How to calculate Investing vs Pillar 2 buybacks?

Hi,
I recently moved to CH and my partner and I have around CHF 300K pillar 2 buyback available between us two. On the other hand, we have CHF 100K to invest right now from a past real estate sale.

What would be Mustachians’ best calculation method to know the best path & mix between Pillar 2 buybacks and pure investment (e.g. ETFs)

Some elements I think we need to consider:

  1. Age (30s)
  2. Wealth Tax
  3. Will retire in CH ? (yes 95%+ likely)
  4. Reinvesting the tax savings
  5. Pillar 2 investment specificities / long term growth projections
  6. Likely other elements I missed.
  7. Portfolio - tolerance for stocks vs bonds (ok with 80%+ stocks, up to 100% at this point in time)

Is there some kind of calculator or model I could build to understand which option is best? Between full buy-back now, or spread over time, or not in full, or not at all… (100% invest myself now, put in pillar 2 when closer to 55+ age)

Thanks in advance for your help :slight_smile:

What’s extremely important is your marginal tax rate. This will define the rate of return of your second pillar investment (in the form of tax advantages).

I made some calculations on my blog: Should You Contribute To Your Second Pillar In 2021? - The Poor Swiss

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An alternative for at least part of this will be purchase into 3a. This should become possible relatively soon and will allow tax-deductible investment into index funds with VIAC and co.

It is expected to be limited to 34k per person every 5 years (and only up to the age-dependent maximum of 3a assets according to a BSV table). UBS already has a calculator for this: Potential 3a payment | UBS Switzerland

You could invest the money with a regular broker now and transfer 2x34k every 5 years into 3a in addition to the usual 2x6.8k every year (until you hit the maximum). This would require selling the investments but immediate reinvestment in a similar strategy in 3a should keep the risk to a minimum.

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Getting a 25% yield in the 1st year and then 1-2%/year for the next 30 years compared to getting 6%/year over the whole period. Isn’t the answer obvious? Or am I forgetting something?

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First thing is to figure out how good your 2nd pillar is.

There are two different ways how 2nd pillar foundation uses your contribution. I only know how it is called in German, sorry, maybe somebody can provide a link with a explanation in English

https://www.123-pensionierung.ch/de/pensionskasse/leistungsprimat-beitragsprimat/

“Leistungsprimat” works like an insurance, " Beitragsprimat" works like a saving account with an insurance component. I don’t know if “Leistungsprimat” is still used at all, but: caveat emptor.

There is also a question how good your 2nd pillar foundation in crediting you what they earn with your money. Here was a relevant discussion:

So: read yearly reports.

Once both questions are answered, probably the easiest way to consider 2nd pillar is to count it as bonds in your asset allocation. A good 2nd pillar will give you 2% or more long term with a guaranteed minimum of 1% p.a. or so (not negative for sure). Cash and savings accounts will give you slightly above 0 if you optimize or might incur negative interest rate. Taking out cash from 2nd pillar is not so easy, but you can control how much you contribute if you start from 0. You get tax savings when you pay in, you pay no wealth tax on money in 2nd pillar, you get taxed if you take money out, so the tax advantage probably levels out somehow or at least is complicated to calculate. So, my advice: simply count it as bonds.

And definitely not buy back everything at once, you will kill your tax deduction advantage by strongly driving down your income and your marginal rate. For a couple, I would suggest not putting more than 30k per year in 2nd and 3rd pillar (which you should invest in stock funds or not use at all) combined.

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Thank you Jay - I didn’t mention 3rd pillar as It looks to me like 3a is must-do - we will max out 3a every year for both my partner and myself, already done for this year.

I wish it was this simple :slight_smile: I assume there are more elements to take into consideration…

It is definitely good advice to understand the details of your pension fund. However, you have to keep in mind that you may switch jobs at some point, in which case you may end up at a worse pension fund (always check pension fund details before signing an employment contract). And you’re officially forced to transfer your whole pillar 2 to the new pension fund (unless the new pension fund/plan imposes a lower limit).

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There are also advantages and disadvantages, and the marginal tax rate is probably the most important parameter.

Thank you @thepoorswiss . I might be misunderstanding your article and how pillar 2 work but you seem to calculate immediate return during the years of investment, and not taking into consideration what happens after retirement. Wouldn’t pillar 2 transform into a state pension for lifetime?

A real Boglian will try to take it out and manage own portfolio him/herself.

As @Dr.PI said, I am counting on taking out my second pillar as a lump sum. If you don’t, you then have to take into account the conversion rate of your second pillar. But since you are more than 30 years (likely more) away from retirement, it’s impossible to know how much conversion rate you will get at this time.

Thank you @thepoorswiss and @Dr.PI - In that case it makes no sense to go for buybacks unless I’m looking to get immediate tax returns, which as I understand are not worth it until very much later (essentially a few years before retirement) - I would still like to model it using all variables (marginal tax rate, wealth tax, etc.) but it won’t be a piece of cake.

tldr;
make some rough excel-calculation. and don’t hurry, because the pillar2 buybacks dont expire or something.

the fundamental points are:

  • buybacks can be deducted from income tax once, hence are most valuable at times where your marginal tax rate (e.g. gross income) is largest. that is typically towards the end of your carreer. Mind restrictions on how close to retirement you can do buybacks.
  • you pay taxes once for withdrawing money from the pillar2 system, slightly offsetting the gains of buybacks
  • money in the pillar 2 system has inherently low compounding interest
  • money in the pillar 2 system is exempt from wealth tax. however, the average wealth tax is far lower than average returns from passive indexing, hence it can be considered as a drawback
  • if you plan to convert your 2nd pillar into an annuity, try different assumptions on lifetime etc. until this happens, the Umwandlungssatz is likely to further decrease due to demographics
  • pillar 2 comes with various insurances (widow rent, children rent, work inability insurance,…) that all cost (your) money and are not transparently billed. You need to check in detail with your ppension fund to what extent your pillar 2 capital (other than you insured salary) contributes to those insurances

overall, i am not a big fan of the pillar2 system and believe the money is better kept in a private account.

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Or before planning to start to have kids…

Anyway, I have always understood that the best time to do a buyback is 5 years before retirement age

Because for most people (at least in the past), that is the point where the income is the biggest, kids are out of the house (so no tax reduction there).

And you loose the least time out of the equity market (equities can’t catch the return of the tax break anymore)

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As mentioned, it’s also a decent alternative to (negative) bonds for people who don’t want to be 100% invested in stock. Esp. with cash in bank account becoming more and more cumbersome (limits gets lower every year).

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There was a lot of answer about fiscal optimization in the thread.
You have also to think which allocation of asset you feel confident with. If for example you do not feel comfortable to put all your asset in stock but you would like to keep half of it in bonds and cash, then it may well be better to buy back some pillar 2 instead than piling up cash.

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