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Old 26.03.2015, 12:35
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Re: Pillar 3a stock funds

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I agree, sensei but the path to financial freedom is long and hard for those bombarded with FUD and the promise of tax breaks. They (or should I say, we) cannot see the forest for the trees...

I think it should be sticky up there in the section that rule of thumb goes:
- if you have an investment horizon of 20 or more years, stay out of 3a and invest in low-cost funds, diversify and buy-and-hold no matter what.
- if you are on the market for a primary residence in 5-10 years, stick to 3a, as the tax breaks make sense. Else, go option 1
For those rich enough and smart enough, the truth perhaps lies in the mix of both - put money on the 3a to buy property while on the side you invest properly and with low TER?

In my research of 3a funds (as we are on the market for a house soon-ish), I found UBS to be daylight robbery with TER of 1.4% and higher, CS to be second with classic robbery and so far lowest fees Raiffeisen (your random mugging kinda thing). What sets the Raiffeisen offer apart is also the higher equity component at 2/3 of the mix, whereas both UBS and CS cap at 45%.

What say you, sensei - does above make better sense?
The CS 45% equity index fund had a TER of 0.88%. It's the actively managed ones that are more expensive, so you're not comparing like fruits.
FWIW 2 basis points to increase your equity exposure by going with Raiffeisen is well worth it IMO

Now I understand that both are expensive compared to non-3a Index ETFs, but I ran some numbers for the tax saving...

I used the Comparis website, the Gemeinde where I live (Freienbach - one of the cheapest in the country, so minimal potential for marginal tax savings) and using the standard 120k less 20k of general deductions.

When I used the full allowance (let's call it 6.5k) the tax saving was just over 1k.
Over your 20 year horizon the tax savings are 20k. Assuming a 5% return pa the cumulative TER is just under 20k. So it's marginally profitable, but not enough for me to invest. BUT I don't think that I can beat the market in the long run, so if I invested in index ETFs I would still have to pay management fees, transaction fees etc let's say 0.4%. The difference between the 0.4% and 0.88% over 20 years is about CHF 11k, so I'm up 9k on the deal, plus I don't have to declare my 3a account as part of my wealth and I can reinvest the tax savings in the meantime.

My conclusion is if the cumulative marginal TER is less than the cumulative tax savings, you can deal with the reduced liquidity and you don't think you can beat the market, then a funds 3a makes financial sense.

It also appears that it makes more sense a) the more you earn, b) the higher your marginal tax rate is (i.e. your location) c) the lower the fund TER

It would obviously be better if you could choose which funds/stocks to invest in within the 3a, but that's not going to happen.

I'm sure FMF will explain why I completely misunderstand...
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