Voluntary 2nd pillar purchase


#1

Hello everyone

I just set up my account for this forum and introduced myself over here. So I thought why not make a post right away to get things rolling!

Before diving into the actual topic / question of my post I first want to provide you some background about my current situation:

I’m 26 years old and work in Web Design both part-time (40%) and as a freelancer (60%). Since I’m earning more than SFr. 21’150/year at my part-time gig, I’m also connected to a “Pensionskasse” (2nd pillar) and I’m not allowed to put more than SFr. 6768/year into 3a. Giving up my part-time gig is (currently) not an option.

Now since things are going pretty good - both at my part-time gig and as a freelancer - I’ve made quite a decent income last year and will be in the same situation for this year. What I had to learn the hard way: high income also results in higher taxes. Well, I knew about it beforehand but was still very surprised about the actual number that I had to pay for 2017. :wink:

So I thought about how to lower my taxes and invest more money for my future at the same time - after subtracting my maxed out pillar 3a, freelance expenses, etc.

The 2nd pillar seems like a pretty good option for that. But to be absolutely honest I’m not 100% sure if it’s a good option and how much I should / can buy every year. I read through several articles online (for example https://www.123-pensionierung.ch/de/pensionskasse/pensionskasseneinkauf/) but I’m still not quite sure about how this all works.

  • So basically would you recommend doing volunary 2nd pillar purchases to lower taxes?
  • How / where can I find out if I’m allowed to do so and how much am I allowed to buy every year? How much does actually make any sense?
  • Is there anything else I need to pay attention to, regarding voluntary 2nd pillar purchases?
  • Are there any other ways to lower taxes you would recommend, in addition to 2nd pillar, 3a and daily business expenses (like food, travel, etc.)?

As I already mentioned, I’m still trying to figure out this whole FI thing. I’m sorry if these are some very basic questions and even more so if they were already answered in another post. I’d be very grateful if you could point me into the right direction if that’s the case.

I’m really looking forward to your answers.

Cheers


#2

There is a post somewhere on the forum. If I remember correctly, it doesn’t make sense to voluntarily pay more on the 2nd pillar since you’ll get more back if you invest that money on the long term.

Your 2nd pillar provider should tell you how much you can “invest” in them.


#3

Hey! Thanks for your quick response.

I see but if I don’t pay more on the 2nd pillar voluntarily I also won’t be able to subtract that number from my taxes, i.e. the money I pay taxes with is “lost” and not invested at all.

Or is there another option than 2nd pillar where I can invest it and subtract it from my taxes?

I’ll check if I can find the post you mentioned.


#4

Well,
let’s say you put 2000chf in 2nd pillar and you save 100chf.
If you invest those 2000chf in an ETF, you might get 70chf the first year. Then another 70chf the next year and so on and on.
The 2000chf in 2a will give you what? 1.5% per year?

Numbers are totally made up btw. It’s just to explain the difference between one time gain (less thax the first year) and recurring gain (investment with higher returns every year).

Ofc. 2a is safer than investing…


#5

Hi, in my company people do this. We are basically freelancers, but with a salary and the rest is paid out as bonus. We can also decide to put part of the bonus into pillar 2 as employer contribution. As some of the guys are old, they are fine with investing into a low return investment, just to same some taxes.

As for me, I’m really undecided. I don’t really understand how pillar 2 works. On pillar 2 websites you find some returns like 5-6%, but in the end your portfolio goes up by only 1-2%.


#6

Generally, the returns is what they get. And the interest is what you get. The way I understand it, they are making 5-6 percent on your money each year and giving you about 1% :thinking:


#7

If this is how it works then why are people not protesting? I’m sure it’s at least not done in a straightforward way. Like, they need to keep this Deckungsgrad above 115%, or something?


#8

Gentlemen,

this is probably the most discussed topic in Switzerland’s pension system. The reason why you do not get the full return they have achieved is
a) they have cost (Verwaltungskosten)
b) not all your money goes to savings (insurance like life insurance, invalidity etc.)
c) they have to plan for negative years (in negative years you still get your 1%)
d) because of c) they need to build up reserves
e) they pay the pensioners 6.8% of their assets annually (i.e. for CHF 100.000 assets you get 6.800 annualy)

As e) is of course to high in our current environment and is also paid in negative years, this is where your money goes. That people are not marching on the streets against this is probably due to Swiss gentleness (the French would burn down a few McDonalds to protest).

All the best
Gondolin


#9

Yes, they have a legal reserve to keep. And of course, they are using this money to pay current people that are retiring either with a pension or a lump sum.

Still, I am not sure if it’s a good investment. I never did the full comparison myself, but Mr. RIP did something like (https://retireinprogress.com/october-2016/). buyinvsstocks

They are a very good short term investment but not very good long-term.


#10

Hm I see. Seems to be a little more complicated than I initially thought / hoped. Definitely want to do more research on the topic though. Cause right now the best option for me would be to go full freelance so I wouldn’t have a “Pensionskasse” anymore and could therefore put more into 3a. At least in terms of lowering my taxes and long term investment combined.


#11

I think I get what you’re saying. Thanks for the clarification. This really helps me a lot. I guess I need to look for other ways to save taxes then. At least for now. :wink:


#12

You can try to do the math yourself if you want to be sure :wink:


#13
  1. Basically, from a pure tax perspective, making volutary purchases makes sense. If you would like to know how much you will save, just multiply the total amount of the contemplated purchase with your marginal tax rate. Go on this website to get a (very) rough estimate of your marginal tax rate. Knowing your marginal tax rate will help you to estimate the potential tax savings.

