How much to put into pension fund vs general investment account?

1

How much do you think should be put into the pension fund versus kept outside? Let’s assume that the return you get on the pension fund is similar to what you would get investing outside it (big assumption, I know). Let’s also assume you will get pension only as lump sum (so we take away the annuity vs lump sum factor).

So factors would be:

  • Lack of flexibility with pension being locked up with exceptions for buying own home etc.
  • Tax deduction on contribution
  • But tax payment on withdrawal
  • Wealth tax reduction and tax free receipt of dividends/interest within the PF
  • Anything else I missed?

I worked out in my case that so long as the funds withdrawn are not more than 4x what was put in, the wealth tax will be less than the tax deduction benefit. And if it is more, well, that’s a nice problem to have.

So then I think the main factor is flexibility. Supposing you have enough outside the fund to last you until retirement when you can withdraw the pension amounts, then you would be OK.

But then maybe this doesn’t offer much flexibility. And what if you want to spend most of your money before you hit retirement age?

How are you thinking about this?

2

Personally and cognizant I don’t plan or want to live in CH forever, or buy a property here, I’ve come to the conclusion that it makes sense to put the minimum required and funnel cash to the brokerage account.

Still unsure about the 3A, but considering sequence of returns risk together with uncertainty in the job market I’ve also decided not to put anything in the 3A either.

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3

Does this decision change depending on if you live in CH or not? I guess if you leave, you can take the pension with you in some cases. Maybe this could be more favourable in some situations? i.e. you get the tax benefit but don’t have the lock-in.

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4

Yes! There’s the specificities of taxation as a lump sum (which are grey in Greece’s case which would be my target to move to, taxation of foreign annuities looks a lot better but that’s moving the 2nd pillar at VB and waiting to turn 65…), moving to an EU country or not (2nd pillar is locked in this case), considering buying a house or not etc.

If I was hell-bent on staying in CH AND not pursuing some sort of coastFIRE I think I’d actually max the 3A in every opportunity and also buy into the 2nd pillar because it sounds like it makes sense :slight_smile:

5

I have the same issue.
Pillar 2 and pillar 3 are around 70% of my wealth. I did a lot of pillar 2 buybacks.
If I leave Switzerland, I would still need to wait 3 years bc of buybacks.

6

I guess it depends how much flexibility you have. For large withdrawals, I imagine it would be worthwhile de-camping to a country which doesn’t tax the withdrawal before moving again to your final country.

7

I think flexibility is overrated. If you invest in stocks , you are also not completely flexible as money needs to stay there long term 8-10 years.

In my view what matters most is the total expected returns post taxes and the cash flows when you need it.

One can argue that tax situation for lump sum can change. But tax situation for taxable account can also change.

I have seen many people in my life who say “I don’t want to add more money in pension fund because I want flexibility and I can invest it and get better returns”

What actually happens? -: savings account with 0.15% interest for next 20 years :wink:

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8

I disagree with this. You can get locked in if prices fall, but if prices 10x, then you can simply sell and take the cash.

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9

Sure, some people can and would do that, but that’s faff for me, I’ve moved enough and enough times and frankly hate it!

So while you’re right re big withdrawals I don’t personally want to ever have to consider that, so minimising is my choice.

10

Yeah but how do you know that at the time of investing?

As a general rule, equity investments are for long term. Everything else is luck

11

But anyway, the flexibility means you can get at the cash anytime e.g. if you have an emergency, you can raise the cash and use the funds.

Or if you are diagnosed with a deadly disease and have only 5 years left to live and you want to take that money and do something with it in your remaining 5 years.

12

That’s true.
I think pension fund is of course less flexible. But I think if you have enough money outside pension fund, you will be fine nevertheless

Normally what I do is I try to invest what I can and how much my risk tolerance allows. Rest I know I will not put in stocks anyways and will end up leaving money in cash , so I try to dump it into pension funds & atleast enjoy the tax deduction and whatever return I will get inside pension system

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13

I don’t, we’re just talking about different aspects of flexibility. Equity positions in a broker can be moved to another broker regardless of their market performance at the time while pensions funds are locked by default. That’s a Yuge difference in terms of flexibility!

Have you tried moving pension contributions between countries? I tried to move my UK pension to Greece and it was basically impossible because the provision was that you need to find the exact same pension scheme in the other country, which obviously didn’t exist, hence there are a few thousand £ in a UK pension provider which’ll give me tens of £ per month in 25 years’ time, ie it’s about as useful as the proverbial tits on a boar :slight_smile:

I didn’t even bother trying to move the Ponzi…errrr Greek public pension from Greece to CH.

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14

Well. I understand your comments. I just think that lot of constraints we talk about are not always applicable to everyone

For example -: I don’t intend to move my pension anywhere outside CH. So for me the money will not be locked as I can get it when I retire.

But for someone else if the plan is to leave CH, then yeah maybe there are other options

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15

Just to clarify, by locked, I mean unable to access before you retire. I think the expectation is that you get access to your money at retirement age.

I discovered today that through a special ‘quirk’ specific to my situation, if I work an additional year more than I had planned to, I have the opportunity to voluntarily contribute up to 250k into the pillar 2 pension fund. But I wasn’t sure if putting more money in made sense or not.

16

Depending on how many years left before withdrawal this could be a good tax saving opportunity.

17

I would basically stop working in the year I make the contribution and transfer the pension into a vested benefit account where it can grow (or shrink) with equity market returns.

I’d then withdraw at retirement age some 15 years later.

18

I think we need to evaluate risk-adjusted returns, in which case, the lower the official SNB rate goes, the better the deal we are likely to have with the 2nd pillar. 0% interest on CHF in a bank account is already an amazing deal when CH government bonds have a negative yield. whatever % returns in a sufficiently covered pension fund would be an even better deal to me if rates go negative again.

That being said, I don’t see a need for bonds in my allocation currently so I personally would rather take everything I can out of the 2nd pillar if/when I can.

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19

They’d put it in a vested benefits account, so freedom of investment with low fees.

Personally I think it’s a no brainer as long as the marginal tax rate is significantly higher than the lump sum tax rate in the canton where you’ll most likely retire.

20

If you are married (even in a stable situation for now) all these buybacks are at risk to be cut in half to your spouse in case of divorce.

It won’t be the case if you can make private investments on your brokerage account if you have signed a prenup.

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