IBKR Lombard Loan to contribute to 3rd and extra-mandatory 2nd pillar

Taxes
1

I’ve been thinking lately, and it seems like a good idea to get a margin loan from IBKR to contribute to my 3rd pillar and extra-mandatory 2nd pillar.

Some information:

  1. I have a finpension account with a 99% equity exposure for my 3rd pillar.
  2. The maximum I am allowed to contribute to the extra-mandatory part of my second pillar is around 220k CHF, and this year I can contribute a maximum of 27k CHF (as per an official letter from my employer regarding the 2nd pillar). My second pillar pays 1.5% interest per year.
  3. This year, I will pay a total of 23.5k CHF in taxes (including city, cantonal, and federal taxes) on a taxable salary of 111.5k CHF (considering wealth tax as well). If I had contributed 27k CHF last year as a voluntary purchase of the 2nd pillar, my taxable salary could have been 84.5k CHF, resulting in total taxes of around 17,950 CHF—about 5k CHF less than now.
  4. Even if I decide to take out a margin loan, my IBKR portfolio (following a Boglehead strategy) should suffice to avoid a margin call, even under extreme market conditions.
  5. IBKR currently charges a 2.7% interest rate on margin loans in CHF, which is tax-deductible.
  6. I may consider buying a house in 2-3 years, potentially withdrawing from both my 2nd and 3rd pillars (or not).

My plan is to not repay the margin loan until retirement or until there is a significant change in IBKR’s interest rates.

The scenario as I see it is:
Against me: A 2.7% interest rate.
With me: In the first year, I receive a “bonus” of 5k CHF that I could invest (e.g., in VT or something more conservative, like a 60:40 or 40:60 portfolio). Simultaneously, my 2nd pillar grows slowly (at 1.5% per year), progressively offsetting the 2.7% interest rate, since the 2nd pillar is compounding. So, we essentially need to outperform 2.7% - 1.5% = 1.2% in the first year. For the 3rd pillar, it’s even better, as both the tax savings and the amounts invested in finpension grow at a higher rate.

At some point, when I am closer to retirement, I could consider a repayment plan, either by myself, with a bank loan at a better interest rate, or by paying it all at once.

What arguments are there against this reasoning? I hope this stimulates a constructive discussion.

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2

I would not borrow to buy an investment with lower expected returns than the interests on the loan, hence, I wouldn’t do it for 2nd pillar buy-ins unless close to retirement (including FIRE, as vested benefits accounts can be invested more freely) or if my pension fund provided consistent good returns. Buying a home could count too but that would have to be an actual project and not just some potential opportunity in my book.

One thing to keep in mind is that you can’t use 2nd or 3rd pillar money to repay IBKR’s loan, hence, you have to count on your other assets to sustain a potential margin call in case your assets at IBKR loose value. To also keep in mind is that the terms and conditions of the margin loan can change at IBKR’s whims. Notably, some ETFs/stocks can no longer count as having 100% collateral value, up to no collateral value at all. IBKR may also ask for increased margin on short notice in times of financial uncertainty.

I would assess whether I want to invest on margin irrespective of 3a or 2nd pillar opportunities. If the answer is yes, then I’d consider those opportunities in no different way than I would had I the extra cash through other means.

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3

For the 2nd pillar scenario

I would like to see the calculations for a time period from now until retirement to understand if this plan has merit. I can do that but I assume you already did the math.

Can you share please?
Don’t forget to calculate the lump sum withdrawal tax as well.

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4

For 20 years a compond calculator says:
2nd pillar: 27k becomes 36,3k.
tax saved first year: 5k let’s say at a conservative 5% growth (40:60 portfolio?) rate becomes 13k.
We owe IBKR 27k@2,7% in 20 years gives a total of 14,3k + 27k principal.
Every year you spare a little bit from taxes (interest deduction and wealth tax reduction).

36,3k+13k (49,3k) > 14,3k + 27k (41,3k) → 8k diffference + little tax benefits every year. This is just for 2nd pillar and just for one year purchase. You could do additional purchase every year in addition to 3rd pillar on margin. Given all the necessary attentions, as the previous user stated.

5

I think you are missing lumpsum tax at withdrawal from 2nd pillar. Depending on cantons and timing of withdrawal , this can be 10-25%

In addition, you should also do some sensitivity analysis - what if interest rate increases by 2% at IBKR and 2nd pillar don’t follow.

Right?

Last point -: have you considered an alternate scenario where you don’t put anything in 2nd pillar. But invest the whole margin loan in IBKR (60-40). Most likely this will end up with higher value versus your current plan.

Note -: I am in general against taking margin to invest. It’s like Japanese carry trade and it can back fire big time. But if you are willing to go through it, think of other scenarios and try to understand the overall risk reward for this plan.

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6

If you decide to do it, don’t use the fund from the loan directly for the purchase into the second pillar. Send your money on a roundtrip or ideally buy into your second pillar first, then take on the loan. Your tax office could otherwise get the idea that this constitutes illegal tax avoidance.

