Suppose that I know I am going to buy a property to live in N years from now and that I would like to take as small a mortgage as possible. (Alternatively: suppose I know I want to start a business and fund it with my own capital.)
From what I understand about Pillar 2, it would be optimal to make as many voluntary contributions as possible in the next N-3 years to save on income taxes, and then to withdraw this money to pay for the property.
This especially makes sense if you are a high earner or in a high tax canton, since e.g. a marginal tax rate of 35% results in a ~54% fictitious âreturn on investmentâ due to the tax saving: you pay 6.5k of post tax income to get 10k of pillar 2 money, 10/6.5 â 1.54 (an alternative way of viewing this is that you get a discount on the part of the property you purchase with the pillar 2 money which is equal to your marginal tax rate).
Reality of course is more complicated and there are several things that the above does not consider. Iâm curious if anyone has thought of these things and can comment. Here are a few factors Iâve briefly thought about, but havenât come to any conclusion:
IIUC the capital from a voluntary contribution cannot be paid out within three years of being paid in â however does this affect withdrawal of earlier contributions?
In reality I donât know when, if ever, I will buy a property. How should I weigh this up in any decision making?
Are there unaccounted taxes that need to be paid when withdrawing from the 2nd pillar?
Curious to hear peopleâs thoughts
[There are discussions on Voluntary Contributions here but they do not cover this topic specifically,
however mods feel free to merge these threads if you think that makes sense Voluntary 2nd pillar purchase ]
Funny coincidence, I was about to open a thread with questions on pillar 2 / BVG buy-ins too!
First, my input on your questions:
IIUC the capital from a voluntary contribution cannot be paid out within three years of being paid in â however does this affect withdrawal of earlier contributions?
From a social security regulation perspective, you could theoretically withdraw at any given time the amount you had on your account three years prior (by the day, not month- or year-end). In practice AFAIK pension funds simply lock withdraws for a full three years after the last buy-in. Why? Because what you are planning to do is tax evasion and illegal. Each cantonal tax authority assesses things a bit differently and each case is to be assessed individually, but withdrawing anything within three years is AFAIK fully taxed in all cantons. Withdrawing between three and five years potentially requires a story on why that wasnât foreseeable just years prior and after five years you are safe in all but the most egregious cases. Also note that you can only withdraw every five years, and some limitations begin to apply from age 50.
Are there unaccounted taxes that need to be paid when withdrawing from the 2nd pillar?
The withdrawn amount is taxed as (separated) income at drastically reduced tax rates (federally one fifth, cantons vary). On 1â000â000 CHF as a single individual you pay somewhere between 6% and 14%.
In reality I donât know when, if ever, I will buy a property. How should I weigh this up in any decision making?
That is one of my questions too, and I believe one should not consider an eventual hypothetical property but simply buy into pillar 2 / BVG as much as youâd like. I assume I could always pledge my pillar 2 / BVG for the mortgage if I ever buy a property, fix (part of) my mortgage for at least three years and then withdraw the previously pledged pillar 2 and repay the mortgage instead of refinancing. Has anyone experience or concerns with this?
Also, my own additional question:
In general, how likely is it to get an (out-of-policy) mortgage without providing 10% hard cash (pillar 3 or free liquidity)? I wonder if one could get a mortgage financed only by pillar 2 / BVG? Question may sound unreasonable, but SNBs reporting (graph 36 on page 38) says that in 2021 a slight majority of new mortgages violated the banks self-imposed affordability criteria with a calculated 5% interest, so why not violating the 10% rule too? That is assuming true affordability would be of no concern at all for the bank (net worth above mortgage amount/property value, very high income).
Does anyone have any concerns or knows of any limitations or negative aspects of potentially very high (more than 1â000â000 CHF) pillar 2 / BVG amounts, especially at a relatively younger age? I have access to a 1e solution and am considering buying-in heavily over the next years.
Whatâs your personal asset allocation? You donât share any information on income or other assets. I consider pillar 2 like a bond as it gives a relatively stable return. Depends on your pillar 2, of course.
So even without early withdrawal itâs an interesting investment due to tax savings and some return.
Not neccesarily if you are not yet sure about the early withdrawal. Depends on your income and amount you can buy in. I set a limit (like 30% marginal tax rate) and then bought in up to that amount. Itâs less attractive to go âall-inâ due to progressive taxes.
