Accepted. I thought you meant this in context of pension system. Which I am discovering more and more to be ‘healthy’ because of hidden cross subsidies.
Based on what I have learnt so far. Following is my understanding
AHV is there to allow minimum income for people irrespective of what they might have earned during their lifetime. There is some sort of variation but there is a cap on how much one can get.
3a is completely independent and helps people who have higher income. Reason is that only people with higher income have money to invest in 3a.
2nd pillar is kind of mixed bag. Traditional systems were build on defined benefits schemes where employer’s funds were funding the retirement of employees. The system worked well when life expectancy was low and demographics were favourable. Now things have changed and many funds are defined contribution schemes and depend heavily on their configuration of retirees vs contributing members.
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Talking specifically about 2nd pillar. There is a very big variation between funds. Some provide very good interest, some don’t. Some have high conversion (blended) rate, some don’t. Some offer 1e, some don’t.
But if we ignore all the differences, following is always true
- voluntary contributions to any 2nd pillar mainly helps richer people because only high income earners have money to voluntary contribute (benefit being tax savings)
- Marginal income tax % at time of contribution are generally higher than lumpsum tax at time of withdrawal. This again is more probable for higher earners.
- extra mandatory contributions partially support the regulated conversion rate for mandatory contributions. It is not clear what’s the actual impact but I think it depends on ratio of Mandatory pot vs extra mandatory pot at the fund level. I would see this as kind of a payback/tax/redistribution
- Even if there is some sort of support from Extra mandatory to mandatory, what matters in the end is annual interest. Because irrespective of what cross financing is happening, once the interest is credited , then it’s done
- During retirement phase, the decision to withdraw as lumpsum vs annuity would depend on what exactly is blended rate at that time. But no one is forced to take annuity if lumpsum is better
I understand that 1e is easy to understand and it looks better as it is more or less similar to 3a. But it also has it’s disadvantages for an individual because all risk moves to the individual. Most people don’t know how to invest even if they think they do. It also has this problem of transferability as it’s not standard yet. Thus changing employers during bear market can be extremely painful unless laws are changed
This is why rather than looking at fund configuration & offers (as it depends on where you work) , I focus mainly on following to decide if voluntary contribution makes sense or not for me
- Guaranteed interest rate if any . Some funds offer up to 3.5% guarantee , some offer 1.25%
- Historical credit interest rates & coverage ratio of the fund
- Expected returns (in case of 1e offering)
- Estimated lump sum rate at time of withdrawal (I always assume that I will withdraw the capital and won’t take annuity. This is just to keep things simple)
- Marginal income tax rate at time of contribution
- What is my estimated return if I don’t add money to pension system and invest personally after taxes
For a country which is built with direct democracy, is known for its financial system and highly educated citizens, I remain confident that whatever happens in future will not be bad. It might be a bit better for people with lower income and perhaps less better for people with higher income. But in the end if I end up on the side with person with higher income and higher wealth, I will be fine anyhow 
P.S -: I believe pension money is meant for funding last 20-25 years of our life. And this will always be the case. So I don’t count on getting it to fund 40 years of my life. If life expectancy increases, the retirement age will increase too.
P.S -: personally I like 1e system as it brings a balanced approach where base plan takes care of redistribution and 1e is personal.
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More like retired at 62 and died at 77. But yeah in same lines
My usual hyperbole man!
Not really, as it’s fully funded by design. Defined benefit vs. defined contribution is not generational, it transfers risk from employer to the insured. The main challenge to either is long periods of low interests and returns in general, plus life expectancy. That’s why funds struggle to keep up the required average returns with their asset allocation.
But I’m with you on the holistic approach. It’s easy to single out and criticize individual pillars or regulations, but overall it’s a very balanced system with some benefits for everybody.
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Most importantly, your force or incentivize people to save for retirement.
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Not really. At least it didn’t happen in the last 40 years in the 2nd pillar.
And it didn’t happen in the last 77 years in the 1st pillar - and apparently won’t happen there in the near future either.
