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Old 18.11.2012, 10:46
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3rd pillar and buying own house...

Hi. I hope someone can help with this question regarding the 3rd pillar...
There are two things. First, recently we are considering setting up our regular contribution to the 3rd pillar. Second, we are planning to buy a house, not now, but in a few years.

I'm aware that you can withdraw your 3rd pillar when you buy a house of your own, but are there some restrictions (e.g. minimum time of contribution)? For example, if in 3 years we want to buy the house will it be possible to withdraw from the 3rd pillar at that time? Especially, I read something about the "five-year rule", which seems to say that you can withdraw your 3rd pillar every five years. What is this supposed to mean?

Or, here is a more fundamental question: is it interesting at all to set up the 3rd pillar account at the time when you know probably you want to withdraw from it to buy a house in a few years?

Last edited by happyrobbie; 18.11.2012 at 11:02.
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Old 18.11.2012, 16:04
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Re: 3rd pillar and buying own house...

Hi happyrobbie,

in my opinion setting up a 3rd pillar (currently) makes little sense. The best return you would get is slightly over 2% - there are better investments out there. You would save taxes but only now - you might simply end up paying them later, depending on the development of your income. Relating to using the 3rd pillar for buying real estate:
http://www.finanzmonitor.com/3-saule...ug-auszahlung/ give a lot of information. Essentially, you can withdraw or collateralize your 3rd pillar only once every 5 years for the purpose of buying property (by law - your bank/insurer might pose different additional restrictions). If you use your 3rd pillar for real estate (you can only use it for your own use) you will have to pay taxes on the funds.

Cheers

Aaron
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Old 18.11.2012, 16:22
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Re: 3rd pillar and buying own house...

When you want to buy a property and need a mortgage, your bank or financial company will try and grab first rights to whatever assets you have, including, third pillar, life insurances and your internal organs if you don't watch what you sign.

My advice would be to shop for the deal that doesn't have you sacrifice everything to the bank and leaves you flexibility. At least split your mortgage into various chunks so that you can either pay back or negotiate bits of it at varying times provided that you've ensured their expiration dates are split over several years.
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Old 18.11.2012, 17:58
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Re: 3rd pillar and buying own house...

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In my opinion setting up a 3rd pillar (currently) makes little sense. The best return you would get is slightly over 2% - there are better investments out there. You would save taxes but only now - you might simply end up paying them later, depending on the development of your income.

Essentially, you can withdraw or collateralize your 3rd pillar only once every 5 years for the purpose of buying property (by law - your bank/insurer might pose different additional restrictions). If you use your 3rd pillar for real estate (you can only use it for your own use) you will have to pay taxes on the funds.
There is also the "indirect" method of using these funds by pledging them to the bank and drawing down a bit more mortgage. This may well be cheaper as the return on the 3rd pillar cash is tax free, whereas the mortgage interest is tax deductible, and you arent subject to the withdrawal tax.

I disagree with Aaron about the utility of a third pillar pension fund. Particularly if you live in a high tax location like Zurich and are looking to build up a cash based nest egg (or mixed investment to the extent that is allowed) are saving say tax at a 40-50% marginal rate, that is a massive boost to the effective post tax returns. Foreigners are generally able to plan to recover this cash at an efficient tax rate in the future.
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Old 18.11.2012, 18:35
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Re: 3rd pillar and buying own house...

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There is also the "indirect" method of using these funds by pledging them to the bank and drawing down a bit more mortgage. This may well be cheaper as the return on the 3rd pillar cash is tax free, whereas the mortgage interest is tax deductible, and you arent subject to the withdrawal tax.

I disagree with Aaron about the utility of a third pillar pension fund. Particularly if you live in a high tax location like Zurich and are looking to build up a cash based nest egg (or mixed investment to the extent that is allowed) are saving say tax at a 40-50% marginal rate, that is a massive boost to the effective post tax returns. Foreigners are generally able to plan to recover this cash at an efficient tax rate in the future.
Agreed, Aaron hasn't afforded in the yearly tax savings granted for contributing to the 3a which is money saved nett.
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Old 19.11.2012, 09:42
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Re: 3rd pillar and buying own house...

