Here’s my take on the whole 2nd pillar contributions and buy-in:
Most pension funds will probably pay 1-2 % per year in the foreseeable future. With aging populations and the current rules on solvability it’s not really realistic to hope for more.
There are some pension funds that pay substantially more, but those are usually limited to high earners and have low share of retirees. I’ve seen one offer from a 2nd pillar provider that consistently offers more than 2 %, but they only admit medical professionals).
So, from an investing point of view, 2nd pillar pension fund payments should be avoided if you go all in on other investments because they have a low long term return. Whatever you save in taxes now, you pay through forgone returns.
I made up an example, and I am calling on all experts to point out flaws.
Example
Let’s assume that you pay an additional CHF 1000 into your pension fund. Here’s what you get:
- You get a marginal return of, say, 1.5 % per year (gross)
- On top of that you get the tax savings, say a 25 % marginal taxe rate.
- You can invest these 250 CHF in the stock market with, say, 5 % (gross, being conservative)
- You get a weighted rate of return of:
1000*1.5%=15 CHF +
250*5%=12.5 CHF
27.5 CHF,
which would yield 2.75 % on those CHF 1000 your originally invested. - Now, if you had put those 1000 in the stock market, you’d get 5 %. So, over the very long run, you would get a much higher return. With more volatility to be sure, and get to use the money as you want.
You’ll have to pay taxes when you withdraw the capital later, but with smaller sums the tax is not that high. It’s a one time fee of 5-10 % (30’000 it is only around CHF 1350, so not even 5 %).
The higher contributions have a much better return if you withdraw within 3-7 years of paying more contributions.
The 2nd pillar is more interesting from a savings and insurance point of view.
You should choose higher contributions or buy into the second pillar in the following cases:
Near term
- You plan on withdrawing the money within a few years for opening a business or buying property. (In case of buy-in you cannot withdraw for the next three years). The tax savings work mostly short time (up to 7-10 years).
- You are about 10 years before retirement and want to max out on the tax savings and increase your pension.
- You plan on changing jobs or FIRE-ing and plan on investing the money in a vested benefits account in the foreseeable future (VIAC, Finpension).
- You plan on leaving the country for good in the foreseeable future (depends on the country), see double taxation and social security rules.
Longer term
- You want a nice safety cushion.
- You have gaps in your 2nd pillar because you’re from abroad or because of studies, sickness, absence from workforce.
- If invalidity or death benefits are linked to the sum in the pension fund, you may want to increase your contributions to increase the sum you or your loved ones will get if you get ill or die. (Your mileage may vary.)
- You are fickle with money and want to lock away the money from yourself or people near you, e.g. if you or someone in your family have a history of gambling addiction or drug abuse.
- You fear that you might go bankrupt and want to protect the money from collectors.
Caveats:
- Always check with your pension fund which rules apply in your case. They can vary a lot.
- Check taxation in your place of residence. This might spoil the prize.