To 3rd pillar or not to 3rd pillar


#1

Hello from a long time “lurker” :slight_smile:

I have been thinking about this for some time: Like every year I am currently faced with the decision to pay into some form of 3rd pillar investment.

Now just looking at the tax rate, I am under the impression that it is actually a risky undertaking

This year we will be paying a state and local tax rate of ~ 7.5% (Zug) and an additional 4% Bundessteuer. Lets say the best case scenario is, we retire in Zug which would amount to a tax rate of 3-6% (depending on the total amount withdrawn). Not a great return from the tax rate alone but it is something.

But am I right that if we were to retire anywhere else, we could actually pay more in withdrawal than in income taxes? Especially if we were to move abroad and then we would have to declare it as income there?

Let me know what you guys think - what’s the point of 3a in Zug?


#2

The first question to ask yourself is “what is my marginal tax rate”? This helps determine your one time tax saving. Don’t take your average tax rate for computing your tax saving. FYI: https://www.kgeld.ch/service/rechner/steuerrechner/

The 2nd question is “do I need immediate access to this money”? This should help you to know whether you are ready to pay for the illiquidity associated with a pillar 3a.

Based on your fiscal residence at the time you withdraw your pillar 3a money you will be taxed. There is then a lot of room for optimization :slight_smile: Maybe you won’t even pay a dime on the entire withdrawal :wink:

Does it make sense for you to have a pillar 3a? It depends on your situation, salary, future choices, etc…


#3

why do you say marginal tax rate is important? The link you provided mentions the social security payments as well which do not get “reduced” by the amount you pay for pillar 3. Or do I misunderstand your point?

As for the rest - of course it is a bit difficult to look into the future, but that’s kind of what is concerning me. You might trap your money in pillar 3 :slight_smile:


#4

Happy man. The third pillar is not for you.
I should move in your village in Zug.


#5

Hi oozoo,

You are indeed completely right, I updated my link accordingly. It is indeed false to consider the social security payments for the mean of this calculation.

Let’s take an example to distinguish between the average and the marginal tax rate: (not realistic)

If someone has an taxable income of CHF 100’000 and pay CHF 10’000 of taxes, he has an average tax rate of 10%. However, remember that the more you earn, the more taxes you pay and that this is not a linear relationship. In order to simulate your marginal tax rate, you need to answer the question " If my taxable income increased by CHF 10’000 how much taxes would I be paying?"

Let’s say a taxable income of CHF 110’000 results in 12’300. Then the increase in taxable income of CHF 10,000 leads to a CHF2,300 increase in taxes. Therefore, your marginal tax rate is 23% (2300/10000).

When computing the tax saving of the 3a, you need to analyze how much taxes you would save and therefore you are not interested on your average tax rate but on the impact of this decrease in taxable income on your current situation (=marginal tax rate).

I hope this helps :smiley:


#6

Hey there,

you are right, the marginal tax for the additional 6768 * 2 is 23% for us. Indeed the progression even in Zug is not to be underestimated :slight_smile:

I used the https://www.zg.ch/behoerden/finanzdirektion/steuerverwaltung/steuerrechner - its simpler than the alternative, if you roughly know your combined net income

Cheers!


#7

I’ve found an interesting reading some time ago which looks into some tax related aspects related to 3rd pillar. It’s a quite long reading, but I think it’s worth. Unfortunately it’s available in German only, but I’m still posting it here as it probably helps you never the less: https://www.truewealth.ch/point-of-view/saeule-3a-achtung-vor-der-steuerfalle/


#8

This link is a goldmine.
So basically, for the average Swiss guy starting contributing to third pillar at 25:

  • if your third pillar average annual returns are superior or equal to 6%, the tax advantage disappear because of the amount of tax you have to pay at the end: But the money is still locked until you reach conventional retirement age.
  • if your third pillar average annual returns are lower than 6%, then on the long term your simple tax savings will be dwarfed by the opportunity cost of not investing in a low fees ETF (historical returns ~7%).

Of course, everybody has to do his calculation based on his time horizon and expected yield, but “tax savings” official solutions from the government aren’t really that attractive.


#9

Hi everyone

I wasn’t really active on your forum lately - just to much going on, but this post attracted my attention. Especially as I asked Felix (CEO of Truewealth) to correct his Article.

