My broker vision on the 3rd pillar strategy

Hi there !
Through another topic on the forum, I put a subject on the table that could be debated.

In advance, thank you all for your expertise! Any point of view will be welcome!

After 5 years of 3rd pillar with insurance with a low interest rate, a broker made me switch to a 3rd pillar with a contribution level of 6,500 per year (paid in one go to limit costs) , and a guaranteed capital of 250kCHF (+20k from the contract of the first 5 years). You will find that 6,500 CHF paid over 35 years will be less than 250kCHF, in other words, I would winner a lil bit. If we add the tax gain (25% of 6,500 CHF per year), this is more (yeah, of course, the tax on the capital withdrawn must be deducted)

I am already invested in dividend equity markets and ETFs with part of the rest of my savings (about 15kCHF/year).

However, I still wondered about stopping my current 3rd pillar contract to move to Pax or Finpension that I discovered recently.

My contact tells me it’s not particularly relevant. His arguments are as follows:

  • the 3rd pillar is provided as a supplementary pension. Would you be willing to risk your retirement with the markets? if the stock markets collapse before you retire, your current contract guarantees you a capital of 250+20kCHF upon retirement. And it’s guaranteed. And if you want, you can use the rest of your savings “which you don’t need” to invest in the markets, don’t hesitate, in the end, this will also be a plus for your retirement!
  • moreover, your current contract covers you against the risks of disability and death. It’s important if you’re thinking about your family…

Again, I will be ready to stop everything, immediately and go to Finpension or Viac.

But his argument of guaranteed capital for retirement + not subject to the markets variations + using the rest of my savings for the markets : it does not seem wrong to me too…

Additional information 1: In addition, if I can, I will take early retirement.
Additional information 2: apart from the family, we do not close the door to going abroad in 5, 10, 20 years…
Additional information 3: I am also wondering at the moment about buying back my 2 missing years of the 2nd pillar, do not tell my wife in case she wants to divorce hahaha

Thanks again for your views!
A very nice day to all!

6.5k/year for 35 years with avg. stock returns (6%/year) will get you to 750k. Even if the next couple of decades really suck and we only get 3%/year, you would still get to 400k.

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If you want the amount of 250’000 CHF guaranted, you can also, for purpose choice, save 1’000 CHF per month during 250 months (20 years) and put it in a saving account without interest. You will reach this amonth faster than your currently 3a. Then, you just have to forget this saving account (of course because of inflation, and other parameter, this 250’000 CHF will lose you “money”. But at least, you have your guaranted 250’000 CHF.

And for the disability/death, you can subscribe to a specific insurance for this purpose. VIAC does it :wink:

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Yes. And you’ll probably large amounts of money for that guarantee.
Huge amounts, if you factor in the opportunity costs.

We have probably about a dozen threads about 3a insurance contracts and/or “guaranteed” products. And they’ve always been expensive in fees and underperforming equity markets under any reasonable assumptions. Furthermore, they’re usually very opaque about costs and fees.

Guaranteed to win a little.
Most probably destined to lose a lot (compared to non-guaranteed options).

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Now, admittedly you’re also paying for disability insurance, which in the absence of further information/details we can only ignore. That said, only looking at the investment performance:

35 years * 6’500 CHF/years = 227’500.
You’ll be guaranteed the equivalent of an annualised investment performance of 0.28%

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Hi ! Thanks ! But 25*10000 = 25’000 :grin: on 20 years ok

I edited it haha :joy: (20 chars)

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Are you sure about that? It seems to me that that would be the case if the whole amount was invested at day 1. I get a CAGR of 0.74% with a final amount of 250K and 1.19% with 270K. Still not that much (more on it below) but that’s a guaranteed payment, so it still has some worth for some people.

@Kens:

Those are legitimate considerations but they’re not one size fits all. Most people here don’t have the risk profile for these kinds of solutions (though it may be interesting for other kinds of people).

First off, how did you reach that 250K/270K number? (Not sure I understand the 20K part, is the guaranteed amount 250K with its value after 5 years being 20K or would those 20K come on top of the 250K for a 270K total?) Guaranteed money is only really relevant when it covers expected liabilities, that is, is there a CHF 250K/270K gap in your retirement expenses that this policy allows to cover fully?

The reason I’m asking is that insurance brokers/financial advisors in Switzerland tend to overestimate our needs and run under the assumption that our salary is our expenses. As you put away a considerable chunk of money every year, this is not your case, so you don’t have to guarantee 100% of your salary for retirement expenses.

