Since my arrival in CH in 2020, I have always chosen to contribute the minimal LPP amount proposed by my company (3%), rather than the mid (6%) or max (9%).
This for 2 reasons :
The employer contribution stays at 11% anyway
I’d rather keep the cash and invest in on the market at ~7.5%/year.
But looking at it closely, it might not be the right calculation…
Everything additional I put on my LPP will generate an immediate tax benefit of my marginal rate (~35%) PLUS the performance of my LPP that has been ~2.5/3% on average, and can never be less than 1.25%.
Doing a quick Excel calculation, the scenario in which I keep the cash and invest in stocks scenario is positive only after 20 years, considering that we keep getting an average 7.5% on stock in the future.
Therefore, if my goal is to leave CH in less than 20 years, and FIRE abroad, I should simply max out my LPP. It provided better returns, and protect me against any downside.
According to this VZ article, the 2nd best pension fund had a 3-year-average of 3.5% in 2025. The one my employer selected only managed 1%. You might be overestimating your pension fund performance (do they disclose their 5 or 10 year average?).
Did you take into account the tax due when taking the pension money out? I don’t think staggered withdrawal is possible when moving abroad, but I might be wrong.
Check what part of your pension fund contributions actually makes it into your pension equity. Last time I checked with my pension I was shocked. It’s like a fund with a 30% issuing fee.
Can’t say much more without seeing your calculations.
If you FIRE in an European country, you won’t be able to withdraw your 2nd pillar until retirement age. Also, in 20 years, you may have kids and it won’t be easy to settle in a far away country as it may also depend of your partner opinion at that time.
Lastly rules may changed and you may not able to do a withdrwaw at the time of retirement. Swiss may only allow annuities with a lower conversion rate. If a crisis happen they may lower it to 3,5-4% and your saving will have been lock.
It may be safer to diversify and do not lock more savings than necessary. Are you already maxing out your 3rd pillar or diversifying your equity position on a broker ?
Do you know if the risk premium is included in your contribution or is it pay fuly by your employer ?
Is it alsi good to check if the lpp fund is healthy. % of fund coverage ? TER ? Statistics of worker vs retired ?
I guess lots of people, particularly younger ones avoid 2nd pillar, citing low returns, maybe quote some blogger or refer to their superb own investing strategy.
However, 35% tax savings and 2.5% interest are an attractive return for me. Depending on your withdrawal tax, that’s some 6% average over 10 years, 5% over 15 and 4% over 20 years. Pretty neat for a relatively safe investment.
Question is, how confident are you about those assumed 7.5% in your own account, in CHF and after tax? If you get those, of course you have higher returns eventually, but it comes at a risk.
And once you are able to move 2nd pillar to VB, you could achieve similar returns with your own 2nd pillar at your own risk.
To me, it comes down to your overall plans. And, as FunnyDjo mentioned, carefully check taxation abroad if that’s on the table.
Personally, I both added to pillar 2 as well as own investments. If you’re confident enough in your stock market returns, you might as well do minimum contributions now, and do buy-ins a few years later (assuming you still have a good pension fund and high tax rate).
The article is about the years 2022, 2023 and 2024. Total return of the S&P 500 was around 27% during that time in CHF terms, or about 8.4% p.a. However, picking the S&P 500 as a benchmark to judge whether they did a good job is not fair for a Swiss pension fund.
A more reasonable benchmark for the stock portion would be an All-World index, which returned 16.4% over these 3 years, or about 5.2% p.a.
If you then consider that a pension fund can’t be fully invested in stocks, the 3.5% are not unreasonable. However, I think the main issue is that there are a lot of pension funds that are much worse.
What kind of s*** pension fund is that? In general all your contributions go to your pension equity, except for the risk part, which shouldn’t change based on your contribution, but rather be a fixed %. That means OP is paying that amount anyway no matter whether he contributes 3% or 9%.
The simplified calculation is fairly simple. 100 CHF of Pre-Tax Income translate into
2nd Pillar: 100 * (1 - Withdrawal Tax Rate) * (1 + Expected 2nd Pillar Interest) ^ Number of Years
Free Investments: 100 * (1 - Current Marginal Imcpme Tax Rate) * (1 + Expected Post Dividend Tax Return - Wealth Tax ) ^ Number of Years
Until one year ago, you could assume that your expected Withdrawal Tax Rate was in the range of 10-12% only. Meaning that it nearly always made sense, to invest into your Second Pillar. This provided you already maxed out third pillar and Our Marginal Income Tax Rate was in the range of 30%+ (which is the case with a pre tax income of 100-120+ already).
The Problem now is that we don‘t know how the Expected Withdrawal Tax Rate will change. Major political uncertainity and we may end up in a situation where that tax was even higher than the current Marginal Tax Rate. Therefore, i no longer recommend to invest into the second pillar. This is rather remarkeable as I started to invest into it from age 26 onwards already and as I invested a double digit number of years.
You mix things up here… 30% may be risk premium and admin cost, but these risk premia only apply zo your mandatpry deductions. If you invest into it, 100% will go against your your Personal savings. Thats the law.
Note that these 3.5% isn’t the PF’s return, but the interest. Maybe a CHF-heavy portfolio with lots of bonds has a +10% return when stocks only do +20%.
However, in bad years the PF might have -10% vs. -20% in a stock only portfolio. And yet you get your 2-3% return that year.
Should be clear that on average, stocks only do better, especially in a low interest world.
Why is it too much? You get a fairly advanced invalidity and death coverage for it. It reflects the cost of the insured risk, no-one makes money on this as such.
These shouldn’t be mixed up. A while ago was some outcry about management fees, and if I remember correctly they ranged in the pretty low single digits.
Risk can depend a lot on industry or fund, from close to 0 to maybe 4%. And then again on your plan whether the employer takes on the majority of it or you pay some 2% or so yourself that don’t add to your own balance.
But that shouldn’t change with voluntary contributions. Management fees on the other hand lower the fund’s return, and hence the interest they can pay out.
Correct, risk and admin premia are a percemtage of the insured salary. If You choose a higher savibgs perxentage, the insjred salary does not change. Meaning no additional risk and admin premia, all additional invest to 100% goes in your Personal savings pot.
By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, tu confirmes avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
