I have the option to change my own pension fund contribution (2/6/8%) while my employers contribution will stay the same (7%). I reduced it to the lowest option 3.5 years ago and now I’m starting to question this decision.
My thoughts back then: I don’t care about my pension fund or future retirement, I want more money now. My thoughts since I started investing 2 years ago: While I pay more taxes with a lower contribution, my yield in ETFs will surpass those of my pension fund (usually around 2-3%/year).
What are your thoughts on this? Did anyone run the numbers?
Yes as it’s already above the mandatory contributions:
25-34: 7% 35-44: 10% 45-54: 15% 55-65: 18%
So as long as you get at least 7% (in my case) and your contribution is max. half of it, everything is within the laws. 2% + 7% = 9%, of which 78% my employer is contributing.
I can’t tell you the name of the pension fund. But it’s a pretty decent one. 130% covered and like I said usually 2-3% interest every year.
As I’m 30 years old, I aim for a maximum equity allocation. Everything outside my pension fund (emergency fund and small property abroad ignored) is invested in stocks.
Over the last couple of months I started to change my view on pension funds. They play a significant role in my net worth progression. While the performance is lower, the yield/risk ratio is extremely good. It’s basically a risk-free and tax-free 2-3%/year bond. If I increase my contribution, I save a lot of taxes (with 25% marginal rate).
If I ignore risk and just aim for the best longterm yield, is it better to keep it at 2% and invest my higher net salary in ETFs at IBKR? Or shouldn’t I ignore risk and look at other factors too despite pure yield?
Another question: if you switch to more contributions, does the maximum buyback amount also grow or would that tax defered space be lost if you don’t contribute to it regularly?
If your pension fund is with the primauté des prestations model (and this should be the case as 95% are) one “trick” you could do is the following :
Keep your contributions at 2%
Invest in VT
Proceed to a rebuy (rachat in French) in the pension fund at the end of the year if the equity performed well. This will decrease your taxed revenue.
Yes this is my case also: the difference between a buyback or monthly contributions is that with monthly contributions the max buyback amount grows so I’am doing the max contributions per month (2% of the guaranteed gain).
I am also buying back every year approx 10k as that brings me in back (with other decent deductions) in confortable taxation territory (running the numbers on last year tax program to estimate the buyback needed this year). Would be recommended though to do the buybacks at the end of the career as you earn more then…
I’m maxing out my 2nd pillar contribution since I work (higher % possible) but I’m not buying back (too young and too many uncertainties regarding the future of pension funds until my retirement).
The only goal was to reduce my taxable income. I’m single with no child.
Due to major changes in my pension fund, I’ll modify my strategy and will start contributing to the lowest plan possible next year.
On one hand, this will decrease both my contributions and my expected annual pension. On the other hand, my taxes will be higher but nothing unbearable. I’ll be better off investing this extra money (less taxes) on my own.
I’ll make a review of my financial situation in my 50’ taking into account my 2nd pillar at that time. An option could be to increase my contributions and potential buybacks (and lowering my taxable income) when the salary is higher (theoretically) than in your 30’ or 40’.
Disability or unemployment are not taking into account here, although they could have a material impact in my financial situation. Of course, the plan will change if a wedding or children enter the game.
Conclusion ? the pension strategy must be individual.
Do you really get 2-3% a year? In my experience most pension funds only pay-out the mandatory 1% and keep the rest as “reserves”.
On that basis the tax advantage is quickly offset by the low returns after a few years only, and it’s not really worth it.
Another option, if you have a chance to change jobs in the future and you forget to transfer the pension assets, you can have them invested through Value pension/VIAC
I would stick to your strategy unless you have a concrete plan to withdraw the 2P in~5 years (eg buy property or leave Switzerland to a country with favourable tax treatment)
You can model both scenarios side by side with your marginal tax rate. In my case paying lower 2P contributions is likely to pay off within 3 years
You have to consider volatility but at your age you have a long investment horizon which means equity risk largely disappears
Consider also:
-age 30 your salary and marginal tax rate is likely to be higher in the future - so also better to make top ups later
-% contributions increase with age. I’m 15 years older than you and I’m surprised how my 2 pillar assets now really ramp up, I actually have too high % of our nw in 2 pillar vs what I would like, we are considering leaving CH and I have a problem how to get it out without paying high taxes in the destination country
-your next employer may not have such a nice scheme and you will be obliged to transfer your assets into it
I might buy a house within the next 5-10 years and withdraw the whole 2nd pillar.
When changing jobs, I’m potentially able to transfer the assets to ValuePension. Thus investing them again at a higher yield and without taxes on dividends.
Insurance benefits are linked to the insured salary, so it doesn’t matter what’s inside @Guillaume_GVA
Future yield of the pension fund. @FuriousP we got 2-3%/year in the last 5 years. But of course that doesn’t have to stay that way. They might starting giving us only 1%/year and finance the current pensions from retired people with the rest of their gains.
Next employers pension fund like @Barto suggested. Will it be worse? Can this be offset by just transferring the assets to ValuePension again?
This is a related thread. It seems that it makes sense to contribute more to the pension fund if you plan to withdraw it within the next 5-10 years (either retirement or buying RE). After the the compound effect of stocks will start overcompensating your tax savings.
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