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Old 22.02.2019, 00:35
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Pillar 3 vs SP500 returns

I'd love to bounce this off some mustachians if any are lurking in here...particularly for points "Not Considered" (see end of post).

The question: Is investing in a low cost SP500 index (assuming 8% growth) a better alternative than pillar 3a investments (assuming 6% growth) even if you save about 1700 a year in taxes with the latter option...

Background/my personal opinion

The swiss Pillar 3 option is pretty abysmal: The Swiss government mandates by law that a fairly high % of the portfolio must be swiss stocks (no thank you...) and nearly all the brokers/banks that will hold a 3rd pillar for you will charge RIDICULOUS fees - to the extent that if you hold a 3rd pillar account through a bank i'd argue that you're literally being legally robbed....
In my research so far the only worthy company for holding a pillar 3 is VIAC with much lower fees and a 100% stock portfolio option (actually 97%?) that you can maybe expect 6% annual return over the looooooong run. (point being, i NEVER expect any combination of pillar 3 funds/equities to beat out SP500 over long run)

The Dilemma

Option 1: Max out Pillar 3 contribution of 6800 a year at 6% annual growth. With the 1700 i save in tax each year, i invest this portion in the SP500 which returns 8% annually

Option 2: I don't contribute anything to Pillar 3, and instead i invest 6800 each year in SP500 which returns 8% annually.

In a brief calculation i did, by about 29 years Option 2 starts winning out.

Assumptions: the rate of returns, you'll hold SP500 stocks through a U.S broker with negligible fees.

Non Considered: you'll be taxed on 30% of dividend payments as non resident alien using a U.S brokerage, and i'm not sure the tax you'll pay for transferring sales of foreign securities into Switzerland..
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Old 22.02.2019, 10:51
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Re: Pillar 3 vs SP500 returns

The thing you did not consider are FX effects. I once had an SP 500 ETF which performed nicely… but since the Swiss franc shot up that year did I make from my perspective a loss.

On your long term calculation can only a few percent in exchange rate changes tip the balance either way.
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Old 22.02.2019, 14:23
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Re: Pillar 3 vs SP500 returns

I've never actually calculated it, but when I moved to Switzerland I immediately started paying into the 3rd pillar (cash) and eventually I moved it into VIAC which is the "best of the worst" options in terms of fees. I hope that more competition will come in pillar 3 which will reduce fees even further.

I also invest seperately and since 3rd pillar is <7000CHF per year, it's not really much to play with.

A couple of other things to consider:
  • You can remove funds from 3rd pillar if you leave CH or you buy a house, keeping most of the tax benefit (you'll pay some though), so you may not hold it for 29 years...
  • You won't pay wealth tax on the capital in the 3rd pillar
  • Adding more to 2nd pillar may also be an alternative
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Old 22.02.2019, 14:25
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Re: Pillar 3 vs SP500 returns

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The thing you did not consider are FX effects. I once had an SP 500 ETF which performed nicely… but since the Swiss franc shot up that year did I make from my perspective a loss.

On your long term calculation can only a few percent in exchange rate changes tip the balance either way.
That may be true, but if you have your money in Swiss stocks, they'll also tend to counteract the currency increase (so stock prices will decrease).

That's because the big Swiss companies (Nestle, Roche, etc.) make almost their entire revenue outside of CH...
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Old 22.02.2019, 14:49
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Re: Pillar 3 vs SP500 returns

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That may be true, but if you have your money in Swiss stocks, they'll also tend to counteract the currency increase (so stock prices will decrease).

That's because the big Swiss companies (Nestle, Roche, etc.) make almost their entire revenue outside of CH...
Sure. I never said the OP should buy Swiss stocks. I am just answering the question what the calculation does not consider. Currency rates.
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Old 22.02.2019, 15:12
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Re: Pillar 3 vs SP500 returns

I think it'll be tough to get 8% from s&p for the next 3-7 years (parroting others, even buffet)


I don't know what you mean re: transferring sales of foreign securities- I think you will only really be facing wealth tax


As mentioned by others, your FX will play a significant role here. Probably more so than the difference in gains between s&p vs pillar3. I expect USD to slide as the world loses confidence due to lack of leadership and waning soft power/US foreign policy. The fed plans/expects about 2% inflation and uses it's reserve currency status to pay down debt, shifting this burden to the world. I think the CHF benefits from long term sound fiscal management, where I think the USD stumbles.