Which partly explains the predicament we are in.
The question is why not.
Because large parts of the population has signed up for a relaxed retirement. Even early retirement, they just don’t know it yet.
For the initial question, I try to stick to 30% pension fund, 70% taxable. It becomes somewhat interchangeable once you got access to VB and/or 1e, though.
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Now I wonder if I’m putting too much into the pension fund. At first, I figured:
- Work out how many years you have before retirement and how many after and simply put taxable and pension in proportion to this
- Then I thought: maybe I need more in earlier years when I’m hopefully more active, versus later on in life, where my only expenses are rocking chairs to sit on while I shout at kids on my lawn
- Then I thought: wait, I forgot to count that I have AHV income at retirement age, so that flips it even more to taxable.
- Plus any amount in taxable will carry over into your pension years, so if in doubt, it would be more conservative to keep it tax taxable.
- And then I remembered there are also options to take pillar 3a out 5 years in advance
- And you use some to pay off mortgage
- The last 2 favour paying more into the PF to the extent that you have that flexibility to withdraw again
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Well, if you have a shorter time horizon and can actually invest the full pension in VB as you like, I see no reason to not max out the buy-ins while you still can.
Assuming, of course you still benefit from tax deductions and got enough in taxable or other income to cover your expenses till you can cash it out.
My 30% does not include VB, I got more then 2 decades in front of me, and eventually all buy-in potential is used-up, so it seems to be quite different parameters.
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If I manage to make it to 2028 and follow my current plan, my pension assets pillar2+3a will be about 1.4x my taxable assets with the possibility to drop to 85% with mortgage pay-off.
I guess this can still make sense. Plus I have to factor the real risk that I burn-out/bore-out before then, but I hope to last at least 1 more year.
EDIT: to lock up the additional payments for 10 years (the earliest I would likely be able to withdraw for mortgage purposes), I calculated I would get an additional 5% annual rate of return on the amounts I contribute. So then I need to decide if the lack of flexibility for 10 years is worth it.
Because no big party wants to burn their fingers and lose voters by actively asking to increase retirement age (last time it was a young party).
And when the population has a say through voting, they don’t want to work longer than the people before them..
This may be changing in a few years, when all baby-boomers are retired, so they wouldn’t be affected anymore and can therefore vote for an increase of the retirement age.
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I maxed out my pillar 2a through massive volunteer contribution over the past 5 years. Half my net worth in pillar 2a today. I would do more if I could to reduce taxes, everything taxable above 175k in fact. That money is protected and my pension plan is providing a good return considering that. This strategy is especially favorable close to retirement, reducing risk, tax
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Why not contribute even more than over 175k, unless you are saving it for future years? Even down to 70k-80k can still be a net positive depending on your canton.
I’ve been doing the same and will push my taxable down to around 70k. I wish I’d started sooner as not only would I have been able to spread the benefit and reduce higher marginal tax, I’m running out of time to use up my pension allowance as I want to retire soon but underfunded my pension throughout my working life.
Ideally, I’d have liked to retire this year or next year, but I will instead target 2027 or 2028 to give me time/capacity to fill my pension gap.
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The reason is simply that I knew I would out of room for contribution to my pillar 2a, so then it made sense to optimize for where marginal tax rate starts to decrease - that maximizes taxes saved. That happens to be around 175k
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I’m not sure what you are trying to say, but I guess it is that you only have a ‘small’ amount of voluntary capacity to make and a ‘large’ amount of income/years to offset so it is better to spread the available capacity over the many years/top slice income to get most marginal tax benefit?
I have the opposite problem of: ‘large’ amount of voluntary capacity to use up and not so much income/years to use it up in.
Just make sure your tax savings are well above the lump-sum tax rate for the most likely canton you’ll be living in. (It doesn’t make sense to save just a few percents, I’d target 10-20% savings)
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Indeed what I meant.
Understand your case, but be sure to have enough free (taxable) investment to bridge until you can access the pillar 2a. I only built my 2a once I was FI in taxable assests actually
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