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Agreed, Aaron hasn't afforded in the yearly tax savings granted for contributing to the 3a which is money saved nett.
True if you have no better way of investing. Assuming you are in your mid 30s, so you have about 30 years to pay. Lets say you would pay 30% in tax:
Maximum contribution 1st year: 6682 (P3) vs. 4677 (noP3, after 30% taxes).
30 years at 2% for the 6682 CHF gives you 12.1k CHF, same as 3.22% for 4677 CHF.
So all you have to do is to find an investment yielding a bit more than 3.22% per year and you are better off not going for P3. This is a very simplified calculation but the idea remains the same if you consider that you would be paying every year into the P3 or a different interest accruing account and that interest rates will change etc.
The statements that P3 is tax-free are not really correct. It simply depends on how you withdraw your money in the end you might just as well pay a considerable amount of taxes.
It is more of a personal choice whether you feel comfortable with your investment - and that is what P3 is - be it P3 or not.
I think the kind of fuzz that is being made about P3 is way too big and it is not such a good investment as it is advertised.
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Old 19.11.2012, 09:49
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Re: 3rd pillar and buying own house...

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True if you have no better way of investing. Assuming you are in your mid 30s, so you have about 30 years to pay. Lets say you would pay 30% in tax:
Maximum contribution 1st year: 6’682 (P3) vs. 4677 (noP3, after 30% taxes).
30 years at 2% for the 6’682 CHF gives you 12.1k CHF, same as 3.22% for 4677 CHF.
So all you have to do is to find an investment yielding a bit more than 3.22% per year and you are better off not going for P3. This is a very simplified calculation but the idea remains the same if you consider that you would be paying every year into the P3 or a different interest accruing account and that interest rates will change etc.
The statements that P3 is tax-free are not really correct. It simply depends on how you withdraw your money in the end you might just as well pay a considerable amount of taxes.
It is more of a personal choice whether you feel comfortable with your investment - and that is what P3 is - be it P3 or not.
I think the kind of fuzz that is being made about P3 is way too big and it is not such a good investment as it is advertised.
You didnt factor in the tax on the running yield I think, that would make the 3.2% comparable to 2%-tax=say1.2%. Edit: you did it the "other way round" so in fact your 3.2% is post tax, you would need over 3.2%/say60%=5% pre tax to match the 2% in the P3.

Find me another equally safe return of 3.2% on cash deposits in CHF. Your answer ignores asset allocation: sure you probably want to have a portion in equities or whatever, but pillar 3 is a very good place to park the long term cash slice of your assets.
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Old 19.11.2012, 10:30
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Re: 3rd pillar and buying own house...

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Essentially, you can withdraw or collateralize your 3rd pillar only once every 5 years for the purpose of buying property (by law - your bank/insurer might pose different additional restrictions). If you use your 3rd pillar for real estate (you can only use it for your own use) you will have to pay taxes on the funds.

Cheers

Aaron
Hi. This 5-year rule applies from the moment when you set up the 3rd pillar account, or from the first withdrawal? For example, if I set up 3rd pillar in 2012, does it mean that I cannot utilize this fund to help buy a house before 2017? Or does it mean that I can use it for a house purchase in 2015, but then for the next withdrawal I have to wait until 2020?

Also, if I need to withdraw from my 3rd pillar for house purchasing, do I pay the tax for the withdrawn fund? (does it make difference if I take mortgage or pay the house all at once?)
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Old 19.11.2012, 10:35
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Re: 3rd pillar and buying own house...

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Hi. This 5-year rule applies from the moment when you set up the 3rd pillar account, or from the first withdrawal? For example, if I set up 3rd pillar in 2012, does it mean that I cannot utilize this fund to help buy a house before 2017? Or does it mean that I can use it for a house purchase in 2015, but then for the next withdrawal I have to wait until 2020?

