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Old 21.09.2020, 10:15
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Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good deal?

C-permit, married, kids, EU national.
Have been filing taxes since we arrived here 6 years ago.
Now our salaries have increased, and the tax bill is getting a bit more substantial. All included, we are talking about a 33% marginal.


My tax situation is quite standard (both salaried) so I am quite sure I applied all the deductions I could (if you think I missed something, go ahead and suggest). I think the only thing that would have a significant impact would be to contribute to Pillar 2: we both have a lot of missing years, so it would be up to us to decide what to put in there.
Main advantages:
- we get about 1/3 of what we contribute back, to be invested the way we want
- tax rate during retirement will be lower
Main disadvantages:
- the interest rate is very low -- 1%. This money would be stuck there for >25 years.


Have you done your math and decided it was/was not worth it?
Can you share some insight? Thanks all!
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Old 21.09.2020, 10:45
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

Do you mean Pillar 3 & if so yes it is worth it in my past experience where I was able to contribute to Pillar 3a to reduce tax

Last edited by magic; 21.09.2020 at 10:49. Reason: More specific
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Old 21.09.2020, 11:02
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

No, you can't pay back Pillar 3, the tax exemption is capped every year.

I guess the OP refers exactly to Pillar 2. In this case, well, the pension will also be higher: the pension funds usually have web interfaces and pension simulators to calculate this. You trade some interest rate for some more security in later years, and here opinions can vary a lot.
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Old 21.09.2020, 11:52
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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No, you can't pay back Pillar 3, the tax exemption is capped every year.

I guess the OP refers exactly to Pillar 2. In this case, well, the pension will also be higher: the pension funds usually have web interfaces and pension simulators to calculate this. You trade some interest rate for some more security in later years, and here opinions can vary a lot.
On my annual statement for pillar 2 I normally get a questionnaire with an option to invest more. Not sure how this affect tax though?
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Old 21.09.2020, 12:06
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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No, you can't pay back Pillar 3, the tax exemption is capped every year.
But you might be able to do so in the future.
Can't find the link now, if I do I'll update.
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Old 21.09.2020, 13:18
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

If I could contribute towards past Pillar 3 years, I would definitely do it. I know it's under discussion, but it is not possible at the moment.


I meant voluntary contributions to Pillar 2. These contributions are deductible, so you don't pay taxes on that part of your income (similarly to Pillar 2 mandatory contributions).


Voluntary contributions become part of your Pillar 2 pot, therefore low growth (1%) and either a lump sum distribution or a fixed income when you retire.
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Old 21.09.2020, 13:28
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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- we get about 1/3 of what we contribute back, to be invested the way we want
- tax rate during retirement will be lower
This might depend on how far away from retirement age you are.

There is no guarantee that present tax rates will still be in place when you are, say, 80.

Basically you are betting on them remaining as low as they presently are.
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Old 21.09.2020, 13:39
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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Main advantages:
- we get about 1/3 of what we contribute back, to be invested the way we want
Those 33 percent are a one time saving.

The 1 percent or so interest (vs the 6 to 10 percent you could be getting on the stock market) are a recurring penalty.

So whether or not this makes sense for you depends

- on your personal level of risk aversion.
- number of years until retirment.
- potential penalty through cost of opportunity, should you on day find something else you can do with that money but discover you can't recover it from your Pillar 2.

So there is no right or wrong answer here but it depends on you and your situation.
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Old 21.09.2020, 13:41
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

To pay less taxes, get an accountant who knows how to milk the system.
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Old 21.09.2020, 13:41
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

It is most worth if you can back the pillar 3a money within some years.
This is: near retirement, if you intend to leave Switzerland in a few years, become independent and start a business, or you can use it to finance self lived in real estate. Financing real estate is possible every 5 years.

It might also be worth if you see it as "cash" (in case of a pillar 3a bank account) as part of your overall assets and portfolio.

It can also be worth if you are the person who rather spends money and stock market gains on silly things than long term investments.

You can also use VIAC which allows you to invest your pillar 3a on the stock market. One draw back: the better your pillar 3a investments performs the more payout tax will you have to pay in the end when you cash in.
Biggest disadvantage and the great unknown is the actual pay out tax which will be used in a few decades. Currently it can be up to 10% depending on amount and place of residence (place of domicile of holding institution in case you are abroad). You can have up to 4 (may be 5) pillar 3a accounts which you can cash in in the years just before retirement. This lowers your payout tax rate.