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7

Doesn’t make sense to me. Your tax rate is not high enough to warrant this risky kind of investment.

If you have spare funds to invest, then invest that instead.

If you don’t, then I wouldn’t go into debt to invest in illiquid investments that you cannot afford.

IMO, this is a bad idea.

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8

You’re right, it could require active monitoring and decision making.

Regarding alternative scenarios, I’ve tried with some but came to the conclusion that we should only compare to scenarios with the same risk factors (ie the proposed one consists of 27k in the 2nd pillar @1,5% interest, so basically safer than a government bond and 5k into whatever strategy, in the case I mentioned a 40-60 (ie 2k Stocks - 3k bonds). It adds up to 30k bonds + 2k stocks, safer than almost a 95:5 portfolio. So I think it’s fair to compare these two strategies, and I’m sure that if I take out a 27k loan to pursue such strategy it will be a losing one.

9

Here are my calculations.
For a 60-40 Portfolio, I would not expect more than 3.5% post tax returns.
In CHF terms, I think we need to expect 5-6% from Stocks and 1.5-2% from Bonds and then there is also tax on dividends and bond coupon rates.

Assumptions -:

  • Margin loan -: 27 K
  • Tax savings -: 5 K
  • Lumpsum withdrawal tax -: 15%
  • 20 years

Conclusion -: the whole plan results in net loss of 721 CHF
This means such an investment is very sensitive to your long term interest rate on IBKR and also on the marginal withdrawal tax rate for 2nd pillar.

Using loan to invest might work well for Real estate due to leverage. But otherwise, it is best to use money you have to invest rather than taking loan.

Begin End
Year Investment in IB (60-40) 2nd Pillar Growth IB Growth 2nd Pillar Investment in IB (60-40) 2nd Pillar Loan Int % Interest
1 5000 27000 3.50% 1.50% 5175 27405 2.70% 729
2 5175 27405 3.50% 1.50% 5356 27816 2.70% 729
3 5356 27816 3.50% 1.50% 5544 28233 2.70% 729
4 5544 28233 3.50% 1.50% 5738 28657 2.70% 729
5 5738 28657 3.50% 1.50% 5938 29087 2.70% 729
6 5938 29087 3.50% 1.50% 6146 29523 2.70% 729
7 6146 29523 3.50% 1.50% 6361 29966 2.70% 729
8 6361 29966 3.50% 1.50% 6584 30415 2.70% 729
9 6584 30415 3.50% 1.50% 6814 30872 2.70% 729
10 6814 30872 3.50% 1.50% 7053 31335 2.70% 729
11 7053 31335 3.50% 1.50% 7300 31805 2.70% 729
12 7300 31805 3.50% 1.50% 7555 32282 2.70% 729
13 7555 32282 3.50% 1.50% 7820 32766 2.70% 729
14 7820 32766 3.50% 1.50% 8093 33257 2.70% 729
15 8093 33257 3.50% 1.50% 8377 33756 2.70% 729
16 8377 33756 3.50% 1.50% 8670 34263 2.70% 729
17 8670 34263 3.50% 1.50% 8973 34777 2.70% 729
18 8973 34777 3.50% 1.50% 9287 35298 2.70% 729
19 9287 35298 3.50% 1.50% 9613 35828 2.70% 729
20 9613 35828 3.50% 1.50% 9949 36365 2.70% 729
Marginal Lumpsum tax 15%
Final Value 2nd Pillar Post tax 30910
Final Value IB 9949
Interest -14580
Loan Repayment -27000
Net return -721
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10

I dont think it makes sense financially, but since money in 2nd pillar can be used only after 3 years for home purchase, you may use it to front load it now and then buy a home in three years.
Any other scenario doesn’t really makes sense.

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11

8k (or less when accounting for the withdrawal tax) in 20 years sounds like very little for the complication and added risk.
And as others pointed out, it’s fully dependent on the conditions of the loan by IBKR, which can change at any time.

You could save CHF 8k in 20 years by simply spending CHF 33 less per month (not accounting for inflation), or work to get a raise.

