Looking for advice: 2nd and 3rd Pillar

Hello everyone,

I have 29 years and just got my B permit, currently living on FR canton.
Salary is 3990 CHF/month - NET.

I have some questions about the 2nd and 3rd pillar that I hope you can help me.

For the 2nd Pillar I can choose to contribute:

  • 3.5%
  • 8.5%
  • 11.5%

On top of my employer contributions, fixed at 10.5%.
My employer told me that there are tax advantages to contribute to my 2nd pillar like we have with the 3rd Pillar.
My questions are:

  • What is the limit for the tax advantages?
  • Is it worth contributing the maximum I can on my 2nd Pillar?

For the 3rd Pillar, as I’m taxed at source and don’t fill my taxes, can I benefit from the tax advantages?
Would it be worth it in my situation?

I will do some research on my own, but as I’m new to this any feedback/opinion is welcome.

Thank you!

There’s no limit for the tax advantages. If you contribute more to your 2nd pillar, you have a lower income that will be taxed.

You need to find out yourself, if youthink you can generate a higher return with your investments than the return of your pension fund and the tax savings (additional contribution × marginal tax rate), then you should not contribute the maximum. I think it should be easy for you to “beat” your pension fund with investments as you are probably in a low tax bracket with your salary, so not a lot of tax savings.

4 Likes

Personal opinion, to address the question in the thread title:

:point_right:t2: Before you take any look into non-mandatory contributions to 2nd pillar, max out your 3a third pillar.

With pillar 3a, you have a choice of fund and investment strategy. With pension funds, you don’t. Also, 2nd pillar pension funds in many ways are more like these intransparent combined savings-investment-insurance products, where costs are pretty intransparent and you’re basically unable to figure out what performance and return you’re going to get at the end of the year. Maybe they aren’t as much as a black box, but still a pretty dark grey box.

On top of that, should you change jobs, you are (though loosely if at all enforced) legally obliged to transfer your pension fund capital to your new pension fund scheme. As great your new employer and job may be, their pension fund can still be shitty.

:point_right:t2: Generally, I’d stay clear of making higher contributions to pension funds than mandated.

The system is - or can be - kind of “rigged” against persons paying in, in several ways: towards high earners, towards pensioners, politically in the determination of conversion rates, as well in the fees and costs associated with running the scheme.

…with maybe two exceptions:

  1. If you have very high income, your tax savings potential is very high and if you and your pension fund both know what they’re doing (chances are you won’t know what you’re doing unless you receive professional-level tax advice) OR

  2. If you are within the last 5 years before retirement and want a higher monthly pension. Maybe a few years more prior to retirement, if you prefer the legally guaranteed returns of pension funds over market returns.

You clearly fit none of these profiles (no offense :wink: ).

9 Likes

You can have several 3a accounts, which can be liquidated separately in separate years before pension.

1 Like

Net salary is usually considered after 2nd pillar deductions. You have probably already done it but just in case, I’d try to assess how much money will hit my bank account with each of these options, assess my expenses then choose according to the advice provided by the others above.

Edit: Also, if you haven’t already done it, I’d ask for a copy of the pension plan and check what part of the 2nd pillar is used to cover life insurance and which part is used for retirement savings/investments. This should help you better assess the actual returns you could expect from your 2nd pillar premiums. Taking the opportunity to check the insurance coverage included and see if it fits your needs (it usually does, special cases being people with dependants and a poor supporting network - which might be your case -. In any case, don’t let 3a insurers talk you into their % of salary covered speach, what matters is expenses and if you’re here, chances are you are saving a decent enough part of your salary to make their models irrelevant) shouldn’t hurt (it’s on the pension plan document).

Don’t forget the taxes you have to pay when you withdraw either 2P or 3P.

Probably doesn’t make sense to save taxes at a low rate now if the tax rate when withdrawing is likely to be higher

1 Like

Maybe, maybe not.

His marginal tax rate is probably between 20 and 25%.
Tax rates for a capital payout from a Schwyz-domiciled fund (such as finpension) start at 2.5%.

