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:
Will retire in CH ? (yes 95%+ likely)
Reinvesting the tax savings
Pillar 2 investment specificities / long term growth projections
Likely other elements I missed.
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)
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.
“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.
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).
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?
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.
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.
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).
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.