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Old 22.08.2017, 14:53
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Pillar 2 contributions

Apologies if this has been covered elsewhere. I have searched through the forum for threads on this topic but have not found an answer to my specific question, or it may be that I have failed to understand as I am not very financially savvy...


My new employer has given me the opportunity to increase/decrease my pillar 2 pension contributions by 2% from the standard model. Regardless of my choice, it seems that they will always contribute the same amount. I'm just wondering if there is any obvious benefit in me taking either of these options?
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Old 22.08.2017, 14:58
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Re: Pillar 2 contributions

Depends on what you do and plan to do with your money.

If you keep it all on savings account, you're probably better off with increasing pillar 2: you get less taxed and interest is higher than what banks would pay you

Otherwise, pillar 2/3 are pretty shitty investments and you should have as a little as possible in them. Unless you plan to withdraw soon for buying a property or emigrating, then it can be a nice way to steal save some tax money
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Old 22.08.2017, 15:01
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Re: Pillar 2 contributions

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Depends on what you do with your money.

If you keep it all on savings account, you're probably better off with increasing pillar 2: you get less taxed and interest is higher than what banks would pay you

Otherwise, pillar 2/3 are pretty shitty investments and you should have as a little as possible in them
Given the very low interest rates, I agree on pillar 2 as a not optimal investment option. On the other hand Pillar 3 can be used to reduce tax burden and if you link it to an ETF it can yield 3%-5% annually.
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Old 22.08.2017, 15:06
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Re: Pillar 2 contributions

Total cost to you of ownership of most fund based 3a easily exceeds 1-2% p.a. Banksters profit more from it than you, the pleasure is all theirs I'm afraid
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Old 22.08.2017, 15:18
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Re: Pillar 2 contributions

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Total cost to you of ownership of most fund based 3a easily exceeds 1-2% p.a. Banksters profit more from it than you, the pleasure is all theirs I'm afraid
I'm not with CS or UBS and my total cost of ownership is 0.88%. Performance will depend also on the type of funds you invest in (risk profile). Maybe my performance calculation is wrong but...I'm pretty sure I get 3%-5% annually.
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Old 22.08.2017, 15:20
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Re: Pillar 2 contributions

How much return you get out of it is not so relevant - it's more up to the market, than you or the fund. 3-5% might sound OK, but when the market is up 10+%? Not so ok

What you need to focus on is costs, explicit and implicit. Consider withholding taxes, currency hedging costs - they are significant but not in TER! Misallocation (home bias, f'ing negative yielding bonds) is pretty bad too, but harder to quantify. Compare returns against some good benchmark, like VT, make sure to account for dividends reinvestment
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Old 22.08.2017, 15:43
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Re: Pillar 2 contributions

If your Pension-Fund (P2) becomes "sick" (notleidend), you'll have to take a cut on your pension.
That's one reason why so many people are taking money out of P2 and buying property: they feel it's a safer investment.

Also, if you die, your partner will only receive a significantly smaller payout.

In contrast: cash or investments are much simpler in that respect.

In my case, I need to live 13 years after my retirement to see the money back (35k deficit, would give me around 2.something CHF more per year after retirement).
I think I would do it, if I had bought property (I will most likely not have a lot of interest payments). I could then offset Eigenmietwert with P2-payments....
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Old 22.08.2017, 16:00
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Re: Pillar 2 contributions

Investing an extra 2% in pillar 2 I think is a good idea.

That 2% is removed from your taxable income, so it reduces you tax burden. That in itself may be better than any interest offered in savings accounts.

Once you have set it up, it goes automatically from your account, you dont notice it. where as if you have to allocate the same money each month to a saving account some tight months you may skip the transfer.

As for the money going to relatives if anything should happen, I may be wrong, but I thought that figure on the end of the year pension statement was whats in the pot, thats the amount you get towards a house, business, if you could withdraw it, and also if it was to be passed down should the worst happen.
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Old 22.08.2017, 16:08
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Re: Pillar 2 contributions

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Investing an extra 2% in pillar 2 I think is a good idea.

That 2% is removed from your taxable income, so it reduces you tax burden. That in itself may be better than any interest offered in savings accounts.

Once you have set it up, it goes automatically from your account, you dont notice it. where as if you have to allocate the same money each month to a saving account some tight months you may skip the transfer.