Three important things are missing:

  1. Costs - Truewealth for example has around 0.2-0.3% higher costs than VIAC, so you should compare the return after costs. I would guess, that we are around the lowest fees in the market.

  2. Tax on income - the article does not take into credit, that you receive for example the full swiss dividends in your pillar 3a while you have to pay tax if you save privatly. For US equity there is no difference (unfortunately the updated double tax treaty is still not signed by the US). I know you mustachians do not like Swiss equity that much :wink: but if you think about the dividens (approx. 3%) and you end up paying 35% income tax (see https://www.123-pensionierung.ch/images/451_grenzsteuersaetze.pdf), you perform 0.4% better in the 3a (40% CH allocation, 1% tax difference)

  3. the tax benefit from the 3a contributions could be invested, to simply sum up is not a fair comparison. You can either choose to pay it as tax (no pillar 3a) or invest the tax savings on top of your pillar 3a with your private savings.
    If you invest the tax benefit of 1’396 with your private savings at 6%, the result would be 229’010 instead of the 55’840

I hope this helps.


Is it fine to fill up 3A every January or do I need to spread it out?
#10

Can you elaborate on this, How much are US dividends taxed when receiving them through you eg. VIAC third pillar?
When we invest privately in the US markets with a swiss Broker using an Ireland-domiciled fund, we pay 15% tax on our dividends. Using a US-domiciled funds we can effectively reduce the tax on US equities to 0% (using W8-BEN and by reclaiming the remaining 15% through our taxes).


#11

@Joey, this may be true if you are taxed at source (i.e. only your salary).
Since the big majority of people with a 3a are Swiss or have been here for >5 years (in the general population, on this forum relation may be skewed), this “group” is mostly referred to in discussions around this topic - and we are taxed on all income incl. dividends. And the marginal tax rate which applies to dividends can easily be 20%, often 25%, or even >30% (depends where u live). It is this tax which is not deducted on Swiss dividends earned in my 3a. Some other dividends (from US) “lose” “only” 15% in my 3a, I believe.
When u personally and outside of a 3a reclaim tax on US dividends via a tax declaration, u kind of get 15/30% back and then pay the marginal swiss tax rate (20-30%?).
If u live in a tax haven like Zug, your example may be different, but again that is a small share of the general population.


#12

I began paying into a 3a account in 2006… and stopped in 2011, when the money creation of the National Bank was on the track of being completely out of control.
It is good to optimize the taxes, fine-tune the commission rate, etc. but the value of the money you’ll have when you retire is a big question mark.


#13

But @Zerte2, what to do instead? Buy gold, property, bitcoins? The latter would have been a good move in 2011 :wink: Do you have a 3a money account, or a fund account?


#14
  • Property is best but tricky: pension funds have frontrunned you and flooded the country with appartment blocks. However it something to consider IMHO.
  • Gold “as liquidity” - but you need to trust that other people on Earth have faith in its value. No return (=dividend, interest) and only costs.
  • Perhaps cryptos (not tried yet) when the hype has faded enough (one more year?).
  • “Value stocks”: stocks with a good dividend, low P/E and P/B, underlying company in good shape. Of course it is difficult to find such gems since the market has rushed into stocks while interest rates were zeroed or worse. However, in the US, perhaps, with raising Fed rates (for how long ?)…

Yes I still have my 3a. Is it possible to liquidate it ?


#15

Your last option (“Value Stocks”) can be held within 3a and should retain value through some inflation, better than cash in the bank, under the pillow would.
You can’t liquidate 3a unless you are 60, emigrate or you buy a property.
Until that time I recommend you transfer to a 3a fund solution (you didn’t say if you had a 3a cash account, or a fund), for example VIAC, which lowers income tax and has the lowest commission (in 3a). You could fine-tune your ETF portfolio there to be “value stocks”-heavy.
Of course it would’ve been better to do that with your 3a cash account back in 2011. :wink:
Sorry to come up with the 2011 again, can’t resist because in retrospect such fabulous advice is very easy :slight_smile: Alas, advice on the future is harder, but do consider moving some of your 3a cash into ETF’s via VIAC.


#16

Thx! I’ll definitely have a look into this possibility.
Perhaps back in 2011 there were no such sophisticated options with portfolios that you can fine-tune.