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)
Does this consider reinvesting your marginal tax savings in your taxable account?
My take is that investing in 3a and vested benefits (in ~100% stocks) is always a plus unless your marginal tax rate is very low, IF you reinvest your tax savings in the stock market.
E.g. put 10k into 3a, save 2.5k taxes, invest 2.5k saved taxes in taxable, where it compounds.
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)
I guess we’re on the same page, but just to clarify: if you leave your savings in cash, they will not compound at stock market levels, and this indeed will result in a difference for terminal wealth (holistically, looking at your total net worth including taxable)
This is why pension fund buy-ins are a poor choice in the long run, because pension plans (usually) compound at a significantly lower rate than the stock market.
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
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