I have also contemplated this but haven't pulled the trigger yet. As a US citizen, I would not get the benefit of the tax break (my US tax will increase by the size of the swiss tax decrease).



Why do you think you'll manage 6% in a pillar 3a account? I haven't looked deeply into these options, I've really only looked at backfilling pillar 2.
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Old 22.02.2019, 15:25
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Re: Pillar 3 vs SP500 returns

Interesting comparison...

I did some Excel hackery and below my results, I'm not a quant by any means but the problem that would need to be solved is as follows:

What is the break even point (in number of years) for Investment A vs Investment B given a certain number of assumptions?

Investment A: is the Tax Deferred Wrapper in Switzerland (i.e. 3rd Pillar Account)

Investment B: is a Direct Investment without the Tax Deferred Wrapper (i.e. S&P 500 Benchmark)

Assumptions:
- Investment Return / Rate in the Tax Wrapper is always lower than an equivalent Direct Investment due to fees (currently around 0.5% for VIAC)
- Tax Savings are Re-invested at the same rate as the Direct Investment
- Marginal Tax rate of 20% at inception
- Deferred Tax rate of 5%

Result:
- With an 80bps difference in returns and a 5% deferred tax rate, the direct investment catches up with the 3rd pillar investment after roughly 30 years.

(attached the Excel hackery)
Attached Images
File Type: jpg 3rd Pillar vs Direct Investment (small).jpg (116.2 KB, 47 views)
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Old 22.02.2019, 20:19
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Re: Pillar 3 vs SP500 returns

Some things to consider:

1. Pillar 3A does not count towards wealth tax. You save the corresponding amount on wealth tax.

2. Marginal tax saving, obvious. ~20% per year return for free.

3. Dividends are also tax free! Another ~20% (on dividend income) saved here

4. Fund costs are more then compensated by the above.

5. You may be wrong expecting the "World" index to underperform SP500 long term. There were certainly periods where SP500 was lagging behind.
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Old 22.02.2019, 21:36
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Re: Pillar 3 vs SP500 returns

Let me add another question here.


Doesn't the Pillar 3 option become even less attractive if you are in a low tax canton already? For example I live in Zug where tax is < 10% so saving compared to Geneva where tax is 25% is way less attractive.


Doesn't this make more sense the biggest your income tax is or am I thinking this wrong as another dimension to consider?
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Old 22.02.2019, 22:15
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Re: Pillar 3 vs SP500 returns

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Doesn't the Pillar 3 option become even less attractive if you are in a low tax canton already? For example I live in Zug where tax is < 10% so saving compared to Geneva where tax is 25% is way less attractive.
Even if. 10% is bad? Compounded over 30 years it is huge.
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Old 22.02.2019, 23:24
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Re: Pillar 3 vs SP500 returns

Yes but you don't save that, you just delay it until later and your money are locked. You still have to pay the tax.


Alternatively, you can invest it wherever you want for those 30 years and have them immediately available if you need them. I could see the value if you your income tax is 25% and you get back let's say 5k this year but if you get back 1.5k it doesn't look so appealing compared to having them locked in a vehicle with limited investment options and high fees. VIAC seems okayish but is supremely inferior to buying your own ETFs for minimal costs and selling whenever you want.


I never understood why Pillar 3 makes sense for anyone. I think people just are impressionable and see the immediate tax return and think this is a good deal but long term it's not. Maybe slightly better than keeping your money on your bank account though.

Last edited by Troublawesome; 22.02.2019 at 23:35.
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Old 22.02.2019, 23:45
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Re: Pillar 3 vs SP500 returns

Not true. You generally pay less tax on withdrawal and there are ways to do it before retirement.

No withholding tax of reinvested dividends means the effective costs incurred are way lower than the advertised 0.5%. The absolute minimum withholding tax is 15%. Assuming 2.5% dividend yield this translates to effective saving of 0.375%. In other words, your 0.5% management fee on VIAC goes down to 0.125% or less. This is as good as individual ETF purchases, or probably even better as you have no transaction fees either.
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Old 23.02.2019, 01:11
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Re: Pillar 3 vs SP500 returns

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Not true. You generally pay less tax on withdrawal and there are ways to do it before retirement.

