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Old 17.02.2016, 16:36
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Are the tax benefits of Pillar 3a just an illusion?

I apologize for the provocative title, but I would like to see some discussion

I perfectly understand how making voluntary contributions to Pillar 3a (and Pillar 2, if possible) allows an individual to defer taxes on that income until retirement.

What is not clear to me is whether this option is really a good idea for those that are not 100% sure that they will retire in Switzerland.

The fact is that in basically all other countries that I am considering (EU), income tax on pensions is not competitive with the marginal tax rate that I see here in Switzerland (even in the expensive Zurich). Even if my pension will be lower than my current salary (let us say 60%).

My understanding is that, even if I withdraw these contributions when I leave Switzerland, I will have to do that when I am formally not a resident anymore, and most tax treaties I have seen imply that the lump sum is taxed in your new country of residence (am I missing something?).

It then becomes hard to judge whether it is really worth locking some money in these "containers", or rather have them taxed at an attractive rate, and available for some standard investment.

Any comment would be appreciated,
Thanks to all
Saverio
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Old 17.02.2016, 20:19
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Re: Are the tax benefits of Pillar 3a just an illusion?

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What is not clear to me is whether this option is really a good idea for those that are not 100% sure that they will retire in Switzerland.
I thought about the same issue. I decided, you would need to be sure you wanted to stay in Switzerland after retirement as well as your working life.

For that, you would have to really really like it here, or come from such an abominable place that it is worth committing to for a few decades even if you are not from here!
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Old 17.02.2016, 20:44
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Re: Are the tax benefits of Pillar 3a just an illusion?

The 3rd pillar allows you to reduce your annual taxes by CHF6768 per annum, so that you may get some money back after filing a tax return on yearly basis. You get the money now and that's the main advantage. Other than that, you can use it as a pledge during purchasing the property.

Then you get heavily taxed at the retirement but that's later. So, basically advantage is that you discipline yourself to put some CHF560 per month aside, accumulate meagre interest rate, tend to believe that you are saving and reduce the taxes now

Let other more experienced investors in the "Säule 3a" convey their thoughts though.
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Old 17.02.2016, 21:49
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Re: Are the tax benefits of Pillar 3a just an illusion?

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The 3rd pillar allows you to reduce your annual taxes by CHF6768 per annum
to be clear:...reduce your taxable income by CHF6768 per annum...

Tax saved will be dependent on your earnings and tax rate - as usual the more you earn, the higher your marginal tax rate, so the better the saving.

This is by far the best part of the deal. Bearing in mind that the money is locked away (with limited get-out clauses) typically for many years, you should compare the rate with bond yields rather than traditional savings rates. On that basis the meagre interest rates are even less appealing.

However, as a non-swiss, in addition to the usual house buying and business starting options, you have the advantage of being able to retrieve the cash when you leave. How you are taxed at that point will depend on your situation, planning and flexibility in terms of tax residency.
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Old 17.02.2016, 22:14
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Re: Are the tax benefits of Pillar 3a just an illusion?

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It then becomes hard to judge whether it is really worth locking some money in these "containers", or rather have them taxed at an attractive rate, and available for some standard investment.
Only that rarely happens. I have been maxing out my contributions for nearly 30 years now and by the time I retire I will have access to a fair sum, would I have done as well or better if I'd gone with a standard investment? In theory yes, in reality probably not! Not doubt if I had access to the cash some good reason would have popped up in the last 30 years to cause me to spend it.

I think the lack of access to the cash is a positive thing in saving for retirement.
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Old 17.02.2016, 22:23
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I have been maxing out my contributions for nearly 30 years now and by the time I retire I will have access to a fair sum, would I have done as well or better if I'd gone with a standard investment? In theory yes, in reality probably not!
The investment options available in the Pillar 3a accounts are usually not that different from whatever is available to the regular (not heavy) investor. You could still put your money in a Pillar 3b, where they are far from your eyes

Saverio

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Tax saved will be dependent on your earnings and tax rate - as usual the more you earn, the higher your marginal tax rate, so the better the saving.

This is by far the best part of the deal.
The thing is that there are EU countries where my current marginal rate would "happen" with much lower incomes. It's very hard to say now, it depends on so many things.

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However, as a non-swiss, in addition to the usual house buying and business starting options, you have the advantage of being able to retrieve the cash when you leave. How you are taxed at that point will depend on your situation, planning and flexibility in terms of tax residency.
Sure, if I understand what are the tricks that I need to play in order to tax those distribution in Switzerland. Maybe living in Switzerland more than half a year on the year I leave, so that I will be a Swiss tax resident for the year?

Last edited by 3Wishes; 19.02.2016 at 21:56. Reason: merging consecutive replies
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Old 19.02.2016, 17:12
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Re: Are the tax benefits of Pillar 3a just an illusion?

I don't know if this would apply to you but a US citizen is taxed on both 2nd and 3rd pillars in Switzerland. At least according to my US tax preparer. Rotten but true.
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Old 19.02.2016, 21:28
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Re: Are the tax benefits of Pillar 3a just an illusion?

What if you temporarily (for 6 months+) become resident of another low-tax country? Shouldn't that help?
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Old 19.02.2016, 21:46
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Re: Are the tax benefits of Pillar 3a just an illusion?

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What if you temporarily (for 6 months+) become resident of another low-tax country? Shouldn't that help?
According to most tax treaties, you are considered resident (for the entire year) of the country where you lived for the most part of the year.

Therefore it seems to me that it would be enough to leave Switzerland for example in November, and ask for the lump sum payment as soon as you de-register, before the end of the year. You should be taxed on that income according to Swiss taxation.

Saverio, not a tax expert
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Old 20.02.2016, 09:19
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Re: Are the tax benefits of Pillar 3a just an illusion?

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According to most tax treaties, you are considered resident (for the entire year) of the country where you lived for the most part of the year.

Therefore it seems to me that it would be enough to leave Switzerland for example in November, and ask for the lump sum payment as soon as you de-register, before the end of the year. You should be taxed on that income according to Swiss taxation.

Saverio, not a tax expert
That does make sense to me as well. Of course, you'll still be taxed at your marginal tax rate, which certainly sounds like it would "void" and past tax benefits
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Old 20.02.2016, 10:02
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Re: Are the tax benefits of Pillar 3a just an illusion?

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That does make sense to me as well. Of course, you'll still be taxed at your marginal tax rate, which certainly sounds like it would "void" and past tax benefits
Actually the lump sum paid out is taxed at a special reduced rate, so you might gain something. However, I am pretty sure there are some restrictions, and the reduced rate does not apply to your pillar 3 contributions made in the last few years before leaving Switzerland.
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Old 21.02.2016, 17:26
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Re: Are the tax benefits of Pillar 3a just an illusion?

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Actually the lump sum paid out is taxed at a special reduced rate, so you might gain something. However, I am pretty sure there are some restrictions, and the reduced rate does not apply to your pillar 3 contributions made in the last few years before leaving Switzerland.
Yes, I think you are right - my bad.
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