  2. Now that we covered the tax aspects, you still need to know where you are putting your money and what return you can expect going forward. The pillar 2 is characterized by the political context and the related high uncertainty of the sustainability of the whole pension system (Pillar 2 = Black box). In other words, I personally consider that when making voluntarily purchases you know where you are putting your money in but have no idea on how much you will get back. For the sake of simplicity, let’s a rate of return of 1-2% for the future. Doesn’t look like the best investment ever to me…

  3. Now that we know that the money put in the pillar 2 is a bond proxy (at best), does it make sense for you to “invest” your money in this vehicle? You are 26 years old and work in web design, I will assume that you have a decent salary and that you are single. Therefore, you will have a relatively high marginal tax rate, let’s say 35-40%. This means that for every CHF 1,000 purchased you will save CHF 400 of taxes. At first it seems to be a very high rate of return, but remember you are investing in a black box which does not allow you to withdraw your capital when convenient and coumpounding at 1-2% per year. In summary, You get a 40% one effect and then let your money sleep for at least 40 years in a very low compounding investment. I would rather pay taxes and invest the whole amount in the market for 40 years (the coumpounding effect is the thing).

Further ideas to optimize the whole thing: Why not making Pillar 2 purchases and exit some years after?

  • You are a freelancer, meaning that you could basically found a company at any given time and therefore withdraw your pillar 2 and use this cash within the company. Thus, you might aim for higher coumpouding rates.:money_mouth_face:
  • If you will to emigrate at some point, you could take the money back as well. Depending on your new location you could be able to withdraw the whole cash without paying any taxes. Thus, you would have your money directly in your private wealth and aim for higher rates of returns as well:money_mouth_face:

Both alternatives would allow you to make 2nd pillar purchases and then a few years after (min. 3 years) have your money back. Thus, you would only let your money compound at a very low rate of return for a few years.

I assumed that you are single with a high salary, why wouldn’t wait until you are older (higher salary and therefore higher tax bracket), married (higher tax bracket) and make the purchases at this point. Note that this would results in higher tax savings. So if you plan to get married, wait for a few years and consider doing the purchases at this future time.

Suggestion: Should you wish to make pillar 2 purchases, always make it on several years to break the high taxation brackets. This results also in higher tax savings compared to a huge purchase in year one.

Caution: When withdrawing your money from the pillar 2, always consider the effect on your situation -> if you were to get disabled your annuity would be greatly reduced! Contracting a private insurance to cover such risks should be considered!

I hope this helps :blush:


#14

Wow, thank you! This explanation helps a lot! A lot more of my questions answered.

I think I need to read through it a few more times though, just to make sure that I fully understand everything you’re saying.

The option to withdraw my pillar 2 and use it to found a company (for example going from a one man company to a GmbH?) sounds very good actually. But then I would also have to consider how many years I’d like to make pillar 2 purchases and how much I’d be able to put in every year. I’m not sure about that yet, especially when considering that I don’t know where I’ll be in five years from now (Married? Kids? Freelancer? Rockstar? :wink: ) and if I want to / need to found a company. That’d also mean that I wouldn’t be able to invest that money otherwise.

At the first glance I feel like it makes much more sense for me to just go with the first option though, i.e. paying (high) taxes and invest the whole amount in the market.

But let me ponder this for a brief moment! :wink:


#15

I think that you grasped the main idea, it is not solely a financial decision but rather a lifestyle one, which can be financially optimized :blush:

IMHO, you are a bit young to fully take advantage of the pillar 2 purchases (I am 26 years old as well so it is kind of easy for me to put me in your shoes) :wink:

Personally, I focus on saving bunch of money and educate myself while letting the “potential purchase gap” increase with the years. Let’s see where I am in 5 years and analyse the situation at this point.

“Let’s stash some cash!”

Cheers!


#16

Phew, happy to hear that! The thought of paying high taxes instead of doing pillar 2 purchases just didn’t make much sense to me. But it does now thanks to your explanation.


#17

Cool summary there, mr RTF. Btw what does your acronym mean? I always read it as „read the fu##ing…” (manual) :joy:

I should only add that the employer contribution is deducted before AHV, so it could be even more money saved than 40%. That is of course, if you can tell your employer to put more money in 2nd pillar.


#18

sry i was too lazy to read through all that is written.
keep in mind that there is a specific limit to pillar 2 contributions. the limit is computed like “to sustain pensions as if you had always had today’s salaries, it takes a certain stash, more than you have today (unless you earned since ever today’s salaries). you might voluntarily pay the difference”

that means that the largest tax advantage is squeezed out late in you carrer, when your salary and grenzsteuersatz is very high. certainly not in your before - 40’s (<= thinking in “normal” carreers :D)


#19

actually one has to compute the time value of the tax savings. i have no idea (not attempted) to make assumptions on the future development of my grenzsteuersatz and inflation to check wether i should take the tax benefits today or larger benefits later :thinking::face_with_monocle:


#20

this holds only if “short term” is longer than three years.
You can’t withdrow money within three years after you made a voluntary 2nd pillar purchase.
See here Art. 79b