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12

|1 | 2 | 3 | 4|
|— | — | — | — | — | — | — | — | — | —|
| | Begin | | | | | End | | | |
| | Investment in IB (60-40) | Additional Tax benefits | 2nd Pillar | Growth IB | Growth 2nd Pillar | Investment in IB (60-40) | 2nd Pillar | Loan Int % | Interest|
| | 5000 | 0 | 27000 | 5% | 1.50% | 5250 | 27405 | 2.70% | 729|
| | 5250 | 200 | 27405 | 5% | 1.50% | 5722 | 27816 | 2.70% | 729|
| | 5722 | 200 | 27816 | 5% | 1.50% | 6218 | 28233 | 2.70% | 729|
| | 6218 | 200 | 28233 | 5% | 1.50% | 6739 | 28657 | 2.70% | 729|
|5 | 6739 | 200 | 28657 | 5% | 1.50% | 7286 | 29087 | 2.70% | 729|
|6 | 7286 | 200 | 29087 | 5% | 1.50% | 7860 | 29523 | 2.70% | 729|
|7 | 7860 | 200 | 29523 | 5% | 1.50% | 8463 | 29966 | 2.70% | 729|
|8 | 8463 | 200 | 29966 | 5% | 1.50% | 9097 | 30415 | 2.70% | 729|
|9 | 9097 | 200 | 30415 | 5% | 1.50% | 9761 | 30872 | 2.70% | 729|
|10 | 9761 | 200 | 30872 | 5% | 1.50% | 10460 | 31335 | 2.70% | 729|
|11 | 10460 | 200 | 31335 | 5% | 1.50% | 11193 | 31805 | 2.70% | 729|
|12 | 11193 | 200 | 31805 | 5% | 1.50% | 11962 | 32282 | 2.70% | 729|
|13 | 11962 | 200 | 32282 | 5% | 1.50% | 12770 | 32766 | 2.70% | 729|
|14 | 12770 | 200 | 32766 | 5% | 1.50% | 13619 | 33257 | 2.70% | 729|
|15 | 13619 | 200 | 33257 | 5% | 1.50% | 14510 | 33756 | 2.70% | 729|
|16 | 14510 | 200 | 33756 | 5% | 1.50% | 15455 | 34263 | 2.70% | 729|
|17 | 15455 | 200 | 34263 | 5% | 1.50% | 16428 | 34777 | 2.70% | 729|
|18 | 16428 | 200 | 34777 | 5% | 1.50% | 17459 | 35298 | 2.70% | 729|
|19 | 17459 | 200 | 35298 | 5% | 1.50% | 18542 | 35828 | 2.70% | 729|
|20 | 18542 | 200 | 35828 | 5% | 1.50% | 19679 | 36365 | 2.70% | 729|
|Marginal Lumpsum tax | 15% | | | | | | | | |
|Final Value 2nd Pillar Post tax | 30910 | | | | | | | | |
|Final Value IB | 19679 | | | | | | | | |
|Interest | -14580 | | | | | | | | |
|Loan Repayment | -27000 | | | | | | | | |
|Net return | 9009 | | | | | | | | |

Have a look at this table instead if you consider the 5k invested in VT (average return of conservative 5%). Also considering around 200 CHF/year from passive interest deduction and reduction of wealth tax.
Do you think these calcs are correct? Also consider that potentially one could do this every year potentially for around 10 years in my case and then let things grow. Every year one could have around 9k 20 years later.

13

First of all, all this looks to me very complex and not really sound way to invest money. Using high interest debt to put money in low interest pension fund to eventually save income tax to invest into high yielding risk asset (VT)

Wouldn’t it be better to just invest 5 K in IBKR and forget about pension fund, IBKR loan etc?

Anyways - to answer your question

If we increase the returns from IB portfolios by adding more risk , the numbers would change. Sure. But 5K with 5% returns over 20 years should mean 13.26K . Not sure why you have 19.6 K….

What does the 200 CHF passive tax benefit mean?

Why wealth tax would be low?
You mean debt can be reduced from taxable wealth while wealth won’t increase as you are adding money into 2nd pillar? This sounds fine but I wonder if this actually will play out like this. Tax authorities would wonder why you are taking a loan to invest into voluntary pension. This might be considered tax avoidance. Not sure though

14

Sorry I’ve messed up the table.

  • Interests are tax deductible: 729 CHF per year in this case would provide around a 20% tax reduction (145CHF) depending on marginal aliquota. Also if you check calculation for wealth tax, debts are deducted too, you’re gonna have additional discount on your taxes. I’ve put 200 CHF total. This are adding up each year to the initial 5k.
  • Also notice that if you put 27k into 2nd pillar and 5k into VT you’re basically creating a (18:82 Portfolio) considering 2nd pillar as bond. Also you’re basically doing so cost free, without touching your money. Same obviously if you just invest a margin loan directly. But in this case we should compare it to a portfolio with similar risks (ie 18:82). Also you would lose the 5k bonus from tax benefits.
  • I don’t know about tax avoidance. I will check the law even though I’m playing at their games I think.
  • Also it would be nice to have a 3rd pillar simulation as well. I think the net would be way higher than putting in our own money to max it.
15

No problem.
Yes 3a would make it better than 2nd pillar.

I think on paper your plan might yield benefits if everything works out

  • IBKR interest rates stay as they are
  • VT performs as you expect
  • Tax laws let you deduct income, marginal tax. wealth etc
  • You don’t get a margin call

But as you have heard me saying multiple times. Margin loan is not good. It might be okay for short term things but not for a long term plan. Others on the post said the same.

But of course it’s your decision and I wish you good luck.

1 Like
16

Thanks for your feedback, you’ve partecipated the most here. I thought about sharing with the community here since confrontation is healthy and others may have come up with the same idea, at least here they can find some opionin and data.

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