Also, if I need to withdraw from my 3rd pillar for house purchasing, do I pay the tax for the withdrawn fund? (does it make difference if I take mortgage or pay the house all at once?)
No you can only draw down every 5 years, but I believe you can do it "immediately"

You pay a "special tax" which is most likely lower than your income tax rate. However you have to replace the withdrawn funds before you make further contributions.

If you need the cash for the deposit it would probably make more sense for you to not go for the 3P immediately. You really should explore the indirect method: this is stuff you will discuss with your proposed lender, they will tell you what they will accept (as usual the less you need the money, the more helpful they are in lending it to you.)
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Old 19.11.2012, 10:45
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Re: 3rd pillar and buying own house...

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No you can only draw down every 5 years, but I believe you can do it "immediately"

You pay a "special tax" which is most likely lower than your income tax rate. However you have to replace the withdrawn funds before you make further contributions.

If you need the cash for the deposit it would probably make more sense for you to not go for the 3P immediately. You really should explore the indirect method: this is stuff you will discuss with your proposed lender, they will tell you what they will accept (as usual the less you need the money, the more helpful they are in lending it to you.)
So you are saying that it makes sense only if we set up the 3rd pillar if we may need to use it later for paying the mortgage, but not the 20% deposit, right?
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Old 19.11.2012, 10:49
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Re: 3rd pillar and buying own house...

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So you are saying that it makes sense only if we set up the 3rd pillar if we may need to use it later for paying the mortgage, but not the 20% deposit, right?
That's right, if the purchase is going to be a near term thing. Otherwise it would be a good place to save for the deposit, but "round tripping" it into the 3P to take it straight back out doesnt make so much sense.

Have you already spoken to several prospective lenders. This is bread and butter stuff for them.
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Old 19.11.2012, 11:10
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Re: 3rd pillar and buying own house...

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That's right, if the purchase is going to be a near term thing. Otherwise it would be a good place to save for the deposit, but "round tripping" it into the 3P to take it straight back out doesnt make so much sense.

Have you already spoken to several prospective lenders. This is bread and butter stuff for them.
That's the thing, we are not sure when the purchase will be. The plan is still tentative. But one thing is that if we make the purchase, we probably will manage the deposit without the help of 3P, so 3P will be used only for the mortgage, if necessary.

I also heard from a friend who lives in Germany and recently bought an apartment. Actually they had in their savings account more than the minimum deposit. But, after some calculation, they found that it is more interesting to withdraw some kind of pension (similar to 3P here), and together with a minimum amount in the savings account, just to pay the minimum deposit (e.g. 20%). And then they use the remaining amount on the savings account for some investment in my home country (where the annual interest of just an ordinary savings account can be easily over 4% or 5%, and the rate of other investments such as government debt is even higher). He advises me to do the same but I doubt the different situation between Germany and here.
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Old 19.11.2012, 14:13
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Re: 3rd pillar and buying own house...

Then you will be better off without using the 3P. It makes little sense to take out the 3P to cover the mortgage, simply because of tax (mortgage interests and payments to 3P are deductible) and interest reasons.
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Old 19.11.2012, 22:08
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Re: 3rd pillar and buying own house...

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Then you will be better off without using the 3P. It makes little sense to take out the 3P to cover the mortgage, simply because of tax (mortgage interests and payments to 3P are deductible) and interest reasons.
I'm a little confused now...
My first confusion is that, if one day you want to take some money from 3P to help buy a house/apartment, there are two situations:
(1) You don't have the 20% deposit unless you use 3P. Therefore, you have to withdraw 3P, otherwise the purchase is not possible.
(2) You have enough for the 20% deposit without the help of 3P. In this situation, can you still withdraw money from 3P, in order to pay a higher deposit (let's say, 40% instead of 20%)? Is it more interesting to do this, or it's better not to touch 3P and pay a lower deposit and take a higher mortgage?