As for the money going to relatives if anything should happen, I may be wrong, but I thought that figure on the end of the year pension statement was whats in the pot, thats the amount you get towards a house, business, if you could withdraw it, and also if it was to be passed down should the worst happen.

Just check what's written under "Witwenrente".

For me, it's basically 50% if what I get, IIRC - which would be OK if wives had the same jobs as their husbands, with the same pay and the same pension.

More often than not, though, they have (very) much less.
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Old 22.08.2017, 16:30
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Re: Pillar 2 contributions

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I'm not with CS or UBS and my total cost of ownership is 0.88%. Performance will depend also on the type of funds you invest in (risk profile). Maybe my performance calculation is wrong but...I'm pretty sure I get 3%-5% annually.
Don't forget that most 3a funds only have max 50% stocks. Which means the actual cost of ownership of stocks is 2x the quoted TER of the 3a fund, (i.e. 1.76%) since the other 50% just sits there doing nothing but generating costs for you.
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Old 22.08.2017, 16:42
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Re: Pillar 2 contributions

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Don't forget that most 3a funds only have max 50% stocks. Which means the actual cost of ownership of stocks is 2x the quoted TER of the 3a fund, (i.e. 1.76%) since the other 50% just sits there doing nothing but generating costs for you.

Not any more, UBS has a 75% Stocks 3a product, and ZKB have a 65% product. I know as I transferred from the classic 45% max earlier this year.


Regarding your TER, no comment, interesting perspective.
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Old 22.08.2017, 16:46
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Re: Pillar 2 contributions

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Investing an extra 2% in pillar 2 I think is a good idea.

That 2% is removed from your taxable income, so it reduces you tax burden. That in itself may be better than any interest offered in savings accounts.
Each and every contribution to a Pillar 2 generates a one-time tax saving in the year of the contribution only.
The same amount in a savings account can generate annual interest year over year.

Whether an investment in a Pillar 2 does or does not make sense depends on your age, your marginal tax rate and your appetite for risk in alternative investments.
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Old 22.08.2017, 16:49
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Re: Pillar 2 contributions

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Not any more, UBS has a 75% Stocks 3a product, and ZKB have a 65% product. I know as I transferred from the classic 45% max earlier this year.
75%? I'll need to check with my bank.

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Regarding your TER, no comment, interesting perspective.
my concept still applies. Quoted TER is to be multiplied by the reverse of the ratio of shares.
In case of 75% shares it is however quite a bit better. (only 1.33x quoted TER)
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Old 22.08.2017, 16:55
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Re: Pillar 2 contributions

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Apologies if this has been covered elsewhere. I have searched through the forum for threads on this topic but have not found an answer to my specific question, or it may be that I have failed to understand as I am not very financially savvy...


My new employer has given me the opportunity to increase/decrease my pillar 2 pension contributions by 2% from the standard model. Regardless of my choice, it seems that they will always contribute the same amount. I'm just wondering if there is any obvious benefit in me taking either of these options?
If the employer would at least match your contributions, then it might be worth it as you would have an instant gain equal to your marginal tax rate and all this multiplied by 2.

E.g. at a marginal tax rate of 30% and employer matching your contributions, with 700CHF real money you would start with 2000CHF. Now that is quite a return.

But without the employer matching it: FORGET IT unless you buy property in the next 5 years.
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Old 22.08.2017, 17:35
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Re: Pillar 2 contributions

Don't forget withholding taxes and hedging costs. They are never quoted in TER, but amount to pretty significant costs

Withholding taxes: let's say US 15% non reclaimable withholding at 2% div yield = 0.30% cost on top of TER

CHF currency hedging costs (mandatory by law for a good part of foreign investments in your pillar 2/3): difference in 1 month yields, a whopping 1-2% or so!!!

0.88% TER is also pretty obscene by itself, when you can buy very reasonable index funds on the free market with TER from just 0.03-0.04% these days

Cash that sits uninvested and that you may still even have to pay fees on is not nice, but an even sadder thing these funds do with your money:


Last edited by ivank; 22.08.2017 at 18:48.
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Old 23.08.2017, 09:51
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Re: Pillar 2 contributions

Third pillar insurance, account or funds is certainly interesting, but it is capped at 6.7K. If you assume the OP is already paying in the max, it makes this option impossible.

