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Old 12.11.2013, 22:11
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Does it now (2013) make sense to open a third pillar 3a account?

I've been reading this sticky threads about the Third Pillar:
Swiss Pensions - General Summary / 3rd Pillar Pensions

And it seems that back in 2006 the third pillar could give interest up to 7.5%

Right now, things have changed & the interest is as low as it could get: 1.85% maximum says comparis. see https://en.comparis.ch/banken/vorsor...vergleich.aspx

I'm assuming here that now the only interest in investing in a 3a account is to save on income taxes (as with a 3a account "You can deduct the amount you put into your 3rd pillar from your taxable income" & "You do not pay tax on the contributions nor on the interest but you do on the withdrawals").

Hence if you put 6700chf in the third pillar & pay 15% income tax, then you'll get 1005chf back when doing your tax return.

The threads mentioned above also state that you can get your money back before retirement while in Switzerland (for buying or renovating you main home, starting up a business, or using them as security (via a pledge) against your mortgage loan) or when leaving Switzerland (but if you leave for an EU country that's only the over-obligatory contributions you can get back).

Hence I'm thinking: since the interest rates are extremely low, & the money is blocked (unless specific circumstances as explained above) I am unsure this is such a good deal. The real attractive thing is the saving on the income tax really.

I mean, unless you know you won't need the money before you leave the country (and leave to go to a non-EU country) then you won't see much of it back before a very very long time.

That's me thinking loud "ok I could save money on income tax, maybe a bit over 1Kchf but:
1. I won't see this 6739chf (i'm employed & I pay income tax at the source) back before I'm 60 or maybe even later.
2. I could invest this money & keep control over it: that is, take back my money invested more easily if needed (than on a 3a account) & probably make more profit (not hard to beat a merely 2% interest I guess)."


Did I miss anything? Please correct me if I'm wrong
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Old 12.11.2013, 22:15
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Re: Does it now (2013) make sense to open a third pillar 3a account?

I prefer to invest directly, there is no CGT in CH, which is usually the biggest benefit in taxation terms. 15% to loose control of your money for possibly 30 years is hardly a good deal, if your tax rate was 50% it's a different storey.
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Old 12.11.2013, 22:25
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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I prefer to invest directly, there is no CGT in CH, which is usually the biggest benefit in taxation terms. 15% to loose control of your money for possibly 30 years is hardly a good deal, if your tax rate was 50% it's a different storey.
At a marginal tax rate of 30% or so, I find it a good deal.

Tom
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Old 13.11.2013, 18:27
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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At a marginal tax rate of 30% or so, I find it a good deal.

Tom
What really matters is the total accumulated interest of the years. As in the sum you will be left with in 30 years time.

Let's do some maths & calculate the accrued (or compound interest) over 30 years:

In the formulae below (from wikipedia)
, i is the effective interest rate per period. FV and PV represent the future and present value of a sum. n represents the number of periods.
FV = PV (1 + i) ^ n
So in our case, we have:
FV = 6700 (1 + 0.02) ^ 30 = 12136
Adding the 30% that you get on your tax return the year you deposited the money:
TV = 12136 + (6700 * 0.3) = 14146
This is if you have not touched (neither "spent" nor "invested" the 30% tax income you got back).

Now let's calculate the interest rate you'd need to get to beat what this deal provides you (again formulae from wikipedia):
i = ( (14146/6700) ^ (1/30) ) - 1 = 0.025
That's 2.5% annual interest you'd try to beat. Far from undoable IMO.

My conclusion is: unless you know for sure you will be able to fill the conditions that let you take or use all the money you gave toward your "3rd pillar 3a" soonish (less than in 10 years), then don't do it.

But maybe I'm wrong?
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Old 17.11.2013, 12:56
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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i = ( (14146/6700) ^ (1/30) ) - 1 = 0.025
That's 2.5% annual interest you'd try to beat. Far from undoable IMO.

My conclusion is: unless you know for sure you will be able to fill the conditions that let you take or use all the money you gave toward your "3rd pillar 3a" soonish (less than in 10 years), then don't do it.

