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Old 07.08.2013, 19:07
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AHV and BVG for a dummy (me).

Could someone very kind and knowledgeable please help me understand AHV and BVG?

Firstly I would like to understand what each provides on retirement.

Secondly, in summer I am employed, so I get AHV and BVG taken out of my pay. In winter I am self employed. Last winter I just paid the AHV bill sent to me, but I have no idea how much I should be paying, if there is an option to pay top-ups and if I should do this. I didn't pay BVG last winter whilst self employed, is there an option to do this voluntarily, and should I?

Thanks for your help, I've tried to research it, but not really getting it.
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Old 07.08.2013, 19:22
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Re: AHV and BVG for a dummy (me).

Min self employed AHV is about 475 chf . You could take out a 3rd pillar but unless your paying a high rate of tax, its probably not that much benefit in doing so.
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Old 07.08.2013, 19:28
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Re: AHV and BVG for a dummy (me).

Isn't the 3rd pillar a personal pension plan? Don't I need this to save for retirement?
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Old 07.08.2013, 19:39
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Re: AHV and BVG for a dummy (me).

Three things I can tell you:

1) Your pillar 3 is indeed for retirement (or house buying), but you don't need to use it. You can save for your retirement in an ordinary account, under the mattress, or however you see fit. With a 3a account you tie up your savings until retirement in exchange for favourable tax treatment.

2) You can pay extra pillar 3a contributions when self employed to compensate for the absence of BVG. Up to 30% of your income, I think.

3) You can also backpay BVG to cover gaps in your payment record. This is tax deductible in the same way as 3a payments.
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Old 07.08.2013, 19:39
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Re: AHV and BVG for a dummy (me).

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Isn't the 3rd pillar a personal pension plan? Don't I need this to save for retirement?
3rd pillar is a pension plan.

Probably a good to save for retirement , however I question the benefit of using a pension plan for many people. Tax benefits are the usual pitch however most people don't pay a very high percentage if tax in Switzerland. Therefore loosing control of your money for no advantage seems pointless. If your marginal tax rate is 50% its a different story.

The worst investment I ever made was buying back years for my Pillar 2 about 10 years ago, total cost around 35k, its worth no more today. My non pension investments have more than doubled over the same period the younger you are the higher risks you can take as time reduces risk. Swiss pensions are too 'safely' invested , at great cost to you over time
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Old 07.08.2013, 19:44
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Re: AHV and BVG for a dummy (me).

So is the 3rd pillar just a savings account basically? It doesn't give you any massive benefits on retirement over putting the money in a normal savings account?

What is the difference between the 1st and 2nd pillar pension plans?

Do you get a fixed monthly amount from AHV and BGV or is it based on your income whilst working?

Sorry for all the questions, I've tried translating German documents, but they are so complex that I still have no idea what is what.

.... Also I don't understand what pledging your 3rd pillar money towards your mortgage does/how it works.

As I said, I need a dummies guide.
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Old 07.08.2013, 19:45
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Re: AHV and BVG for a dummy (me).

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3rd pillar is a pension plan.

Probably a good to save for retirement , however I question the benefit of using a pension plan for many people. Tax benefits are the usual pitch however most people don't pay a very high percentage if tax in Switzerland. Therefore loosing control of your money for no advantage seems pointless. If your marginal tax rate is 50% its a different story.
Fair point, but don't forget that you also get let off the income tax on any interest that accrues, and on coupon or dividend payments from investments associated with the account. So it can add up over time.

Also, tax is kind of non-linear, so if you knock 6k off your taxable income, it can reduce your tax rate and end up saving you a fair bit.
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Old 07.08.2013, 19:47
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Re: AHV and BVG for a dummy (me).

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Min self employed AHV is about 475 chf . You could take out a 3rd pillar but unless your paying a high rate of tax, its probably not that much benefit in doing so.
Per year or month?
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Old 07.08.2013, 19:57
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Re: AHV and BVG for a dummy (me).

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So is the 3rd pillar just a savings account basically? It doesn't give you any massive benefits on retirement over putting the money in a normal savings account?

What is the difference between the 1st and 2nd pillar pension plans?

Do you get a fixed monthly amount from AHV and BGV or is it based on your income whilst working?

Sorry for all the questions, I've tried translating German documents, but they are so complex that I still have no idea what is what.

