Max Out Pillar 3a or Put All Savings Into ETFs?

Hello all!

Although contributing to my pillar 3a provides tax reductions & a low tax rate upon withdrawal, does it make sense to ignore it and simply pour all my savings into an equity ETF?

My thinking is that the ETF will generate a better return, so there’d be less point in contributing to pillar 3a as well.

I’m with VIAC (97% equity strategy) and the ETF I’d be investing into is VWRL.

Thank you in advance for your wisdom!

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Hi Marco,

It depends on your tax rate, investing horizon and the returns you’d expect outside of your 3a and inside of it. With a 97% invested solution with VIAC, it’s probably going to be difficult to beat.

What are your calculations and what led you to this reflection?

Other parameters like the availability of these funds can also have an impact on that reflection.

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Only advantage for VWRL is lower TER (0.22% instead of 0.51%), so you might think that you’ll end up getting a better return (+0.29%/year). But there are so many factors that are making investing in your 3rd pillar a total no-brainer.

  1. Dividends aren’t taxed at source due to several tax treaties. So you’ll get the full dividend from US stocks for example.

  2. Dividends aren’t taxed as income.

  3. Depending on your marginal rate (assuming a gross income of 85k, no kids, not married you’ll have something around 25%) you’ll save a lot of taxes by paying into your 3rd pillar. You can invest those ~1700 CHF (or whatever it is) that you save each year additionally into VWRL.

The 1st two alone will make up for the higher TER.

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What about the fact that capital gains are taxed in 3a?
If I remember well someone here made a calculation about this but I don’t remember how much of a difference it made.

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Where do you have that information from? The only taxation in 3a happens when you withdraw the money and yes if you originally invested let’s say 30k CHF but later take out 60k CHF you will get taxed on 60k CHF and not on 30k CHF. However the tax rate for 3a withdrawals are lower than the regular rate…

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That is exactly my point, you would not be taxed on the extra 30k outside of 3a. So you get taxed on capital gains but at a lower rate than income tax.
Also you would not pay wealth tax on these for a while so there is some offset.
Depending in which canton you live it might not be negligible in the end.

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In my opinion and calculation, it does not.

Even with a modest 25% marginal rate, pillar 3a can be very attractive. IF you can invest in the same product at comparable fees.

For 10´000 earned, you can invest 10´000 in 3a (not in a single year, just to have round numbers).
But you can only invest 7´500 in your ETF after taxes.

Let´s assume that you expect a nice 7% return: 2% dividends and 5% capital gain.
And that your 3a investment is 0.3% more expensive than the ETF.

After tax, your ETF yields 6.5%. The dividend is taxed every year.
The 3a yields 6.7% (reduced by higher fee) and is not taxed for now. Only when you take it out, maybe at 10%. Both the dividend and gains, as @Gesk explained, but only at the end.

Try it in your calculator or spreadsheet. For 10, 25 or 40 years. With 3% or 7% expected return. Or 25% vs. 35% tax rate. With a similar investment product, the ETF will never catch up the tax advantage. It does gives you more flexibility, of course.

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I’ve put together a quick spreadsheet that probably won’t stay online for long, is very simplistic and doesn’t take wealth tax into account. For taxable investments to beat 3A, you need to either have a very low marginal tax rate, a very high taxation when you retrieve your 3A assets and/or a significantly better yield in your taxable account.

It’s probably very rare with high equities solutions at VIAC, Finpension or Frankly. It may happen if the 3A solution is a more fees heavy one (I had first made a comparison with Swisslife LPP-Mix 75 and my conclusion was that I was better off investing in a taxable account).

https://ethercalc.net/jihshxzv8wkt

White cases are for personable variables to set yourself.
Yellow cases are the results.

Let anybody feel free to correct any mistake or make it on a more permanent support (I wanted to try googlesheets but they seem to require a Google account?).

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Thank you so much everyone for your thoughtful replies!

Based on the informaton, I’ve decided to invest into my pillar 3a and VWRL at a ratio of 5:7, respectively.