Thanks...
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Old 20.11.2012, 13:21
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Re: 3rd pillar and buying own house...

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I'm a little confused now...
My first confusion is that, if one day you want to take some money from 3P to help buy a house/apartment, there are two situations:
(1) You don't have the 20% deposit unless you use 3P. Therefore, you have to withdraw 3P, otherwise the purchase is not possible.
(2) You have enough for the 20% deposit without the help of 3P. In this situation, can you still withdraw money from 3P, in order to pay a higher deposit (let's say, 40% instead of 20%)? Is it more interesting to do this, or it's better not to touch 3P and pay a lower deposit and take a higher mortgage?

Thanks...
(1) Not much of a choice there
(2) Financially, not touching the 3P is the better solution because your receive higher interest on 3P than you pay on a mortgage.

Where is your confusion?
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Old 20.11.2012, 16:39
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Re: 3rd pillar and buying own house...

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I'm a little confused now...
My first confusion is that, if one day you want to take some money from 3P to help buy a house/apartment, there are two situations:
(1) You don't have the 20% deposit unless you use 3P. Therefore, you have to withdraw 3P, otherwise the purchase is not possible.
(2) You have enough for the 20% deposit without the help of 3P. In this situation, can you still withdraw money from 3P, in order to pay a higher deposit (let's say, 40% instead of 20%)? Is it more interesting to do this, or it's better not to touch 3P and pay a lower deposit and take a higher mortgage?

Thanks...
Yes and Yes...
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Old 20.11.2012, 20:39
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Re: 3rd pillar and buying own house...

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However you have to replace the withdrawn funds before you make further contributions.
AFAIK, not with pillar 3a.

With pillar 2 any cash withdrawals must be paid back in full before any tax relief is received on non-mandatory contributions. Are you saying the same applies to pillar 3a ?
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Old 21.11.2012, 00:02
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Re: 3rd pillar and buying own house...

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AFAIK, not with pillar 3a.

With pillar 2 any cash withdrawals must be paid back in full before any tax relief is received on non-mandatory contributions. Are you saying the same applies to pillar 3a ?
No, Pillar 3 is unrestricted ( you could also use the residual value of a 3b life insurance product if you had one)

But the important point is, ask your lender if a pledge for the 20% form your p3 is sufficient. It used to be but with today's prices .....

In Kt. SZ the tax is approx 8% on withdrawing, and approx 12% in ZH. YMMV.
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Old 21.11.2012, 09:47
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Re: 3rd pillar and buying own house...

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AFAIK, not with pillar 3a.

With pillar 2 any cash withdrawals must be paid back in full before any tax relief is received on non-mandatory contributions. Are you saying the same applies to pillar 3a ?
This is correct. Magyir's similar points too.
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Old 21.11.2012, 11:54
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Re: 3rd pillar and buying own house...

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This is correct. Magyir's similar points too.
Let's be clear on the distinctions here. In Pillar 2 you need to replace withdrawals for property purchase in certain circumstances, and any withdrawals for purchases, divorce etc will be shown on your yearly statement.

So Pillar 2 allows you to recover withdrawn funds in later years particularly if you sell the property.

Pillar 3 does not. If I withdraw I can't replace it later as its a non cumulative yearly limit, that I can't recover or restore later.

Therefore as the tax break is more restrictive, it's more attractive to the lender and the reason many now prefer Pillar 3 pledges to Pillar 2.

Basically if they can avoid future Pillar 2 re-adjustments later they will. In addition Pillar 2 pledges are much more difficult to enforce through the courts, as the court is left with the paradox that if they bankrupt my pension, the state may have to support me more in retirement.

Finally with prices twice what they were some years ago, the risk profile has changed for these deals for the banks, and they see what has happened in other bubble markets like Ireland, Spain etc.
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