Yes. It impacts all withdrawals. See this article from Finpension:
"If you have voluntarily paid into the pension fund in the past three years, it is not recommended to early withdraw funds. If you still make an early withdrawal, the tax deduction that you were able to make with the voluntary purchase will be retroactively offset. You will have to pay an additional tax."
Example: If you make a voluntary contribution of 50k in year 1 claiming a 35% deduction on taxes, if you try to withdraw 50k inside 3 years they are likely to argue the 50k contribution was to avoid taxes and not for retirement provision and will make you pay back the 35%.
I believe @1742 is correct that even withdrawals after 3 years could be challenged, depending on the case
Really? I find that strange, since it says on the ch.ch website that withdrawing assets for home purchase is allowed
I wouldnât call this tax evasion, rather tax planning. If a tax incentive is created, surely the only reasonable stance is to assume that people will optimize to take advantage of it (thatâs the whole point). To me this sounds the same as saying that itâs illegal to time ypur voluntary pillar 2 buybacks to be in years of high income.
Ah, ok so assuming that getting the deposit for a mortgage is not an issue, another strategy would be to do the tax optimization after purchasing rather than before:
take out a large mortgage to buy the property lasting (say) 10 years
put as much money into pillar 2 as possible over the next 5 years, so that when the mortgage expires this money is available to be withdrawn
use pillar 2 to pay off the mortgage instead of refinancing after the 10 years are up
Itâs allowed but not 3 years after a buyback. Whatever the amount you want to withdraw and whatever the amount of the buyback. People have gone to the Federal court about this and have always lost.
Really low, unless you have a really good relationship with the bank (big client)
The law could change (tax increase at withdrawal, etc). Some 1e solutions are quite bad (high fees, etc)
See Pension schemes 1e for a discussion on 1e. The main concern is when you change jobs and the new employer doesnât offer 1e (and the stock market just crashed).
Reraising this topic with a couple of further questions:
Are there restrictions on the pledging of pillar 2 assets after a voluntary buy in?
Also, assuming I pledge my pillar 2 and donât make any withdrawal for the deposit:
i. is it possible at a later date (say 5-10 years after purchase when the mortgage is refinanced) to make a withdrawal
ii. at that point do the usual 3 years restriction on buybacks apply?
Context is: I am trying to plan for a potential future property purchase (timing unclear, likely 2-5 years from now, though itâs also possible I will never buy something) and trying to understand how to optimize my asset allocation given this uncertainty. If the answer is yes to the above, it seems that the best approach would be: wait until I decide I am definitely going to buy something, then at that point gather enough for a deposit and put everything else into my pillar 2 to take advantage of the tax break, given that it would be possible to withdraw later on after the mandatory waiting period is over.
Thanks! Yeah makes sense. From what I understood the pledged pillar 2 assets should be counted at some discount (90%?) meaning that one could get a deposit in the extreme case with 10% of the property price in cash and 11% in pillar2 assets.
In my case I think it is likely that between my partner and I we would have more like 15-20% in pillar 2 assets so wouldnât be a problem.
The more I think about this, the less I understand the situation with the pillar 2. Seems really strange to me that it could be financially optimal on an individual level to stack up a huge mortgage and stuff money into the pillar 2 instead of paying off the mortgage (if you have a high marginal tax rate, this can be optimal if the mortgage interest rate is ~2% just looking at the interest payments, without even taking into account the tax relief on the capital).
In essence there is a loop hole that allows high tax rate payers to get a discount on their home by reducing income taxes and instead paying pillar2 withdrawal taxes. The banks also win because of interest is paid on larger mortgages.
Maybe this is all an unintended consequence of extremely low interest rates? since this loophole is no longer interesting if the mortgage interest rate is significantly higher than the pillar 2 rate of return.
Addendum: I donât want to start a discussion about what is fair / desirable for society. Just want to understand the conditions under which the existing incentives can be used and whether things may change depending on interest rates etc.
I guess it should also work in a high rate environment, as the pillar 2 returns should also be higher. Maybe someone who has had pillar 2 returns in higher rate times can comment?
Well, itâs beneficial not only to the financial industry, but to tax payers, to the construction business that can charge more, and the overall public finances of municipalities by tying down said tax payers.
Leaving tax savings on pillar 2 buy-ins aside, my imputed rental income for example is higher than my mortgage deductions.
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