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Old 15.01.2017, 14:56
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Pledging Pillar3a as mortgage collateral

Hi All,

I am looking into P3a and given the fees here in Switzerland I haven't yet figured out if it's worth it (I invest passively) however a scenario where P3 may be useful is for pledging the P3a account (likely invested in funds, not cash) for a residential property mortgage (not referring to liquidating it to contribute to the deposit).

For the case stated above, does the P3a account need to be in the same bank that gives the mortgage or it can be with any P3a provider?

All the best,
K
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Old 15.01.2017, 16:14
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Re: Pledging Pillar3a as mortgage collateral

You get most of a 3a when you clear it every 5 years to knock down your mortgage. For this strategy a simple 3a bank account may be the best.
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Old 15.01.2017, 16:41
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Re: Pledging Pillar3a as mortgage collateral

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You get most of a 3a when you clear it every 5 years to knock down your mortgage. For this strategy a simple 3a bank account may be the best.
Thanks for your this. When you say knock down you mean liquidating P3a account for mortgage payment (is this liquidation tax free?) also in this case does is matter is the pillar 3a account is with the same bank as the bank that issues the mortgage or not?
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Old 15.01.2017, 16:49
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Re: Pledging Pillar3a as mortgage collateral

Any payout is taxed. Any. The more you get out in a single year the higher the tax will be. So, in the end, some-when you will have to pay the payout tax.

You can not use it for interest payment, only to lower your total mortgage.
For this you can have the pillar 3a account with any bank.
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Old 15.01.2017, 17:15
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Re: Pledging Pillar3a as mortgage collateral

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Any payout is taxed. Any. The more you get out in a single year the higher the tax will be. So, in the end, some-when you will have to pay the payout tax.

You can not use it for interest payment, only to lower your total mortgage.
For this you can have the pillar 3a account with any bank.
Then the only benefit I see is that the tax on interest is 0 for 5 years and then it's taxed at the end. I can't see any tangible benefit to put the amount in a P3 vs keeping in a bank acc, am I missing something?
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Old 15.01.2017, 18:30
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Re: Pledging Pillar3a as mortgage collateral

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Then the only benefit I see is that the tax on interest is 0 for 5 years and then it's taxed at the end. I can't see any tangible benefit to put the amount in a P3 vs keeping in a bank acc, am I missing something?
The tax rate on pension capital withdrawals is a special much lower rate than the income tax rate.
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Old 15.01.2017, 19:20
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Re: Pledging Pillar3a as mortgage collateral

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The tax rate on pension capital withdrawals is a special much lower rate than the income tax rate.
So it becomes a question of whether of whether given the tax difference, if a normal account without the high fees is about the same as a P3a account (with the high fees). I haven't run this tbh but I'm not sure if it worth loosing the liquidity of a normal bank account for e.g. 100 CHF gain in total over 5 years.
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Old 15.01.2017, 20:17
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Re: Pledging Pillar3a as mortgage collateral

About pillar 3a investment options:
A normal pillar 3a account has no fees and normally has better interest rate than a standard savings account.

A standard pillar 3a fund has quite high fees and may have not as good performance as a fund on the open market. YMMV.

There is also a third option of pillar 3a life insurance. But that is most of the time the worst option unless you really, really calculated it through and understand what you are doing and specially committing too.


About tax:
Tax is not linear. The more you have, the more, more tax you pay. Yes, double more. This is on one side good. Because the more you earn the more tax you can potentially save with pillar 3a. Depending on your marginal tax rate you can save more than one third of what you paid into pillar 3a. If you pay in CHF 6700 that could mean you save more than CHF 2000 in tax. Each and every year.

But the same more more rule also applies for paying out pillar 3a.

Example for Zurich.
Assuming 0% interest and CHF 6700/year added:
Payout tax for CHF 20100 (a three years saving) is CHF 889 (or 296 per year)
for CHF 33500 (a five years saving) is CHF 1497 (or 299 per year)
tax for CHF 67000 (ten year) is CHF 3122 (or 312 per year)
for CHF 100'500 (15 year) it is CHF 4'983 (or 332 per year)

The longer you add money to pillar 3a the more tax you will have to pay in the end when you pay it out.

Also the more interest the pillar 3a has the more tax you will have to pay in the end. As the payout sum is also larger due to interest. This means pillar 3a has a hidden small capital gains tax.