But maybe I'm wrong?
No you're not really wrong...the tax savings can be fairly easily beat over a long time. You would likely need a bigger percentage than 2.5% to do it. (You didnt account for the fact that there would be taxes assessed gains (interest or dividends) in the taxable account
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Old 17.11.2013, 13:40
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Re: Does it now (2013) make sense to open a third pillar 3a account?

The benefit is it locks the money in until you need it when you retire, regardless of the gains there is a chance it could be lost during other investment or simply spent. It's a solid way of saving it. this is how I see it for myself.
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Old 17.11.2013, 13:52
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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No you're not really wrong...the tax savings can be fairly easily beat over a long time. You would likely need a bigger percentage than 2.5% to do it. (You didnt account for the fact that there would be taxes assessed gains (interest or dividends) in the taxable account
Switzerland does not tax Capital gains, so unless you hold an undesirable passport gains won't be taxed.
As the payout of a pension is taxable (at a lower rate however on the full amount) rather than just the income. The hurdle is quite low, easy to beat long term if you hold equities.
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Old 17.11.2013, 14:32
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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The benefit is it locks the money in until you need it when you retire, regardless of the gains there is a chance it could be lost during other investment or simply spent. It's a solid way of saving it. this is how I see it for myself.
Unless you lack any self discipline whatsoever, this is a poor way of saving for retirement. (at current rates) Even in Switzerland, a 1-2% interest rate will barely keep up with inflation each year and if there is a sudden jump in inflation, you will have negative returns for the year.

The only group of people the pillar 3a helps, as it stands now are the banks. There is very little in it for the common person.
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Old 17.11.2013, 14:44
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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Switzerland does not tax Capital gains, so unless you hold an undesirable passport gains won't be taxed.
As the payout of a pension is taxable (at a lower rate however on the full amount) rather than just the income. The hurdle is quite low, easy to beat long term if you hold equities.
True and the point about the tax being assesed at withdrawal is also true. However, its rare these days that you can invest in a company and not get dividends...so they will be a part of your total return. Either way, the formula should be modifies to reflect that
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Old 17.11.2013, 16:31
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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True and the point about the tax being assesed at withdrawal is also true. However, its rare these days that you can invest in a company and not get dividends...so they will be a part of your total return. Either way, the formula should be modifies to reflect that
Berkshire Hathaway has not paid a dividend for roughly 40 years, which has been very good news for investors
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Old 17.11.2013, 17:12
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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it could be lost during other investment or simply spent.
Do you mean you are worried you yourself could spend it or do something stupid? Surely a bit of self restraint could help there?
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Old 17.11.2013, 18:03
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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Do you mean you are worried you yourself could spend it or do something stupid? Surely a bit of self restraint could help there?
No I have a few different diversified investments but see the pillar as reasonable way of putting some additional money away for retirement as part of my swiss pension.
When it is locked away then it is not likely to be used for other purposes, or be lost via making bad investment decisions.

Last edited by AnAustralian; 17.11.2013 at 18:35.
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Old 17.11.2013, 20:05
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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No I have a few different diversified investments but see the pillar as reasonable way of putting some additional money away for retirement as part of my swiss pension.
When it is locked away then it is not likely to be used for other purposes, or be lost via making bad investment decisions.
I don't know your age, however your biggest risk is likely to be inflation. Money in a savings account is likely to be worth less in 15 years in real terms than today even after interest is added.
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Old 17.11.2013, 20:50
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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Unless you lack any self discipline whatsoever, this is a poor way of saving for retirement.
That, and if you tend to choose poorly.

For me, it's the way to go.

Tom
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Old 17.11.2013, 23:52
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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Unless you lack any self discipline whatsoever, this is a poor way of saving for retirement. (at current rates) Even in Switzerland, a 1-2% interest rate will barely keep up with inflation each year and if there is a sudden jump in inflation, you will have negative returns for the year.

The only group of people the pillar 3a helps, as it stands now are the banks. There is very little in it for the common person.
It isn't really as simple as saying people lack self-discipline.

I had money invested in other funds and lost a lot of money when it all went south a couple of years ago, getting less money back than I invested, while the banks made a lot of money. My third pillars (I have a couple of accounts) during this time have at least maintained their value.

To suggest that the banks provide anything other than profit for themselves on a 3a pillar is a bit disingenuous - when do they do anything else?

