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.
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.
Personal opinion, to address the question in the thread title:
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.
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:
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
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 ).
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).
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)
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 ) , 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.
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.
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.
Just realised that I was on a thread that is 11months old (sorry) …I’ll post my reply anyway for future readers (since I realised only after it was written): it is exactly the right question for a young person to ask. Disclaimer: I don’t know what implications the B-Permit has on 3a investments (if any).
I agree 100% to the combined replies of @San_Francisco and @MisterB : first priority to maximising your 3a and investing it according to your risk profile (i.e. Finpension/VIAC etc). Tax savings, more aggressive investment opportunities and more flexible options for use in a future (direct/indirect) mortgage.
I want to simply stress that this requires discipline above that required by your pension coming directly off your salary. I really wish that I increased my 2ieme later than I did, using it intentionally as a bond part of an overall portfolio rather than my main retirement savings vehicle…while it is now very healthy, it represents 2/5 of my overall portfolio making it more conservative that it should be for someone my age/risk profile.
@Rshine : in your case, until your salary increases a bit, be aggressive and try to get to the 588 chf /month in 2023-2024 for your 3a since less cash flow early in your career will also hopefully help you establish a cost of living at a lower level, encouraging more savings potential as your salary increases and as you save for a future mortgage/retirement in a tax efficient way…
I’ve started to have this discussion with a lot of new (young) colleagues after seeing years where so many would lease a nice car with their first few salaires/bonuses and have nothing left for FIRE, 3a, or extra 2ieme…you need to live and have fun but you need to make choices too ;)…those choices are easier when they are as early as possible in your career.
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Before you take any look into non-mandatory contributions to 2nd pillar, max out your 3a third pillar.
).
) , 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.
…I’ll post my reply anyway for future readers (since I realised only after it was written): it is exactly the right question for a young person to ask. Disclaimer: I don’t know what implications the B-Permit has on 3a investments (if any).