For example with 1% interest
You will have CHF 34867 after five years CHF 1528 (CHF 305 per year)
You will have CHF 147527 after 20 years and must pay a tax of CHF 7914 (CHF 395 per year)
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Old 15.01.2017, 22:55
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Re: Pledging Pillar3a as mortgage collateral

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About pillar 3a investment options:
A normal pillar 3a account has no fees and normally has better interest rate than a standard savings account.

A standard pillar 3a fund has quite high fees and may have not as good performance as a fund on the open market. YMMV.

There is also a third option of pillar 3a life insurance. But that is most of the time the worst option unless you really, really calculated it through and understand what you are doing and specially committing too.


About tax:
Tax is not linear. The more you have, the more, more tax you pay. Yes, double more. This is on one side good. Because the more you earn the more tax you can potentially save with pillar 3a. Depending on your marginal tax rate you can save more than one third of what you paid into pillar 3a. If you pay in CHF 6700 that could mean you save more than CHF 2000 in tax. Each and every year.

But the same more more rule also applies for paying out pillar 3a.

Example for Zurich.
Assuming 0% interest and CHF 6700/year added:
Payout tax for CHF 20100 (a three years saving) is CHF 889 (or 296 per year)
for CHF 33500 (a five years saving) is CHF 1497 (or 299 per year)
tax for CHF 67000 (ten year) is CHF 3122 (or 312 per year)
for CHF 100'500 (15 year) it is CHF 4'983 (or 332 per year)

The longer you add money to pillar 3a the more tax you will have to pay in the end when you pay it out.

Also the more interest the pillar 3a has the more tax you will have to pay in the end. As the payout sum is also larger due to interest. This means pillar 3a has a hidden small capital gains tax.

For example with 1% interest
You will have CHF 34867 after five years CHF 1528 (CHF 305 per year)
You will have CHF 147527 after 20 years and must pay a tax of CHF 7914 (CHF 395 per year)
I see, thanks for the detailed response, I was assuming a higher tax penalty for early withdrawals, similarly to how it would work when caching a UK pension before retirement age.

Are the quotes you mention specifically for early withdrawals connected to a deposit or mortgage payments?
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Old 16.01.2017, 09:32
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Re: Pledging Pillar3a as mortgage collateral

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Are the quotes you mention specifically for early withdrawals connected to a deposit or mortgage payments?
No. They are the normal pay out tax, which applies to any payout for an unmarried person, no taxable church affiliation, 0 children, living in Zurich City in 2017.

Here is a handy calculator.
https://www.postfinance.ch/en/priv/p...alc/cap3a.html

Note: This is the tax which applies in 2017. How the pay out tax is in the future (higher/lower/zero?) nobody knows. Best guess you have: It might be the same as now.
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Old 16.01.2017, 09:55
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Re: Pledging Pillar3a as mortgage collateral

One thing that hasn't cropped up. If you use your 3a to buy a house and then later sell the house, then can you do this scott-free, pay a penalty tax or have to repay into the 3a?
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Old 16.01.2017, 10:05
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Re: Pledging Pillar3a as mortgage collateral

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One thing that hasn't cropped up. If you use your 3a to buy a house and then later sell the house, then can you do this scott-free, pay a penalty tax or have to repay into the 3a?
As far as I know only pillar 2 money must be paid back in case you sell and do not buy a new one to life in.
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Old 16.01.2017, 10:21
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Re: Pledging Pillar3a as mortgage collateral

Some other things to consider:

You can have multiple accounts.

If you are married both partners can have their own pillar 3a account(s).
(Just like an unmmaried couple)

You can only withdraw a maximum of every 5 years from pillar 3a to finance your own home.

A partner can only pledge or use his pillar 3a and pillar 2 money when it is a co-owner.

For married the couple the 5 years waiting period between withdrawls are for each partner individually.
(Just like an unmmaried couple)

5 years before regular retirement age you can ony cash in the whole account and nolonger just a part of it.

If you top up your pillar 2 there is a cool off period of 3 years before you can use the money to finance you own home.

