Hi guys, hope all’s well! Need feedback to make sure I’m not missing something important here… Im thinking of regularly putting a huge chunk of my yearly investments in Pillar 2 instead of the investment account. Assumption: Planning to take it out within 10 years and high marginal tax rate. When I do the math, even if i do something extreme like average 0% return on P2 vs 5% investment acc, P2 wins due to the tax savings. Definitely looks different if i wait till retirement age to take it out but short term looks quite advantageous. Any risks I’m missing here?
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The main issue is the three-year rule: if you withdraw a lump sum within three years of making a contribution, the tax office will reclaim your deductions. Therefore, you generally need to stop contributing exactly three years before your planned exit. Unlike a private investment account, this money is completely illiquid (it is locked until you retire, leave Switzerland or buy a home) and does not automatically pass to your heirs if you die; it is subject to strict pension regulations instead.
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- The funds are locked up
- You might underperform other investments
- Rules might change
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- You’re limited how much you can additionally – if anything – pay into P2.
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Similar topics that might be worth a read before making your decision:
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Thx! I missed these threads and shamefully forgot to do a quick search before posting
Often discussed, but it still seem the option is undervalued by many. Depending on your parameters, it can be a great option. Especially when combined with additional investments and a mortgage, and a decent pension fund, of course.
With 10% withdrawal tax and 40% income tax, even at a hypothetical return of 0, that’s some 4% p.a. over 10 years, and over 8% over 5.
For my planning, I assume 2% return on top, in the last 5 years we averaged some 4%. Not bad, especially considering the predictability.
Even if the investment account does better in the end, so what? You benefit, either way. Besides, high investment returns will also drive up pension fund returns to some extent.
I guess you checked withdrawal tax?
More into detail, you could double-check whether your pension funds pay out voluntary buy-ins in case of death, if that’s a concern. Ours do.
You could consider some higher withdrawal taxes, or restrictions on early withdrawals or vested benefit shenanigans when / if changing jobs. But most likely it still plays out.
That’s a luxury problem. Combined with some retire-early option, most people - even in their 30’s - will have some 5x or more annual salary buy-in capacity. That’s plenty of time to play this game, even at high saving rates that all go into p2.
And you could likely even “reset” that retire-early fund when changing pension funds.
By the time you reach your cap, you likely don’t have to worry anymore, anyway 
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What do you mean here?
Hey a q regarding heirs and death:
there is the dependents pension, which depending on your age represents an fairly competitive annuity, so would the capital being locked up due to early death not be a positive unless you’re >45?
If you leave your fund, and have such a dedicated retire-early account, I assume this is transferred along with your regular account to a new fund - instead of accounted as a RE account on their side?
Meaning your 2 accounts become one?
As regular and RE-account have separate buy-in limits, couldn’t you “re-start” the RE account in the new fund all over as per the new regulations?
This is just speculation, wasn’t in that position, yet.
Just wondering, it’s a side comment. Main comment was that regular buy-in limit can be quite high already, and can be more than doubled with the RE-option.
You probably need to study the details of your exact fund regarding these nuances.
Mine for example says something along the lines of “a pension is paid to the spouse/partner and the kids, expressed as a % of the salary. On top of that the past voluntary buy-ins are paid back to the heirs and the balance of the “normal” salary contributions it not paid out unless it is higher than the kinda “fair” value of the annuity that your heirs are entitled to, if the balance is higher than that - then also the extra of the balance is also paid out to heirs as lump sum”.
So in this case the first X CHF of your pension fund balance (excluding the voluntary buy-ins) are not paid out as they are considered to be covering the survivor pension. But if the balance is less than X then the pension is still paid out in full
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Do check the pension regulation, there’s usually a lot of caveat wrt the early retirement buyin (and from what I understand it’s usually a bad idea to exercise it if you’re not going to retire early).
(e.g. you can lose employer contributions and interest if you end up being above the amount you would reach at regular retirement).
But in general what you describe only work if the insured salary + contribution amounts are higher in the new job (unlikely at 58yo?), since the buy-in can only move you up to the total amount you would have if you would retire at the standard age.
(so there’s no benefits to doing the buy-ins over two employers)
For example:
- do buy-in with first employer, reach max amount (65yo full contributions)
- switch employer, assuming same insured salary and contributions you’re now well over the limit (they might even reject some depending on the regulations), and no early retirement buy-in is available
That ignores compounding. It would be 3.4% cagr over 10 years and 7% cagr over 5 years. Compounding is the single most important metric for investing.
There is, you might even lose some of it.
But if you’re extremely certain you won’t stick around until 58, it shouldn’t be an issue, right? Even if you do, you could amortize your mortgage before you run into the “problem” of having too much in it.
I understood OP in a similar vein, i.e. don’t buy-in till the end of time (when you actually might hit the limit, so you might as well start later), but with a time horizon of a few years, and well before regular retirement age.
Yeah I assume so (but you also need to be certain you won’t e.g. lower your insured salary by going part time, tho if you’re close to retirement this might count as partial retirement and be allowed without lowering the insured salary).
Need to make sure not to hit the 3y withdrawal freeze tho.
Anyway, it’s only possible once hit the buy-in limit, just need to make to read the fine prints before doing that (and understanding the caveats in case things don’t go according to plan).
(btw I haven’t figured out if the ER buyins are tagged specially when switching funds)
How so? I compared 6k (10k buy-in after tax) to 9k (10k after withdraw tax) to arrive at some 8.x% for 5 years. 8.45% when using a calculator, assuming no error in the formula 
Main point is, it’s a nice guaranteed return that diminish over the years, but out of curiosity, how would I get to 7%, instead?
Fair enough. I did, but it doesn’t specify whether there’s a “flag” for it, though. Not as far as I understand, but I could tell you in 3 months Either way, having a limit for buy-ins and cave-eats like those can be navigated or planned for easy enough. If your plan is to buy-in aggressively, it’s kind of the target to eventually hit the limit.
This, for example. If you have 20 years+, it shouldn’t be an issue. If you want to be able to amortize anytime, and are married, you could do buy-ins in 3-years rotations.
Worst case as single, you either do need to wait (or stop buy-ins when getting older) or pay back some tax deductions.
So you should be aware of those points, but it’s not really a “con” or risk for doing it.
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Yeah, I mostly remember chatting with pension committee members explaining it really wasn’t the same as a regular buy-in (but likely depends on pension regulations).
Anyway, at the moment I’m so far from the buy-in limit I still have a lot of time to make up my mind (good problem to have 
)
By the way another trick to increase buy in limit is if your employer changes the pension setup, eg introduction of 1e could allow another buy-in limit (since regular and 1e usually have distinct limits), lowering the age for contribution below 25yo, can unlock a few more years, etc.
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Sure, go on.
Change of regulations (tax rates upon withdrawal).
In one of the groups I am on, someone did some math and concluded that 10 years is a good breakeven point because you get tax savings and some sort of return in 2nd pillar as well.
I never validated this but with high marginal tax rate, it could make sense specially because there is no downside risk with 2nd pillar. I see it as higher interest savings account
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