.... Also I don't understand what pledging your 3rd pillar money towards your mortgage does/how it works.

As I said, I need a dummies guide.


-1st pillar is state pension.
-2nd pillar is company pension, but highly regulated
-3rd pillar is private pension or savings account

Third pillar has two parts. Pillar 3a is the highly regulated thing where you lock up your money and get the tax advantage. But this can take a number of forms, could be a pure savings account, an account linked to an investment fund, or some complex life insurance product (which I don't recommend). Pillar 3b refers to any other retirement or life insurance scheme basically.

Both AHV and BVG will depend on your contributions. AHV has a fairly low ceiling, whereas the BVG can be extended upwards above the ceiling, if your firm chooses to make the "extra mandatory" payments. Look carefully at your statement of benefits from the BVG and it will explain a lot including how much you should expect to get at the end. Your firm should be able to provide an English version.

You can cash out your pillar 3 money to buy a house OR you can "pledge it" which basically means you can borrow more, or at a lower rate, because you use the pillar 3 account as security. I think you can also do this with pillar 2 funds.

Check out these quite handy English documents from Winterthur.

https://www.axa-winterthur.ch/SiteCo...orsorge_en.pdf
https://www.axa-winterthur.ch/SiteCo...ch-voll_en.pdf
https://www.axa-winterthur.ch/SiteCo...-saeule_en.pdf

Last edited by ommthree; 07.08.2013 at 19:58. Reason: Added last para.
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Old 07.08.2013, 19:58
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Re: AHV and BVG for a dummy (me).

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Fair point, but don't forget that you also get let off the income tax on any interest that accrues, and on coupon or dividend payments from investments associated with the account. So it can add up over time.

Also, tax is kind of non-linear, so if you knock 6k off your taxable income, it can reduce your tax rate and end up saving you a fair bit.
The biggest gains over time are capital gains ......already tax free in CH. pension in income is not tax free. You just pay the later. In any case 10% tax on 1.5% interest is not worth it IMHO.

475 in min yearly AHV
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Old 07.08.2013, 20:16
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Re: AHV and BVG for a dummy (me).

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The biggest gains over time are capital gains ......already tax free in CH. pension in income is not tax free. You just pay the later. In any case 10% tax on 1.5% interest is not worth it IMHO.

475 in min yearly AHV
You're sort of right about capital gains, though it depends on the type of investment. Bonds for example have a higher income element.

It is true that you pay tax later, but then it's simple tax rather than compounded annually, and it's taxed separately from your other income, so at a lower rate. Let's say you get a 4% return on your investments and put something in for thirty years, and that you pay 10% tax, you'll actually end up with around 20% more at the end of the thirty years.

In my case, and I'm not on a high rate of tax at all, putting my 6k into my 3a saves me over 1k in taxes. (Granted I'll pay some of that tax back when I cash in the 3a at retirement.)
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Old 07.08.2013, 21:21
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Re: AHV and BVG for a dummy (me).

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You're sort of right about capital gains, though it depends on the type of investment. Bonds for example have a higher income element.

It is true that you pay tax later, but then it's simple tax rather than compounded annually, and it's taxed separately from your other income, so at a lower rate. Let's say you get a 4% return on your investments and put something in for thirty years, and that you pay 10% tax, you'll actually end up with around 20% more at the end of the thirty years.

In my case, and I'm not on a high rate of tax at all, putting my 6k into my 3a saves me over 1k in taxes. (Granted I'll pay some of that tax back when I cash in the 3a at retirement.)
Do you really believe a 4% return, will actually give you enough in retirement , that's 18 years compound growth to double your money.

Edit so after 20 years your 6 k will buy a pension for about 100 chf a month ! To have a good retirement your pension find & savings need to be roughly 100% of your lifetimes earnings. Fwiw I Dont think Swiss funds have returned 4% over any long length of time 5/10/15/20/25 years so your being optimistic and that's before inflation

Last edited by fatmanfilms; 07.08.2013 at 21:32.
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Old 07.08.2013, 21:55
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Re: AHV and BVG for a dummy (me).

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Do you really believe a 4% return, will actually give you enough in retirement , that's 18 years compound growth to double your money.