In the above "your own home" means a house or apartement where you will life for yourself.
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Old 16.01.2017, 11:05
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Re: Pledging Pillar3a as mortgage collateral

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You get most of a 3a when you clear it every 5 years to knock down your mortgage. For this strategy a simple 3a bank account may be the best.
May I ask why? I know the performance of the 3a funds is rubbish. But as long as it is above the mortgage rate, isn't it still better to keep the money in the 3a
account?
Plus keeping the mortgage high has some tax benefits just like keeping the wealth low (amount owned) as 3a does not count towards wealth?
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Old 16.01.2017, 11:14
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Re: Pledging Pillar3a as mortgage collateral

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May I ask why? I know the performance of the 3a funds is rubbish. But as long as it is above the mortgage rate, isn't it still better to keep the money in the 3a
account?
Plus keeping the mortgage high has some tax benefits just like keeping the wealth low (amount owned) as 3a does not count towards wealth?
you have a point on the wealth tax, but the tax is low and 3a is small anyway.

the value may come in with unlocking the funds. if you buy a property, you can release these funds. otherwise, you would need to, say, get the deposit from other funds which could otherwise be earning more than the 0.5% interest that the 3a gets.
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Old 16.01.2017, 11:23
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Re: Pledging Pillar3a as mortgage collateral

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you have a point on the wealth tax, but the tax is low and 3a is small anyway.

the value may come in with unlocking the funds. if you buy a property, you can release these funds. otherwise, you would need to, say, get the deposit from other funds which could otherwise be earning more than the 0.5% interest that the 3a gets.
But the funds are locked (in your property) anyway. Whether your shift the funds from the 3a (by amortising your mortgage) or keep it in 3a, the funds are still locked. Or am I missing something.

Of course: if one is NOT forced to amortise a property/ saving for a purchase / close before retirement, then why would anyone use 3a?
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Old 16.01.2017, 12:29
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Re: Pledging Pillar3a as mortgage collateral

If you do a pledge, you have to amortize this additional mortgage part fully within 15 years, i.e pay back 6.66% of it every year - you lose opportinuties to invest this money.

And return of investment within pillar 3 is significantly less than on the free market, there's a very limited choice of funds and all charge enormous fees.
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Old 16.01.2017, 13:27
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Re: Pledging Pillar3a as mortgage collateral

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But the funds are locked (in your property) anyway. Whether your shift the funds from the 3a (by amortising your mortgage) or keep it in 3a, the funds are still locked. Or am I missing something.

Of course: if one is NOT forced to amortise a property/ saving for a purchase / close before retirement, then why would anyone use 3a?
sure, they'll be locked in the property, but if you don't use it for property, you'll have doubled the amount locked: once for the deposit, once for the 3a. if you use it for the property, you don't need to commit additional funds for the deposit to the extent of the 3a amount.
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Old 16.01.2017, 15:20
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Re: Pledging Pillar3a as mortgage collateral

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If you do a pledge, you have to amortize this additional mortgage part fully within 15 years, i.e pay back 6.66% of it every year - you lose opportinuties to invest this money.

And return of investment within pillar 3 is significantly less than on the free market, there's a very limited choice of funds and all charge enormous fees.
I'm don't understand this, do you mean when someone cashed-in their P3a there is an additional 15 year mortgage issued with a rate of 6.66%?
Can't someone pledge P3a purely for their deposit amount or mortgage interest payments without this involving anything more to the existing settlement with the bank (the existing mortgage)
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Old 16.01.2017, 15:35
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Re: Pledging Pillar3a as mortgage collateral

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I'm don't understand this, do you mean when someone cashed-in their P3a
No, i clearly wrote "If you do a pledge".

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there is an additional 15 year mortgage issued with a rate of 6.66%?
If you pledge, yes - isn't that why you're pledging in the first place? To get above 80%? Without a pledge, you can only loan 80%, the rest has to be cash (min 10%) and withdrawals. With a pledge, the bank can loan you 10% more (up to 90% total) with your pillar 2/3 as a collateral.

It's not "15 years mortgage", banks use 15 years term just to calculate minimum amortization per year: you have to amortize down to 65% linearly in that many years. If you pledge, amortization will be higher, you'll pay back (90% - 65%) / 15 = 1.66% per year, rather than 1% with standard 80% loan. Conditions (interest and duration) on the above 80% part will be the same as for your primary mortgage.

Last edited by ivank; 16.01.2017 at 15:49.
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