No withholding tax of reinvested dividends means the effective costs incurred are way lower than the advertised 0.5%. The absolute minimum withholding tax is 15%. Assuming 2.5% dividend yield this translates to effective saving of 0.375%. In other words, your 0.5% management fee on VIAC goes down to 0.125% or less. This is as good as individual ETF purchases, or probably even better as you have no transaction fees either.
I am not 100% sure all dividends paid by funds or ETFs within a 3rd Pillar Account with VIAC or other providers are tax free, but would be good if you could provide a link to such information.

Further when the funds / ETFs accumulate dividends instead of distributing them, I am highly skeptical of the dividends being accumulated gross within a 3rd Pillar wrapper.

But yeh generally speaking I agree with you, the tax free income (interest and dividends) will help offset the management fees (i.e day light robbery) of this oligopoly called 3rd Pillar Investment Account. Still it doesn’t distract from the fact that 0.50% fee for effectively custodying a bunch of ETFs / funds for clients is a long way off where it should be. I expect it to go down the more people that sign up and eventually when other banks start really competing.
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Old 23.02.2019, 08:22
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Re: Pillar 3 vs SP500 returns

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Yes but you don't save that, you just delay it until later and your money are locked. You still have to pay the tax.


Alternatively, you can invest it wherever you want for those 30 years and have them immediately available if you need them. I could see the value if you your income tax is 25% and you get back let's say 5k this year but if you get back 1.5k it doesn't look so appealing compared to having them locked in a vehicle with limited investment options and high fees. VIAC seems okayish but is supremely inferior to buying your own ETFs for minimal costs and selling whenever you want.


I never understood why Pillar 3 makes sense for anyone. I think people just are impressionable and see the immediate tax return and think this is a good deal but long term it's not. Maybe slightly better than keeping your money on your bank account though.
Marginal tax rate is what counts, not overall tax rate. Even in SZ you could be looking at 25%+ marginal rate. And you can take it out every 5 years at next to no tax to pay down the mortgage. Assuming investment return is greater than mortgage interest it makes complete sense.
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Old 23.02.2019, 22:21
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Re: Pillar 3 vs SP500 returns

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Sure. I never said the OP should buy Swiss stocks. I am just answering the question what the calculation does not consider. Currency rates.
That seems to me like comparing investing in stocks vs. investing in CHF cash, which is a different question entirely.

I mentioned Swiss stocks because investing inside a 3rd pillar has certain minimum requirements for having swiss stocks, whereas outside a 3rd pillar you invest as you wish


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Let me add another question here.


Doesn't the Pillar 3 option become even less attractive if you are in a low tax canton already? For example I live in Zug where tax is < 10% so saving compared to Geneva where tax is 25% is way less attractive.


Doesn't this make more sense the biggest your income tax is or am I thinking this wrong as another dimension to consider?
Yes. I live in Neuchatel where I’m taxed like crazy so I will benefit way more than someone in Zug on my same salary.
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Old 24.02.2019, 12:49
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Re: Pillar 3 vs SP500 returns

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I am not 100% sure all dividends paid by funds or ETFs within a 3rd Pillar Account with VIAC or other providers are tax free, but would be good if you could provide a link to such information.
You are correct, e.g., the S&P 500 ETF used by VIAC is the one offered by iShares in Europe, which AFAIK "leaks" 15% on dividends.
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Old 24.02.2019, 18:03
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Re: Pillar 3 vs SP500 returns

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You are correct, e.g., the S&P 500 ETF used by VIAC is the one offered by iShares in Europe, which AFAIK "leaks" 15% on dividends.
Most if not all EFT's loose the tax credit on the original shares.
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Old 24.02.2019, 18:10
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Re: Pillar 3 vs SP500 returns

Thanks for the helpful response. I will definitely consider your points
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Old 24.02.2019, 21:23
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Re: Pillar 3 vs SP500 returns

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Most if not all EFT's loose the tax credit on the original shares.
ETFs on European stocks probably don't.

And US ETFs on US stocks don't leak anything either (it doesn't apply to 3rd pillar).
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Old 24.02.2019, 23:05
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Re: Pillar 3 vs SP500 returns

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ETFs on European stocks probably don't.

And US ETFs on US stocks don't leak anything either (it doesn't apply to 3rd pillar).
It depends if you want to hold US assets, many people would prefer not to which is why so many are registered in Ireland, however the original 15% withholding tax is lost & zero tax is deducted in Ireland.
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