Using pillar 3b to save tax on bonds

Taxes
1

Hi!
I’m a regular investor that has around 20-40% of the portfolio in Bonds. Naturally , We pay taxes on coupons/dividends from bonds, in contrast to capital gains. I’m generally thinking how to save on those taxes.
I thought that maybe it’s worth setting up pillar 3b in which I could hold the bonds. I’ve read that the dividends they accumulate are not taxed. (This is in contrast to simply buying accumulating bond ETFs, which are taxed on virtual dividends).

Of course I’m aware of all other disadvantages of pillar 3b, like that they aren’t tax deductible - I consider this move only as “after-tax” investment in safe assets.

I also found out that the only pillar 3b available are life insurances. No viac, or finpension or TrueWealth provide that (maybe someone knows differently?) . But maybe even after paying the premium for life insurance, with high amounts hold in bonds it’s worth it? Especially when someone wants to have some life insurance anyway.

Thanks for any opinions on that subject!

2

I expect that the life insurance fees will make that not attractive (plus you’re often locked in).

Maybe check some foreign markets, e.g. France has low fees and no/little lockup for life insurances (no insurance premium and 0.5% or less expense ratio can be found).

(But do your own research how those are taxed)

(Though probably harder to find CHF based bond fund for life insurance in the Eurozone)

3

Evade.

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4

3b are not tax deductible, but can be useful.
For example a death insurance not linked to 3a.

5

You can find other thread on this topic but it’s not an investment that makes sense financially.
Even being tax deductible in Geneva, I haven’t found any insurance company with a decent underlying asset nor return

I will pass on this one.

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6

No idea if it’s doable/easy for a non resident but something like Linxea Spirit 2 : Assurance-vie en ligne et sans frais d'entrée has 0.5% fee and fairly flexible investment afaict.

(Just picked one that seemed recommended on french forums)

7

The term 3b is missleading. Its just money you put aside/invest, that is not part of 3a. So cash on your bank account or stocks/bond in your broker account are categorized as 3b. This can also include shady insurance products which combine insurance and investment products, but do not fall under 3a.

3b has no tax advantage. Hence you cannot deduct „buy-ins“ from your taxable income and you must declare any capital distributions like dividends or coupon payments as income.

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8

I asked Viac last year if they had any intention to make a 3b product but is not on their roadmap.

9

Then what is VIAC invest?

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10

There is „Viac Invest“ for Investing and „Viac Life Plus“ for Life insurance. Both 3b.

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11

There are some pillar 3b products, which have a tax advantage indeed; if I recall it right, Geneva and Fribourg allow deductions regarding pillar 3b (check your individual situation and with the tax office). Since most of the Cantons do not allow the contribution to pillar 3b, most pillar 3b products are freed from capital gain tax, if you are terminating and withdrawing them. Obviously, check the products first, before setting up something.

There are some other specialities as e.g. you can define the beneficiary freely or that the pillar 3b product is not part of the estate, so the beneficiary receives the pillar 3b payout directly, without fighting with the heirs about the money (e.g. your affair, your favorite barber, etc.)

Some additional information:

  • an insurance company is obliged to offer an insurance component - this is according to FINMA, otherwise, they will directly attack and compete banks (I wouldn’t mind it at all :slight_smile: )
  • pillar 3b products are per se not bad. Be aware that you have an insurance component available and the solution is per se always more expensive than “VT and chill”.
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12

This seems to be true. But according to «The Poor Swiss» only for life insurance. But indeed, if you want a life insurance this can be interesting.

However, this deduction is only possible for 3b life insurance

Source: https://thepoorswiss.com/pillar-3b/

13

There are some insurance companies as Helvetia, who offer solutions without insurance component: Fund account: Build up your assets with investment funds | Helvetia.ch

When quickly checking the fund offering, the performance and TER, I would rather not choose the Helvetia funds, but the third-party equity funds as UBS Global Passive Equity ETF.

Item, OP could check with banks and other financial institutions, if there are bond solutions through pillar 3b W/O insurance component. Obviously, I would run detailed calculations since this is probably a strategy for the next >10 years.

14

Thanks everyone for joining the discussion!

As in my introduction, please note that:

  • my goal is to optimize tax on my bonds component of portfolio only. I invest my equity part through IBKR and other means, so I don’t look for equity funds. But good bonds ones , like US treasury 10+ years.
  • the goal is not to deduct tax when buying in. The goal is to optimize taxes on dividends generated and accumulated in the fund. In any other place, by buying ETFs we need to pay tax on dividends, even when only virtual in case of accumulating funds.
  • It would be nice to avoid insurance, so I will definitely check the Helvetia. But then I’m afraid this tax exemption on dividends might work only with insurances.

Please look for example on this offer from Zurich and FAQ question there:
" [

How is the return on unit-linked life insurance achieved?

](Unit-linked Life Insurance and Savings | Zurich Switzerland)

The return on your chosen investment fund is decisive for the maturity benefit of your life insurance. Historically, investments in equities achieve the highest returns over a longer period of time compared to other asset classes such as bonds, real estate, commodities, etc., but also have greater price fluctuations.

Thanks to the chosen insurance solution, dividends are tax free, provided the insurance has been taken out for a period of at least 10 years.
…
"
It seems like there might be something in it, isnt’t it?

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15

Interesting, wasnt aware of the exception in Geneva and Fribourg for 3b life insurance products. Well played insurance lobby😄

We should be mindful about the term 3b product. Your broker account falls also under 3b, so you could also call it a 3b product.

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16

Its a good idea to avoid mixing insurances with investment products. This usually leads to worse returns.

In CH it doesnt matter if the etf accumulates or distributes dividends. You will be taxed the same. There is no way around that, which Im aware of.

17

A long time ago I did a contract equivalent to Zurich’s CapitalFund Single Premium (with another provider).
The single premium life insurance immediately ensured a payment in case of death, and most of the amount was invested in a fund of my choice; I selected a real estate fund, because its large dividend would be tax-free (under this life insurance contract), and would be used annually to pay the insurance “premium” and to buy new shares.

So, during the 20 years of the contract, the dividends were not declared and not taxed as revenue, but the total value of the shares was declared and taxed as wealth.
The contract has expired (I survived :grinning:) ; I received the value of the shares and could re-invest it freely.

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18

That doesn’t sound like a good deal :slight_smile: given that real estate fund with direct ownership are already tax (income and wealth) free.

19

I think here the idea is to benefit from the life insurance wrapper to make it tax free. I never figured out how it really worked (e.g. if my french life insurance with ~no fee and no insurance payment was eligible)

20

The life insurance component was important for me. With this contract, the insured amount was about 250% of the single premium paid.

Over the 20 years, the values of shares went slightly above that insured amount, with about 5% yield per year. Not the greatest, but I had worse deals… :wink:

The best financial return would have been for my wife, if I had passed away shortly after signing the contract :money_mouth_face: