-/year for a 150’000.- payout in the form of a pillar 3b with Helvetia. Looks like I need to shop around (starting with Generali).

[nugget]

did you miss a zero there? otherwise, where can i get these 12% p.a. contracts? want many of them!

[Grog]

I wabt to speciry that you can deduct 3b only in Canton fribourg and geneva

[S44144]

Hello @Julianek
I am in the same situation as you got fooled and subscribed for a 3a pillar with swisslife insurance. I would like to cancel this 3a pillar after 7 months is it possible ? You said you stopped paying premiums how ? What consequences ?

Thank you all for helping me out

[Julianek]

Hi @S44144,

What I did is simply stopping paying after 8 months (and I cancelled my LSV payment at my bank). The insurance company sent payment reminders during 3-4 months, and then finally they sent me a letter saying that since i was not paying anymore, my life insurance contract is null and worthless.

Needless to say, I lost all the premiums I had paid since the beginning (around 4k CHF). But if I had stayed in this contract, I would have lost a lot more in the long term.

[S44144]

Thank you so much !!! I will call tomorrow and tell them that I will keep you posted ! And if they don’t want I will stop paying too ! Thank you so much I finally see some lights I was so depressed about it

[hedgehog]

I’d suggest to send an explicit cancellation letter by registered mail to the insurance, not just stop paying, or they might sue you for the last few months until the moment they decide to cancel - they’re still covering risk of your death until then so you owe them money theoretically.

Don’t expect to recover any money: “Rückkauf” value of your policy in first few years is likely to be zero. You got scammed plain and simple, but unfortunately it’s all legal in CH…

[S44144]

So I contacted the guy who sold me the contract and he sent me the cancellation paper that I sign and sent directly. He tried through 4 mails to change my mind but my decision was made.