Investing in 2a

Investing / Portfolios
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Hi everyone, I have just arrived in Switzerland this year and recently found out about this amazing mustachian community so… Grüezi everyone !!

Im 31 and actually new (unfortunately) to investing… And I just realized (I wish I had years ago) that I need to invest to secure my retirement.

My first step being to start my 1,2,3a strategy.

I am employed in Switzerland since february so I just started to contribute to 1a + 2a and I recently started my 3a.

The question I am right now regards 2a. As I have a considerable gap in 2a do you believe it’s worth buying the gap ? Or would my money better be elsewhere ?

Can you also buy the 1a AHV gap ?

Thanks in advance for your suggestions

Aitor

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afaik yes, you can make up for the last 5 years. call you AHV representative, he/she will tell you how. expect CHF ~440 for each of the 5 years

The question I am right now regards 2a. As I have a considerable gap in 2a do you believe it’s worth buying the gap ? Or would my money better be elsewhere ?

there is no pillar 2a, only pillar 2 (Pension fund)
i am not entirely shure, but i personally thing the boglehead investor (at least in his 30’s) comes out far ahead for every swiss franc in his world portfolio instead in the pension fund. they pay lousy interests, and you have zero control over it.

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Voluntary pay-in contributions to Pillar 2 give you the same tax advantage as Pillar 3a, so you get an immediate return on investment in form of tax savings. Two scenarios to consider:

  1. For the long term, money invested in the stock market will give you higher return, therefore it only makes sense to top up shortly before planned retirement (if ever).

  2. If you intend to purchase property in a few years from now, it makes sense to pocket the tax advantage now, and then take money out of Pillar 2 to finance the property. You will still be able to top it up again (shortly before retirement).

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Though, the buy in the 2nd pillar and withdrawal need to be at least 3 years appart. Otherwise you will have to repay the taxes.

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There is one small distinction between pillar 2 and 3a when it comes to taxes.

The mandatory 2nd pillar contribution is paid as a percentage of the insured salary, which is the amount between around 20’000 and 80’000 (if you earn less than 20k, you pay nothing, if you earn more than 80k, you only pay contribution for 60k).

The percentage depends on age, for example between age 25-34 it is 10%, so for high earners the amount is 6’000. This amount has to be paid at least 50% by the employer. So a typical scenario will have you pay 3’000 and the employer 3’000, on top of your salary.

It is possible to have a different ratio than 50:50, for example 75:25 or even 100:0, which means the employer pays everything. Now, answer me this question. What is better: to have a salary of 100k and a 50:50 ratio, or a salary of 97k and a 100:0 ratio?

Yes, the 97k option is better, because you will pay lower AHV (which is 12%) on the 3’000. The money that goes into BVG from the employer’s side is free of the AHV contribution.

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Thats interesting…Do you know if the ratio can be changed. I checked into my employer documents and it seems I can only change the amount of money Im investing but not my employer’s…

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The exact ratio is indeed to be found in the job contract. The thing is, your company has a single agreement with the BVG pension fund, and they have to keep the same ratio for all employees, as far as I know. So if they pay 100% of the contribution, they will in effect offer lower salaries on the market to balance that effect. In case of big companies there probably is zero chance of convincing anyone :stuck_out_tongue: .

My company is very small and it only hires freelancers, who effectively have to pay contributions on both sides (employer and employee). So the company is focused on keeping the taxes low.

Keeping in mind how taxes are levied (not only on gross salary, but also on top of it), makes you realize how unintuitive a gross salary is. There is the AHV (12.5%) and BVG (10% Sparbeitrag and 0.8% Risikobeitrag for 30 y.o.), that’s over 23% that is split in half. So the employer has to pay some 10-15% on top of your gross salary.

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I asked yesterday to the AHV, 1st pillar can only be bought if you’ve contributed to the AHV before (i.e you were in Switzerland, spent some years abroad and went back) For newcomers in Switzerland like me this is not possible…

They said I could pay 300chf and they can estimate how much is my altersrente. After 40 years old, they do the estimation for free.

However they gave me a formular I can fill to request an estimation for the Invalidrente and they can estimate it for free.

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the estimate is not so complicated if i remember correctly. the maximum AHV rent for a single peron (double for couples) is 14’000 p.a… for every year that you contributed less than 45 years, a deduction of 6.8% is made. that’s quite substantial for anybody who did not start contributing at 20 (expats, academics,…)

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6.8% per gap year ??? So if I miss 15 years (arriving in switzerland with 21+15= 36 years old) there is no more rent (6.8% x 15 = 102%) ???

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ah ok that semms a bit much.
also i think i was too quick to copy pasting number. i need to find the good source, it could be that 28’000 is the maximum rent. for every year that is missing this is reduced by 1/44th, making more sense than 6.8% (probably that author confused with the 6.8% umwandlungssatz)

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If you want to calculate your aprox. AHV Pension you can do that online.

If you want more exact figures and want to understand how it’s done here a general description.