Second, the compounded annual growth of returns (CAGR) on those 250K is roughly 0.74% per year (1.19% for a 270K output). That level of returns is fixed for 35 years, it can’t go down but it won’t go up either. I’d note that it is inferior to the average historical rate of inflation in Switzerland (which is around 2.2% since 1914), so there are good chances that, putting away the tax advantages for a second (other 3a solutions would also have this advantage), putting money in this solution is loosing you purchasing power.

Risk free (if held to maturity) long term bonds issued by the Confederacy currently have similar yields before taxes (an important consideration). Example with one with 36 years remaining and a YTM of 0.76%: CH0224397338

To note is that there’s no guarantee that it will be possible to invest future contributions at similar yields (it could go down but could also go up), but the comparison is interesting (the insurance company isn’t taking on a big risk with this policy, worse to them is the disability/death coverage part, which is probably a big part of the costs).

Regarding the risk insurance part of the policy, it is a very relevant concern. The question is do you need it and would you pay less and have a clearer view of what you are paying for by taking a separate policy covering only the risks of death and disability and investing the rest of the amount separately?

All in all, it isn’t a bad product per se and there are people who would benefit from it. The question is: are you one of them? You seem to have good savings and a lot of flexibility in regards to your retirement costs.

In short, I’d check:

  1. What are my projected needs for retirement/early death/disability? Are they fully covered by my 1st and 2nd pillar + this policy (and the coverage that my wife has)? Are they over-covered and am I over-insured?

  2. Are there other ways to cover those needs? Is this policy the cheapest way to cover the level of security I need?

  3. What am I giving up for this coverage (opportunity cost) and is it worth the cost?

If this policy allows you to cover your needs and those of your family when you reach retirement and in case of disability/death and that wouldn’t be the case without it, then it may be a good solution for you. These kinds of approach rarely fit early retirement folks because retirement at 65 isn’t the plan so we are willing to sacrifice security for the upside potential of being able to retire earlier.

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Whoops. Had a brainfart there. Of course it doesn’t get all invested on day one.

But regardless… for a period of 35 years, calling it underwhelming would be a euphemism.

Hi Wolverine,
And thank for your well-explained answer,

To answer your first point, the 20k is the guaranteed amount planned in 33 years for the contributions of the first contrat and stopped two years ago by my broker.
The 250k part is the guaranteed amount for new contract, started 2 years ago for 35 years. So the two amounts are guaranteed

About you second point. If the same company or another one propose contracts with higher rates (we see that main interests level are currently increasing) won’t it be possible to move to another contract and so make the level of return go up ?
(except taking into account the inflation you’re right…)

You’re also right wit the bonds performance

About your “seperate risk insurance”, I didn’t know there were policies like that ! Do they cover the payment of 3rd pilar cotisations in case of disability, like my policy does ? Indeed it may be a good point ! Is it cheaper ?

About your conclusion : -
1/ well, I do not know how much I will earn with my 1st and 2nd pillar. Indeed, the projections are done with current contributions. But, indeed, if we go in another country (not determined yet), I think we will have enough, right…

2/ As said, didn’t know there were alternatives^^
in fact, if I have an egocentric point of view : my concern is not about the capital left in case of death because I won’t be here to benefit from it. About the disability cover : with a contract like VIAC or Finpension were we are not obligated to invest a precise amount yearly, in case of disability, I won’t be necessary to cover contributions as I can stop them.

3/ As said in point 2/ I just wondered If my broker didn’t over cover me…

Awwwww… I am lost… I think It would be better if I didn’t everything and keep investing on my own… What to do…

Two random questions:

  • what is better between a contract like mine (security before all), a VIAC ones (market and profitabilitly), and an Axa one (150k guaranteed for death and life, so well less, but 30% invested on a world index, no disability cover) ?

  • in case of usign a 3rd pilar for real estate amortization, would VIAC or Finpension works ? Or it is not a concern and I use a bank 3rd pilar for amortization ?

Thank for this nice conversation
Sincerly yours

I think you’ve basically, implicitly given the answer yourself (at least regarding the guaranteed payout):
We don’t know - and neither will Kens know or be able to tell.

For the very point you raised: Inflation and interest rates.
We just don’t know what 250’000 CHF will be worth and buy you in 35 years.

Less than 25 years ago, the SNB interest was 3.5%.
Even at lower interest rates, the minimum guarantee in Kens’ product will be pointless.

…but, first and foremost, a mere number.
You don’t know what it’ll be worth.

One thing is pretty sure though: If interest rates rise again, (due to, for example inflation) you will be able to make risk-free investments at higher interest rates than the one implied by this capital guarantee.

Random counter-question: What are the fees and costs on the products?