Though it also applies to capital gains that (from other personal wealth) would otherwise be free, yes.

1 Like

If you live in Switzerland, the 3a foundation’s domicile doesn’t matter. You have to pay the tax rate of your personal (tax) domicile.

1 Like

True and worth mentioning (see examples of tax rates at finpension).

I intentionally mentioned only the withholding tax rate for non-residents since, for a 29-year old who just received his B permit, capital withdrawal with a Swiss domicile may seem bit of a stretch (of time and/or the imagination) :wink:

In the event of withdrawal when leaving CH there will probably be taxes in the destination country, depending on the dual tax agreement

As I mentioned in another thread, the decision to buy-in and/or contribute more to the 2nd pillar (or 3rd) is heavily dependent on your assumptions about the future, which is to say that it is (at least in part) very specific to every individual.

In essence though, as @Burningstone mentioned earlier, it boils down to the comparison between:

  1. how much that money is expected to return outside the fund, and;

  2. how much that same money is expected to return in the pre-tax vehicle (i.e. 2nd/3rd pillar) plus the expected returns on the tax rebate/refund it generated.

There are many other factors to take into account (as already mentioned in this thread), such as current marginal tax rate, investment horizon, lump sum tax rate and/or domicile at the time of withdrawal, etc. I have just recently posted a small tool in another thread that can help you think about all these different factors (and allow you to plug in your own assumptions):

As you will see, the “investment horizon” is one of the most important variables. Indeed, when you make a buy-in or contribution into the 2nd or 3rd pillar, the tax rebate/refund is practically guaranteed, giving you an immediate boost on the return. As years go by though, this early head start will erode in comparison to the higher returns you could make outside the fund.

I mention this last point because this is what got my interested in this topic in the first place. Indeed, as a foreigner myself initially (now Swiss as well), I had “definitely” left Switzerland a few times already, cashing my 2nd pillar in full (note: it would be only the over-mandatory part for European citizens). In such cases it’s possible to have your 2nd pillar transit through Schwytz for instance for a better lump sum tax rate. Therefore, if for some reasons you think you might only stay for a few years in Switzerland, the “investment horizon” is relatively small, and the 2nd/3rd pillar contributions might look like a better financial transaction. Unfortunately, as @Barto just mentioned, it also depends on where you are going back to (with regards to the local tax treatment of that lump sum), and that opens up a whole 'nother can of worms! :slight_smile:

2 Likes

Thank you everyone for the responses :slight_smile:

As recommended by @Burningstone I did some research on the 2nd pillar fund and It seems to be returning an average of 2%/year on the last 10 years.

Adding the other problems of the 2nd pillar mentioned by @San_Francisco (no offense taken :smiley: ) , I will do some math later, but it doesn’t seem to be worth the higher contribution for the tax savings I will have with my salary.

@Wolverine from what I understood, the numbers I gave are used for savings/investments, and on top of that 0,5% is used for life/disability insurance.

@MisterB thank you for the tool and feedback, I will check the tool later.

…residents.

Depending on your insurance status in that new country of residence, you may be still be eligible to cash out in full (e.g. in Portugal).

1 Like

You’re absolutely right, I misspoke. Thanks for pointing that out.

Regarding the last part of the question: In canton Aargau, if you are taxed from the source there is a form that you can fill in from kantonales Steueramt homepage to reclaim taxes for your 3a contributions. A similar straightforward form exists to reclaim firefighter contributions and childcare expenses.

Not anymore, since 2021 tax year.
Whoever wants deductions needs to file taxes fully (and continue to do so in the future), AFAIK.

2 Likes

Indeed, it seems that they removed this option (it seems to remain only for firefighting contributions).

But we need to ask for it each year?

No, you only have to request ordinary tax assessment once. You’re then required to file a tax declaration every year as long as you reside in Switzerland. As far as I know, it’s impossible to go back to not filing a tax declaration.

4 Likes

Indeed. Once taxed through the ordinary process you cannot go back! Unless you leave Switzerland and come back again on another fiscal year, I guess?