Paying in to the pillar 2 is a one time tax saving. Its also lowering your taxable income, and if that brings it below a noticeable threshold ie 100k, 120k or 300k thats a second benefit and saving.

If you are paying 10% income tax for example, and 2% extra into company pension is 2K CHF, without the saving on income tax by lowering your tax liability, you are saving (or making) 200 CHF, (in really basic terms). To get 200 CHF from a 2k investment currently isnt bad!

On top of that you will still earn the interest rate which that pension fund is paying, which I guess isnt worse than any savings account
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Old 23.08.2017, 10:01
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Re: Pillar 2 contributions

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To get 200 CHF from a 2k investment currently isnt bad!
200 CHF this year and then a lifetime of naughts, pretty bad deal IMHO. A lot of investment return normally comes from compounding which is non existant in this case

Quote:
If you are paying 10% income tax for example, and 2% extra into company pension is 2K CHF, without the saving on income tax by lowering your tax liability, you are saving (or making) 200 CHF, (in really basic terms).
Actually it's marginal income tax rate not average that matters since swiss taxes are highly progressive. So maybe you'll get 400-600 CHF on your 2000 CHF. Still a bad deal if you can't rescue 2000 CHF within next few years. But don't forget to subtract 5-10% for tax on withdrawal, and some fat admin fee for withdrawal. Maybe you won't get even any positive return at all for another reason - if your new country just taxes the whole thing away at its ordinary income tax rates!

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On top of that you will still earn the interest rate which that pension fund is paying, which I guess isnt worse than any savings account
Savings accounts never made anyone rich

Last edited by ivank; 23.08.2017 at 10:12.
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Old 23.08.2017, 11:56
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Re: Pillar 2 contributions

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Third pillar insurance, account or funds is certainly interesting...
3a as insurance is even worse than funds. But we are talking about 2nd pillar here anyhow.

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...Paying in to the pillar 2 is a one time tax saving. Its also lowering your taxable income,
Why "also", isn't that the same thing?

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and if that brings it below a noticeable threshold ie 100k, 120k or 300k thats a second benefit and saving.
no its not, that is not have progressive tax works. your tax rate does not increase for your entire income just by being in a higher tax bracket. There are plenty of threads on this.


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If you are paying 10% income tax for example, and 2% extra into company pension is 2K CHF, without the saving on income tax by lowering your tax liability, you are saving (or making) 200 CHF, (in really basic terms). To get 200 CHF from a 2k investment currently isnt bad!
to compare with an investment outside 2. pillar, you would actually make 200CHF on a 1800 "investment".


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On top of that you will still earn the interest rate which that pension fund is paying, which I guess isnt worse than any savings account
why compare with a savings account, that is just a wallet for spending money of say 6months' salary.
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Old 23.08.2017, 12:12
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Re: Pillar 2 contributions

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Not any more, UBS has a 75% Stocks 3a product, and ZKB have a 65% product. I know as I transferred from the classic 45% max earlier this year.

Regarding your TER, no comment, interesting perspective.
Again depends on the risk you want to take. 75% stocks seems high for me.


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(....)

0.88% TER is also pretty obscene by itself, when you can buy very reasonable index funds on the free market with TER from just 0.03-0.04% these days

(...)
Sure there are thousands of funds to select from....the question is which ones and how do you keep up with your investment portfolio (introducing new funds and selling other funds). It requires knowledge and time. I'm happy to delegate part of the work to an assets manager.
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Old 23.08.2017, 12:25
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Re: Pillar 2 contributions

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Sure there are thousands of funds to select from....the question is which ones and how do you keep up with your investment portfolio (introducing new funds and selling other funds). It requires knowledge and time. I'm happy to delegate part of the work to an assets manager.
Why use an asset manager to choose funds?

The funds themselves have a target which they are supposed to follow, there's no point in paying another layer to spend your money switching between funds when the fund should be adjusting their investments internally to the market.

Pick a couple of funds that match your goals and stick with them; any movement just costs you fees.

If you go to a manager, the criteria to select the fund will be, in order:

1. Is it our own fund?
2. How much fees do I earn from it?
3. Does it sound like it matches the client's description of their desires (i.e. will they actually buy it)?
4. What is the real return?

1 & 2 may swap a bit, but 4 will never be as high as you think.
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