Is it worth starting the 3a pillar in your 40's and with a low salary?

Hey everybody! Me and my wife are both in our 40’s and have moved to Switzerland (Zurich) last year where we plan to live and work until retirement. We have a B permit and have recently founded our own company in Zug. We are both employed in our company for 30 % and 50 % of the time respectively. We’ve set our combined salary to be 7k CHF gross (84k per year). That’s more than enough for us since we prefer minimalistic life and have no children. We are taxed at source. Nice side effect of a lower salary is also lower income tax. But we can set the salary higher if we wanted to increase our monthly investments in the future.

Considering that our salary and taxes are relatively low do we have any tax advantages investing in a 3a pillar versus investing monthly 2000 CHF in a global accumulating ETF? We are not afraid to take risks with a 100 % equity ETF. I’ve searched this forum a bit and found out that you usually say to people “depends on your marginal tax rate”. So I googled and found this online calculator where it says that our marginal tax rate is 17.4 %: https://swisstaxcalculator.estv.admin.ch/#/calculator/income-wealth-tax. What does that mean for us because I have no idea how to use this information?

Basically we wonder what is the optimum scenario for us with regards to investing for retirement. Pillar 3a or ETF investment? What would you do in our case? We don’t plan on buying any real estate property in Switzerland and also we don’t plan to live here after we retire (we like warmer weather). I have paid tax advisors in the past but I’m not confident they will be able to calculate this particular thing for us unless you know someone who is knowledgeable in the topic and can recommend him to us. But don’t worry, we will not make a decision because some random guy on the internet told us to do it so please don’t be afraid to share your opinion on the matter :wink: Merci!

Why not both?

I’d Invest in a 3a pillar (that always comes with tax benefits - even when they are small) that lets you invest in equity funds / ETFs. I guess, the tax benefits still exceed the (slightly) higher fees of such 3a-fund/ETF providers…

I’m happy with VIAC!

This is their fact sheet for the global 100 strategy: https://viac.ch/wp-content/uploads/VIAC-Global-100-EN.pdf with a TER of 0.51%

I really can’t answer you that because because I don’t know if that’s the best solution in our case? What if skipping the 3rd pillar and investing this money in equity makes more sense in our case? That’s what I’m trying to find here: what is the best solution for us.

Consider doing a simulation given your current marginal tax rate?

If you will stay in CH until age 60 then it makes sense. If you leave CH earlier, you will need to plan how to get the money out without potenitally paying more taxes in your destination country than you initially save in CH:

If you invest in 3 pillar now you will get ca. 17% of the amount invested as a reduction in your 2021 tax bill. If you are still resident in Switzerland at age 60 you can withdraw the 3rd pillar at a reduced tax rate. Capital withdrawal taxes compared - finpension

If you leave CH before withdrawing the funds the payout may be taxable in the destination country depending on the Dual Tax Agreement between CH and that country

In your case if you do leave Switzerland the plan to get the money out might be to change from “employed” to “self employed” the year before leaving?

That 0.5% might be compensated by having the dividend be reinvested untaxed though?

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… maybe my question was/is missleading :slight_smile:

with “both”, I mean so by choosing a 3a provider that lets you invest your 3a capital in equity funds / ETFs. In this case, your money is invested in equity WITHIN the 3a pillar (incl. tax benefits)

Good point, I agree. If dividend yield is ca. 3% than at 17% marginal tax rate this is a saving of 0.5%. Have edited my post.

But aren’t returns in the 3a pillar lower than stock market returns? That’s the whole gist of my dilemma…

Why do they have to? There a few 3a that provide 90%+ equity (with a more or less strong CH/CHF bias).

No. Why so? As you invest in the same stock market / index, the returns are the same (not taking fees, taxes on dividends etc. into account). The only thing is, the variety of ETFs/ funds on the “open market” is (ocf) much bigger then with a 3a provider and there are restrictions within a 3a pillar asset distribution (CH / non-CH, currency etc.)

I should be more clear. Yes, fees are higher in the 3a pillar hence the lower return. Is it not how this works?

As explained above, for many (most) people the 0.5% TER will still be better because dividend are reinvested untaxed.

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Is this by default in all 3a pillars or do you have to specifically tell VIAC/Finpension that you want to invest in accumulating ETF?

So if I understand correctly everyone here, we should put the maximum 6800 chf amount in the 3a pillar and invest the rest of our 2000 chf monthly capacity in an ETF of our choosing?

Our age and our marginal tax rate does not matter?

Yes.

Also with a low taxable net worth (no wealth taxes) it is also likely that VWRL is the better option than VT for after tax investments.

With VWRL you have costs of 0.22% TER and 0.15% withholding taxes losses for US securities. So the difference is around 5 basis points with finpension. Tax free dividends, no brokerage fees and the initial tax savings will more than make up for it.

It is also more convenient to just transfer the money and not have to deal with buying the etf.

If you are member of a pension fund then both you and your wife can pay in the maximum of 6883 CHF this year. You can go all equity for that if you want to.

If you are not member of a company pension fund you can pay in up to 20% of your income, capped at about 34000 CHF per year.

The rest I would indeed pay into a low cost, broadly diversified ETF.

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… that’s how I’d proceed.

except, If I know I need the money in the shorter term and for different reasons, one can get money out of a 3a pillar (but I guess, that’s obvious though)

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That’s if you don’t mind having the money stuck somewhere, it is a lot less liquid in a pillar3. But if you decide you want to use a pillar3, I think with the latest offerings, it isn’t really worse/more expensive than e.g. VT.

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I think there‘s no rule by law or (external) regulations requiring them to reinvest dividends. They could just credit them to your cash position.

However, in practice you’ll be choosing an allocation for your investments with VIAC or finpension. E.g. 40% World ETF, 30% Swiss, 27% bonds, 3% cash - all of which will perform differently over time, thus increasing or decreasing their proportional share of your portfolio.

VIAC or finpension will periodically rebalance your portfolio to „reset“ to your desired allocation - and in doing so they‘ll also reinvest your received dividends. They otherwise can‘t keep the share of your cash position constant.

Simplified example:
You invest 100 CHF in pillar 3a, choosing 95% equity fund, 5% cash.
They‘ll buy an equity fund for 95 CHF.
End of the year, the value of your fund holding has risen from 95 to 105 CHF.
Also, the fund has distributed 5 CHF in dividends over the years.
You cash has received 0.5% interest.
You now have 105 CHF worth of equity fund (90% of your overall portfolio) and 10.50 CHF (10%).
They‘ll rebalance by buying more fund units from cash, to reset to your initially chosen 95-5 ratio.

Point being: depending on your provider and product, accumulating vs. distributing fund shouldn’t matter (though of course there could be an account where they’ll only invest the initial 95 CHF in funds and don’t rebalance).

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