I’m currently also trying to figure out if I should put all of my investments into 3a (VIAC) or invest (some of it) elsewhere.

I’m currently confused about the following scenario:

  • I check whether 3a (e.g. VIAC) makes more sense than direct investment (e.g. Degiro).
  • 3a currently makes more sense, therefore I invest everything there.
  • 2 years later, the conditions for 3a investment changed.
  • I reevaluate and it seems that it would now be better to invest directly.
  • All 3a investments up to that time are stuck there for the next 30 years.

Does this scenario generally make sense?

Do we have any idea how likely such a scenario is?
I’m especially worried about this if we expect VIAC/finpension to currently be in a growth phase that allows for them to have incredibly favourable conditions that are unlikely to make economic sense in the long run (e.g. like with early Revolut).

Has anyone thought about whether and how such scenarios should influence the “3a vs. direct investment” decision?

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I don’t think their fees are unsustainable as long as they have sufficiently high AUM. VIAC reached 1 billion AUM already in February 2021, I would guess it’s significantly above that now and it’s hopefully enough to keep this up long term even if they might not make a huge amount of profit. And with CSIF/UBS and Swisscanto there are two separate fund providers that seem to offer acceptable conditions to VIAC and finpension.

Besides VIAC and finpension with around 0.4% p.a., there are also frankly with 0.45% p.a. and yuh with 0.5% p.a., which would also still be acceptable purely based on fees.

This page claims that VIAC now has 2.5 billion AUM.

According to Bundesamt für Statistik, total pension assets were 1159 billion in 2021.
If we assume that Yuh, frankly and finpension are of similar size, the still only manage 1% of total pension assets. This leaves a lot of room for growth.

If the current strategies were unsustainable, I’d expect the different providers (frankly, finpension, etc.) to be correlated and to adjust somewhat simultaneously in the future.

But generally agree with your point that the longer they keep the fees that way, the more likely it is that they follow a sustainable business model.

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These are pillar 2 assets, not sure whether only pension funds or including vested benefits. Pillar 3a was 142 billion in 2021. I can’t quickly find recent figures for vested benefits but in 2017 it was 50 billion. So the total of pillar 3a and vested benefits is around 200 billion and VIAC alone manages about 1% of that. frankly reached 1 billion AUM in November 2021, finpension in February 2022. Yuh 3a presumably has much less as they just started.

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Bonus question: What’s smarter, contribute to 3a at beginning or end of year?

My guess: At end of year, cause you’ll get tax reduction anyway, and can save a year of 3a fees.

And are one year less invested in the market, keep in mind time in the market > timing the market

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A monthly standing order (scheduled shortly after you receive your monthly salary) makes sense and is the simplest approach overall, in my opinion.

If you have non-monthly income (e.g. a bonus or 13th salary payment) that is consistently at least 7k, contributing the full yearly amount right when you receive that extra income is also a sensible option.

Being paid for doing little vs. being not paid for doing quite a lot.

Managing pension assets is a (relatively) uneventful and low risk business. Especially when customers are all local, pay in from their own accounts, choose their strategies and bear the investment risks themselves and they can only be withdrawn by them.

Payment accounts and payments cards though… Granted, you don’t have to run shop in Switzerland, you can do it from Poland or Lithuania etc. But you have to be careful. Monitor transactions, do your KYC. Provide support. Especially when you’re operating an international, cross-border and often „real-time“ business. And when most of your customers don’t pay monthly fees, there’s only transaction fees - mostly lower than the 0.4% percent or more Swiss 3a providers charge.

It‘s like the difference between manning the door at a distinguished opera house vs. a raucous inner-city nightclub that features Gangsta Rap music on a Friday night.

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I think even without the deduction I get comparable or better return on 3a with 0.4% fees? (because marginal wealth tax and tax on dividends might already cover the fee)

I’d invest in VT until December, then get into 3a just to make the end-of-year deadline for 3a contributions.

Interesting, but VT’s only 0.07%, isn’t it?

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You’re taxed on dividends (and wealth)

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