Edit so after 20 years your 6 k will buy a pension for about 100 chf a month ! To have a good retirement your pension find & savings need to be roughly 100% of your lifetimes earnings. Fwiw I Dont think Swiss funds have returned 4% over any long length of time 5/10/15/20/25 years so your being optimistic and that's before inflation
Well, whether 4% will be enough of a return depends on what you put in, and actually the SMI has returned around 8% since 1990. As for putting in 6k, that just happens to be the maximum annual 3a contribution for employed persons. It would not fund a particularly generous retirement by itself, no.

But I don't see what either of those things have to do with the question of whether it's worth putting money in a 3a. Franc for franc, you can save quite a bit in tax. That's the only point I'm trying to make.
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Old 07.08.2013, 21:57
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Re: AHV and BVG for a dummy (me).

There is some complicated jargon going on in this "For Dummies" thread
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Old 07.08.2013, 22:00
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Re: AHV and BVG for a dummy (me).

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There is some complicated jargon going on in this "For Dummies" thread
Sorry sorry. You got caught between two people who both rate themselves as knowledgeable but don't seem to entirely agree. We hijacked your thread and should be thoroughly ashamed.

What jargon do you need cleared up?

Last edited by ommthree; 07.08.2013 at 22:00. Reason: illiteracy
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Old 07.08.2013, 22:05
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Re: AHV and BVG for a dummy (me).

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Sorry sorry. You got caught between two people who both rate themselves as knowledgeable but don't seem to entirely agree. We hijacked your thread and should be thoroughly ashamed.

What jargon do you need cleared up?
Haha! No worries! I just zone out when financial terms are used, do not understand it at all. %'s, returns, compound growth, capital gains....
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Old 07.08.2013, 22:10
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Re: AHV and BVG for a dummy (me).

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Well, whether 4% will be enough of a return depends on what you put in, and actually the SMI has returned around 8% since 1990. As for putting in 6k, that just happens to be the maximum annual 3a contribution for employed persons. It would not fund a particularly generous retirement by itself, no.

But I don't see what either of those things have to do with the question of whether it's worth putting money in a 3a. Franc for franc, you can save quite a bit in tax. That's the only point I'm trying to make.
Your not allowed to invest 100% in the SMI, you would be better just investing 5k in the SMI than 6k in a pension & that is my point, even after taxes are paid.
6 k with 4% over 20 years 13,146.74
5 k with 8% over 20 years 23,304.79

Personally I would pay the extra 1K in tax - 6 k with 8% over 20 years 27,964.75 more than double your great tax saving scheme.

So even with your tax saving your 10K worse off with a pension which is then TAXABLE v Tax Free capital gains.
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Old 07.08.2013, 22:16
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Re: AHV and BVG for a dummy (me).

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Your not allowed to invest 100% in the SMI, you would be better just investing 5k in the SMI than 6k in a pension & that is my point, even after taxes are paid.
6 k with 4% over 20 years 13,146.74
5 k with 8% over 20 years 23,304.79

Personally I would pay the extra 1K in tax - 6 k with 8% over 20 years 27,964.75 more than double your great tax saving scheme.

So even with your tax saving your 10K worse off with a pension which is then TAXABLE v Tax Free capital gains.
I disagree. But we should really get off the OP's thread.
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Old 07.08.2013, 22:20
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Re: AHV and BVG for a dummy (me).

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I disagree. .
Could you elaborate? I can't see how thats possible. I think it's totally relevant to the OP.
The other advantage of your own investments is you can retire very early as I intend to do next year @52.
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Old 07.08.2013, 23:41
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Re: AHV and BVG for a dummy (me).

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Could you elaborate? I can't see how thats possible. I think it's totally relevant to the OP.
The other advantage of your own investments is you can retire very early as I intend to do next year @52.
There are a few things:

-I don't really see where the 4%-8% difference comes from. If it's really the case that you can't get more than 4% in your 3a, then presumably any balanced portfolio would have some lower yielding assets in it in any case, so just use your 3a for that part of your portfolio.

-Around 30% to 40% of your income on the SMI return is likely to be dividends in the long term, which are subject to income tax, which is compounded, on your non-3a investment.

-Withdrawals of your 3a investment are taxed at only around 4% in canton Zurich for a 100k withdrawal regardless of your tax bracket, and you can do it in stages.
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