As required by law, you can withdraw early for home ownership.
(There is may of course, be the question how the remainder will be financed)

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We are in agreement, though I think the answer is personal (there are several risks and benefits to balance). Inflation is a very real risk to a financially secured retirement and, therefor, it is better to invest in assets that are expected to beat it than not.

Thanks for your clarifications on the previous contract amount. As for your question, If moving to another contract involves cancelling your current policy, you’d probably recover less than what you have put in (depending on when that occurs), and you’d be faced with the same situation with your new contract: the first few years would mostly cover the cost of your broker and be used for whatever insurance lies in the contract, so you’d be underwater once again. You’d have to check the specific terms of your contract to know more.

I wouldn’t do my comparisons between insurance providers at this point. Since the contract has been signed, if this is the product you want to go for, I’d stay with it regardless of what better rates another provider might offer (might be worth to use it to negociate with your current provider, though). If that’s not the product you’re looking for (and that wouldn’t be the one I’d be taking), then assessing what solution works for you, then cancelling it and using that solution instead seems to me like the better path.

Risk pure policies aim to fill a potential gap in your pillars 1 and 2 regarding death or disability. They can be tailored to your personal needs and purchased as a 3a product (only useful if you wouldn’t max your 3a otherwise) or as a 3b one (that is to say, it’s simply a contract between your provider and you without tax benefits, except if you pay your taxes in the cantons Geneva or Fribourg).

If that’s a product you could be interested in, I’d shop around a bit then ask my broker about it. Its main use is to either protect dependants (spouse, children, others) or a payment obligation (most often a mortgage) in case of disability. Without dependants, it’s only useful if you intend to maximise consumption, in which case, it’s a bit like paying credit card interest to buy more things right now (you’d be taking a recurring cost to allow bigger liabilities right now instead of managing your current liabilities and growing your wealth instead).

I’d start by trying to figure out my needs (projected expenses in retirement), then my assets (current wealth, income, expected pillar 1 and 2 payments), then figure out what is my chosen way to get there. Once you’ve done that, you should be able to decide whether a 3a mixed insurance policy is a tool you want to use to get there (they’re, in my opinion, tools for very risk averse people who don’t want to go through the hassle of manually managing their investments, and the cost for this service is heavy. Only you can now if this is you, or not).

There are a lot of ressources on the topic on the internet and on this board. I’d start reading enthusiastically in order to understand my options better. We are very cuddled in Switzerland with mainstream options being pushed down on us for us not to have to worry while paying high fees. You’d be able to identify these fees and keep them in your pockets instead if you had a better picture of the whole scene. Asking questions is good but reading is required to understand what questions to ask.

Sleep on it, do not act rashly. This stands for 99.99% of financial decisions. Then ponder how you want to live your future and put in motion a plan to reach there.

Hi Kens,

I would recommend staying away from any equity-based life insurance products (permanent life insurance). These are not an optimal investment vehicle for these reasons.

Firstly, you are bound to a long-term contract. It’s very difficult to know in advance whether you will be able to meet the required premium payments in the future. Many people end up having to surrender these insurance policies, and with very few exceptions, surrendering results in a financial loss.

If a much better investment service or opportunity becomes available, you cannot simply terminate your life insurance policy and move to the better solution. Doing so will normally result in a big loss.

The various insurances (the cash value insurance, term life insurance, and disability insurance) are all bundled into one policy. If you end up no longer needing say, term life or disability insurance at some point (because you paid off your mortgage or your kids have grown, for example), you will still be stuck with those coverages and have to pay for them, since surrendering your policy will result in a loss.

Secondly, the asset management fees are typically high. You can invest at a much lower cost using ETFs (bought through a cheap online broker), or using an affordable robo advisor if you prefer asset management.

All things considered, you’re much better off using the best available investment options, and insuring against the risks of death (term life insurance) and/or disability (disability insurance) separately. That way you can easily terminate any one of these if you no longer need it, or if you want to move to a cheaper/better solution.

If you are considering moving abroad, then using permanent life insurance is an even worse idea, as depending on which country you move to, you might be forced to terminate the policy.

As far as making voluntary contributions to your pension fund (pillar 2), this makes sense if:

  1. The resulting tax deductions can result in a fairly noteworthy tax savings. Unlike the pillar 3a, you can’t invest the money once you have paid it into your pension fund. You only earn the low interest they pay you. So the tax benefit has to be high to compensate for the opportunity cost.
  2. You need/want to add to the “bond” portion of your portfolio, because a Swiss pillar 2 pension fund is essentially a bond (minimum interest dictated by the state).
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