Hi, interesting idea. But I would not do it.
Pillar 3 is tax-sheltered for wealth tax (0,7pct in vaud) and dividend taxation. With VIAC it can be diversely invested in broad index funds. More importantly it is also sheltered from myself and my wants/needs/… I see that as a great advantage.
Personally I am buying a house. We are using pillar 2. But do not touch our pillar 3 and just let it grow over the years.
My 2 cents.
It depends how much liquidity you already have. If you have none, then of course it makes sense to have some liquidity.
If you already have a lot and are drowning in liquidity, IMO, it doesn’t make sense to move from tax advantaged to taxable, esp. since you can only re-fill it at around 8k per year.
The only exception might be if you don’t have much cash and are not able to max out your 3a each year and so this would be a way to recycle cash through 3a that you wouldn’t otherwise be able to fill.
In terms of wealth tax vs withdrawal tax staggering advantage, you can easily run the numbers to work out the breakeven point.
Do a cash flow model:
The other scenario:
When I did this, it only took a small handful of years before the costs in scenario 1 outweighed scenario 2.
Also accounting for much cheaper investments outside 3a?
The calculation is probably different for stocks or bonds, with low appreciation and returns mainly coming from interests. There are also products, like junk bonds, that I wouldn’t buy outside of 3a but would in 3a.
Life circumstances change with time. Tax sheltered/deferred space that has little use today may have more later.
With current landscape, things aren’t (much?) cheaper outside 3a (0.5% fee will often beat just the wealth + income tax on dividends)
Assuming VT is benchmark portfolio and ignoring any psychological, liquidity aspects.
Let’s say total return with VT in CHF terms is 6% (just an assumption and can be also 5% or 7%) for the investment horizon. Investments inside Finpension 3a will have following return
Investments in IBKR would have following
Effective yield -: Capital gains + Dividends - TER - Wealth tax - Dividend tax
Effective yield post lump sum tax will be governing factor
So the calculation should be made to simulate scenarios
Case A -: withdraw 3a now and pay lump sum tax and invest in VT
Case B -: withdraw 3a later and pay lump sum tax with staggered withdrawal at retirement.
P.S -: the scenario @Cortana is facing is very unique. He happens to have an apartment which is on mortgage and is planning to sell it soon. Such cases are not typical in CH and hence common wisdom might not apply.
I think you forgot to include that in the IBKR scenario, the initial investment would be reduced by the capital withdrawal taxes (say 5% assuming 100k withdrawal).
So then capital gains become 3.8%, dividends 1.9% etc. Then you deduct taxes reducing further.
Assuming marginal tax rate is 25% then divi is down to 1.4%. So return is already down by 0.8% to 5.2% which is more than the TER delta (heck greater than the whole TER in scenario 1) and we haven’t even got to wealth taxes yet.
If we take a modest 0.2% for wealth taxes then it brings it to a round 5% return. Compared to 5.6% in the 3a scenario.
Here is my calculations. I assumed 25% marginal tax rate and 0.2% wealth tax. I also checked lump sum tax rates (Aargau) for withdrawal sizes of 50K (the number i read above as intention to be withdrawn) vs. what it might be in 25 years. I think wealth tax is quite important but even without that IBKR is losing.
The conclusion is that if Withdrawal tax rate differential is not too high between two cases, the decision to withdraw money might be counter productive.
This is what I meant by Case A vs B. I just did not do the final numbers as there is lot to assume. But I think you kind of did it in your head and reached the right conclusion 
| Case 1 -: Keep money in 3a | ||
|---|---|---|
| Investment size | 50000 | CHF |
| Capital gains | 4% | |
| Dividends | 2% | |
| TER | 0.40% | |
| Wealth Tax | 0% | |
| Dividend Tax (@0%) | 0% | |
| Eff yield | 5.60% | |
| Investment in 25 years | 195240 | CHF |
| Lumpsum tax | 5.70% | |
| Final value | 184111 | CHF |
| Case 2 -:Withdraw and Invest in IBKR | ||
| Withdrawl amount | 50000 | CHF |
| Lumpsum Tax | 3.30% | |
| Investtment size | 48350 | CHF |
| Capital gains | 4% | |
| Dividends | 2% | |
| TER | 0.07% | |
| Wealth Tax | 0.20% | |
| Dividend Tax (25%) | 0.50% | |
| Eff yield | 5.23% | |
| Investment in 25 years | 172936 | CHF |
| Lumpsum tax | 0.00% | |
| Final value | 172936 | CHF |
@Cortana - Could you share if you decided to withdraw knowing that this might be sub-optimal ?
Just to be clear: By your conclusions, some of you here in this thread would be willing to invest in tax-sheltered solutions, just for the tiny little additional return this might generate? Meaning you would buy into pillar 3a even if you wouldn’t get the one-time (!) tax advantage of not paying income tax to begin with? Because that is the equivalent scenario you are proposing here…
This is absolutely non-sense IMHO. That math shows that you get nearly nothing (additionally) in return for locking away your money for decades.
This is a great comparison, thank you very much. So the additional flexibility will cost me ~10k longterm. I have to think about it.
I appreciate your view but I think it’s not nice to just call a numerical analysis non sense
Even though it might sound strange, but the scenario you suggested is not the same scenario. We are talking about taking already invested money in 3a out.
If the question is whether it makes sense to invest in 3a or not, then it is a different question. And if there is no tax advantage at time of investment, then investor should weigh in what is their objective. Liquidity is important but it depends what is one’s overall net worth and asset allocation strategy.
Correct. Buying into pillar 3a without getting the income tax advantage is even a more positive scenario than not taking the money out as you suggest here, because here you have some amount of withdrawal tax to pay. I uphold my point, your argumentation isn’t logically sound to me.
Alright. I understand that you have a different opinion. It’s alright.
To be fair, it’s a reasonable position, once the money is is locked in 3a the tax advantage at buy-in time shouldn’t matter when making the decision.
Personally I kinda prefer keeping it in a tax advantaged account, since other countries often recognize it and have higher taxes than Switzerland so I like having the options of tax free growth even if I move.
(Also I expect the fees to get lower over time, I don’t think we’ve hit the bottom, at which point it might become more clear cut)
edit: sorry reread the post, and this was about whether to buy-in or not, in which case yes the tax advantage definitely matters (and imo makes it a no brainer)
Absolutely. For various reasons:
What I like about the withdrawal is the rather big difference in freely available assets. Right now my assets look like this:
8k cash
12k crypto
72k ETFs
55k 3a
25k 2nd pillar (ValuePension)
35k 2nd pillar (Pension fund)
50k home equity (after taxes of selling)
16k construction land
So 92k in liquid assets, 115k in retirement accounts and 66k in home equity. Coming back to both scenarios (A is keeping it in 3a and B is withdrawing, reducing mortgage, selling and reinvesting):
Got it.
I think everyone has a preference and if you prefer more liquidity/ flexibility then perhaps you like to withdraw.
I understand your arguments, and it’s the same view you had in an earlier answer: If you are currently flush with enough cash and are sure to be flush with enough cash until you retire, you can risk locking the money away for decades. But how can anyone be really sure of that?
Also yes, at the highest end of wealth taxes in CH the math does become increasingly in favor of leaving the money in your 3rd pillar. But @Cortana lives in AG
PS @Abs_max
Sorry about that, wasn’t meant as harsh as my wording made it out to be.
You can look at it the other way: you need to provide for retirement income, so you know that you need to lock up some funds to be used from retirement age onwards. So why not work out how much that is and invest that in the tax-advantaged vehicles designed specifically for that purpose?