They do offer high yield, emerging markets and inflation-linked bond ETFs.
Since „yield“ typically ignores price movements and capital gains (1, 2), the takeaway is to hold high yield investments in pillar 3a.
Stocks typically are low-yield investments, compared to (as the name says) high-yield bonds. The last 10 to 15 years with their depressed fixed income yields are rather the exception than the norm. But high-yield bonds typically have higher yields than stocks‘ (dividend yields).
Anyway, the overriding factor should be the upfront tax savings. They are investable and alone make pillar 3a worthwhile for most readers, as @Cortana stated.
That’s something the article mentions yet curiously disregards. Which is baffling, especially in light of the high returns of equity investments it assumes. That’s would be my main point of critique.
That doesn’t seem logical, the taxes are commutative so as long as there’s a difference in tax rate between income tax saved and withdrawal tax rate it’s always a win. (Let’s assume exactly same return with no dividends to make it simpler).
X invested amount.
Ti income tax
Tw withdrawal tax
R return
So 3a returns: X * R * Tw
Vs outside: X * Ti * R
So as long as Tw < Ti it’s a win. (And Ti is marginal rate while Tw is average)
This assumes you have a holistic allocation (shouldn’t matter what you do with the savings, and many people have more investable amounts than the pillar3a limits)
Not necessarily, since Ti applies to the initial amount and Tw on the final amount. Whereas in taxable, you are taxed only on the dividends. With enough capital gains, taxable might win, eventually.
If you’re at a high marginal tax rate (for most people often 30%+), are there any situation where Tw can be as high? (Note marginal vs effective rates).
Looks like the top is 30% for a single canton. Median rate for 20Mi is below 10%.
No, this doesn’t matter. Ti is applied to the full initial amount and Tw is applied to the full final amount. And the above formula is for the simplified case without dividends. However,
X * R * T = X * T * R
So as long as the return multiplier is the same and the tax rate is fixed, it doesn’t matter whether you pay taxes right away or when withdrawing after many years on the full amount.
The main complication is that while you can easily calculate Ti when investing, you can’t be sure how high Tw will be at time of withdrawal and Tw is progressive. However, you should be able to make a good enough estimate using finpension’s table linked above (assuming no changes in future tax rates and you know the future canton of residence).
Amusing fact about all this:
If you’re smart about 3a contributions and especially withdrawals, you’ll optimize it such that T_w is a tiny fraction of T_i:
T_i will always be the marginal tax rate. T_w should be a tiny fraction of it both due to progression and privileged withdrawals being classified at 20%-30% of regular tax rates.
What’s more - not only can you access Pillar 3a funds a few yars before official retirement (regular retirement date plusminus 5 years), you can also withdraw additional 3a accounts in the years before this under WEF/LPP rules.
You are both right on the tax rate and the formular.
I was assuming a somewhat lower R for pillar 3a compared to taxable and meant to say in this case, taxable could catch up eventually.
If R is the same or close enough, it’s not possible.
If you invest in the same assets in 3a and taxable, R should typically even be higher for pillar 3a as you don’t pay any dividend or wealth taxes, which should normally more than compensate for the higher fees of finpension/VIAC compared to e.g. VT at IBKR.
True, if you can actually pick ETF freely. I’m tied to my mortgage bank. Similar rates like VIAC, but less selection, lots of CH and CHF-hedged. Combined with fees and tax efficiency, that’s just my personal assumption, despite tax-free dividends.
Even though, 3a is a no-brainer, I’m not disputing that. Let’s leave it that, I simply commented in the wrong context without thinking it through
For 10 year period, MSCI world hedged outperformed MSCI world unhedged by 30 basis points. In fact it seems Hedged version outperformed in all time periods
the TER% difference for ETFs tracking this is very small inside 3a.
Interesting. It is an investment in stocks and an additional negative carry trade (borrowing USD and holding CHF). The interest difference between the USD and CHF is gigantic and the Dollar must have lost that every year. Or, it just lost a lot in the last 3 years. I think there many longer time-frames where you would have lost money with a negative carry trade.
Doesn’t help much, because I am in reverse in such a trade since I swapped a big part of my debt to CHF.
Seems to me they’re mostly neck and neck with yearly variations favouring one or the other. Starting point probably has an important effect as to the magnitude of the difference of returns between the two:
If I may make a comment in regard to the original topic: The Pillar 3a and 2 investment options are in a sense a tax deferral into the future.
For the younger mustachians (or those earlier in their journey) it does have the added bonus of making us feel like we are further along… I don’t know if we typically consider the future tax obligations when tracking NWs here…
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