First you calculate how much your insured average yearly income will be (until you get retired). This is really a simple average. If the first year your income was 50’000 and the second 10’000 your yearly average income for these two years will be 75’000.

A good starting point can be to find out how much your insured Income was till today. This can be found out if you order a “Statement of individual account”. This statement is free.

Suggestion for everybody: It is suggested for everybody to order a “Statement of individual account” in the AHV in order to insure that everything is correct. Mistakes do happen here, especially if you change employers or have more than one, and it can be difficult to correct the mistakes if you find out at age 65 (probably about 30 years after the mistake happened).

Second you think of additions and subtractions to your average income that will apply.

Typical addition is when you have children (Erziehungsgutschriften). You get ad addition of 42’300 (3x the minimal AHV pension) for every year that you had a child younger than 16. This addition is spitted 50/50 for the two parents.

Another typical addition/subtraction is after a divorce. The AHV of both partners is splitted 50/50 for the years they were married.

Now you have your average yearly income that applies for the calculation.

Third, you go to Scale 44. (Skala 44). Here you can find how much would be your pension if you have contributed your calculated yearly income for 44(men)/43(women) years. This pension is between 14’100and 28’200.

Now you have how much your pension would be if you had contributed for 44/43 years

Fourth, you calculate what will be reduced because of missing years. The calculation is linear. You loose 1/44 resp. 1/43 for every year without contributions.

Fifth, you calculate how much there will be reduced if you want to retire before 65/64. if you plan to retire before 65(men)/64(women) you calculate how much there will be reduced for the early retirement. You can retire up to two years upfront. For every year you retire before you will have a deduction if additional 6,8%. (Additional to the missing 1/44 resp. 1/43 from step 4)

To sum up:

  • A approximate AHV pension can be calculated easily online
  • Everybody should order his statement of individual account periodically (e.g. every 5 years) in order to assure that everything is correct there
  • To have an exact calculation you have to take some individual factors into account and invest a bit more time and effort to understand the details
  • It is possible to have pensions bellow the “minimal” 14’100. It is actually also quite probable if somebody contributed a lot less than 44/43 years
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I think it is not a typical yes or no question, it really depends on your personal situation.

If you have a huge salary and therefore a high marginal tax rate, it could make sense to “fill the gap”. Moreover, if you plan to exit Switzerland in a foreseeable future (10y) and have a high marginal tax rate (30-50%) I do believe that filling the gap might result in higher returns than the “save it and invest it” strategy.

I mean, I do not want you to time the market, but your stash in your 2nd pillar will stay safe of stock market fluctuations (let’s google PE Schiller stock market valuation) and if you have a high marginal tax rate, the return is good on the short-middle term. Then after a few years, you leave Switzerland with your accumulated stash (the cash out could be tax free depending on where you decide to relocate) and you can freely invest it in ETFs.

On the other hand, if you want to stay here for the rest of your life, I would be a bit less conservative and keen to let the money work in the market with a higher stock allocation :smiley: In the long run, the market is likely to substantially overperform the returns on a typical 2nd pillar (pension fund).

PS: Welcome to Switzerland! I strongly recommend you to read this forum, you will find a lot of useful information in it and do not hesitate to ask questions to the members :slight_smile:

Cheers,

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Thank you all for your insights !!

There is however an additional doubt that is wandering my head. I’ve heard some discussions about the umwandlungssatz, the % from your 2a capital you get paid per year.

Does this % stay the same like it was at the time of the first contribution or can it change ?

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The “Umwandlungssatz” is defined by law and so it’s not only the result of a pure model / pure mathematics. Politics have a big impact into it.

It was 7,2% and with the 1st BVG revision it was reduced to 6,8% (effective from 2014). The Swiss parliament decided a further reduction to 6.4% but the people voted against it in 2010.

So it the „Umwandlungssatz“ can and probably will change until we are at the pension age. But exactly what and by when will happen is something that nobody can tell you today.

Important to know: The “Umwandlungssatz” id defined by law only for the mandatory part of the 2nd pillar. If your 2nd pillar offers more than the mandatory, for the part that is more, there can be a different (much lower) “Umwandlungssatz”. This is already today usually the case.

So your belief about the changes of the 2nd pillar on a political level is also something to consider when deciding if you want to add/withdraw money to your 2nd pillar.

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Also you have the option to get your 2a gained money as a full- or partly-capital draw. Especially in this FIRE community with people capable handling their own investment, this might be also a very valid option. But all is depending on your personal situation and safety requirements.

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One thing that I was not sure of with this is whether you can average out wages >84.6k? e.g. let’s say you earn 20k for 10 years and then 200k for 5 years. Does that average out to 80k? or is the 200k capped at 84.6k and then your average is 41.533k? (84.6x5 + 20x10)/15.

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Yes, in pillar 1 it’s the average that counts. The actual calculation is more complex than a simple average due to adjustments based on the salary/price index, though.

See https://www.ahv-iv.ch/p/3.01.d for details.

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