It also depends on why kind of profile you have as a person and how much time you have. Some people see stock markets as a huge risk, others as a goldmine. Some have made a tonne of money, others lost everything.

I don't have time to review investments and at the moment don't have that much liquidity, so am investing in the third pillar + bricks and mortar (specifically one property in the UK and our house here in CH).

As I get more money, I will diversify my investments, but for now, 3a. pillar is the most beneficial option (and easiest).
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Old 17.11.2013, 23:59
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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It isn't really as simple as saying people lack self-discipline.

I had money invested in other funds and lost a lot of money when it all went south a couple of years ago, getting less money back than I invested, while the banks made a lot of money. My third pillars (I have a couple of accounts) during this time have at least maintained their value.

To suggest that the banks provide anything other than profit for themselves on a 3a pillar is a bit disingenuous - when do they do anything else?

It also depends on why kind of profile you have as a person and how much time you have. Some people see stock markets as a huge risk, others as a goldmine. Some have made a tonne of money, others lost everything.

I don't have time to review investments and at the moment don't have that much liquidity, so am investing in the third pillar + bricks and mortar (specifically one property in the UK and our house here in CH).

As I get more money, I will diversify my investments, but for now, 3a. pillar is the most beneficial option (and easiest).
Out of interest, why did you sell your investments when they went south a few years ago? Had you held or better still invested more when prices were cheap you would have done very well. It's not as if somebody offers you half the price you paid for a house you will sell it in case it falls more or would you?
We have lots of threads about how expensive shops are in CH, however with investments people like expensive rather than cheap

Every time the market crashes I loose more than 100% of my wealth I had before the previous crash!, markets crashes are regular events, however irrelevant to long term investors.
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Old 18.11.2013, 00:30
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Re: Does it now (2013) make sense to open a third pillar 3a account?

To be honest, I don't understand the whole point of this thread, or maybe the OP just doesn't have the whole picture.

You are not obliged to invest your Pillar 3a savings in the miserable fixed interest accounts, although having said that, a return of 1.85% is far better than the truly miserable 0.1% offered by my bank for ordinary (non-pension) savings accounts. All of my Pillar 3a savings are invested in a mixture of interest-bearing deposits and equities, in a managed fund which in the last 12 months has returned just under 7% p.a. (higher for the average over the last five years). You can get higher returns, if you wish, from more aggressive but riskier funds or of course you can be much more conservative and tend toward the 1.85% mark (or even lower, depending on your bank).

If you take an interest (excuse the pun) in your Pillar 3a account(s), you can certainly make your tax-deductible pension savings work for you.
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Old 18.11.2013, 02:31
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Re: Does it now (2013) make sense to open a third pillar 3a account?

Perhaps look at this way, on its own as a single investment it probably does not make a lot of sense, but it can make sense if used in combination with other investments. It is a good idea not to have all your money in one place. To me putting a few years worth of additional earnings in third pillar makes sense, but I also combine it with making other investments, i.e. shares, property, bank accounts etc. It depends on your individual situation and what works best for you.
If you are a strong financial investor then it probably does make sense to try and make the money work harder for you elsewhere, but with that comes risk. How high that risk is depends on where you choose to invest it and how. Another factor is whether this money will be needed in the short to medium term or not. Another thought might be if one is leaving the country soon, wants to park it until that time to reduce paid tax, then extract it upon leaving the country and then invest it further.
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Old 18.11.2013, 21:05
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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Out of interest, why did you sell your investments when they went south a few years ago? Had you held or better still invested more when prices were cheap you would have done very well...
You are right, but buying a house to live in became a bigger priority and that 20% deposit is a killer... that said we also didn't want to sell our UK house, so we have two properties at least.

That said, the analogy you use is akin to retiring. If your retirement investments go south at the time of or near retirement, you still need the cash... so re-investment isn't (always) an option.
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Old 18.11.2013, 21:18
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Re: Does it now (2013) make sense to open a third pillar 3a account?

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That said, the analogy you use is akin to retiring. If your retirement investments go south at the time of or near retirement, you still need the cash... so re-investment isn't (always) an option.
I also believe thats the wrong way to look at it, in retirement you will live for 25 years so your investment horizon is still long term, stay invested in equities for ever, your income & capital will still grow.
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