How much it makes financially sense depends on your marginal tax rate, how much better an alternative investment performs, and duration of investment. Any potential payout tax cuts into the performance of your pillar 3a.

Considering a pillar 3a product vs. an alternative non-pillar 3a product we can look at each investment year individually:

Pillar 3a is better when
P_3a ∑ (1 + r_3a)^n ∑ (1-t_end) > P_3a ∑ (1-t_marginal) ∑ (1 + r_alt)^n

or
P_3a ∑ (1 + r_3a)^n ∑ (1-t_end) / [ P_3a ∑ (1-t_marginal) ∑ (1 + r_alt)^n ] > 1


P_3a : Is the amount you invest in pillar 3a.
r_3a: it the interest you get from pillar 3a.
r_alt: is the interest of the alternative non-pillar 3a investment
n : is the numbers of years you invest.
t_end : is the pillar 3a payout tax.
t_marginal: is the marginal income tax.

if we set r_alt = r_3a + delta and do some math using the above, we find a nice and easy formula how much better an alternative non-pillar Investment must perform, given we invest it now for n years.

It is: delta = (((1-t_end)/(1-t_marg))^(1/n) - 1) ∑ (1+ r_3a)

Notes: The higher the marginal tax is, the better the Alternative investment must perform to beat pillar 3a.
The longer you invest the smaller is the neede delta.
If the payout tax is higher than the marginal tax pillar 3a will never win.
The influence of r_3a on the result is rather small. For simplicity you could set it to 5%. The result is still correct, but a bit more conservative for any pillar 3a interest bellow 5%.

As shown on this table, where it shows the delta values (in %), vs marginal tax rate and investment years (pillar 3a payout tax is set to 5%). A negative value means, that your alternative investment can under-perform vs the pillar 3a and you would still have more money in the end.
Name:  Pillar 3a vs Alternative small.jpg
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How to read: If the marginal tax rate is 14% and we invest in pillar 3a for 7 years a non-pillar 3a must have plus 1.5 % interest vs. the pillar 3a to perform better.
If the marginal tax rate is 22% and we invest in pillar 3a for 7 years a non-pillar 3a must have plus 3 % interest vs. the pillar 3a to perform better.
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Last edited by aSwissInTheUS; 21.09.2020 at 14:24.
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Old 21.09.2020, 14:02
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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C-permit, married, kids, EU national.
Have been filing taxes since we arrived here 6 years ago.
Now our salaries have increased, and the tax bill is getting a bit more substantial. All included, we are talking about a 33% marginal.


My tax situation is quite standard (both salaried) so I am quite sure I applied all the deductions I could (if you think I missed something, go ahead and suggest). I think the only thing that would have a significant impact would be to contribute to Pillar 2: we both have a lot of missing years, so it would be up to us to decide what to put in there.
Main advantages:
- we get about 1/3 of what we contribute back, to be invested the way we want
- tax rate during retirement will be lower
Main disadvantages:
- the interest rate is very low -- 1%. This money would be stuck there for >25 years.


Have you done your math and decided it was/was not worth it?
Can you share some insight? Thanks all!
Presuming you have no plans to leave Switzerland and in the knowledge you are a long way from returing I wouldn't even think about this.

Last edited by HickvonFrick; 21.09.2020 at 15:30.
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Old 21.09.2020, 14:06
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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But you might be able to do so in the future.
Can't find the link now, if I do I'll update.
Found some sources.
But still has to go through Bundesrat and then probably far future to implementation.

https://www.google.com/amp/s/www.cas...-1555942%3Famp

https://www.parlament.ch/de/ratsbetr...airId=20193702

https://www.agpk.ch/fileadmin/files/...nkauf_2020.pdf

Last edited by gipfelisturmer; 21.09.2020 at 14:23.
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Old 21.09.2020, 14:22
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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Found some sources.
But still has to go through Bundesrat and then probably far future to implementation.

https://www.google.com/amp/s/www.cas...-1555942%3Famp 50

https://www.parlament.ch/de/ratsbetr...airId=20193702 46
This only would apply if you missed payment because you were not eligible to contribute to pillar 3a (not working). Repayment of withdrawals to finance real estate is explicitly excluded.
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Old 21.09.2020, 14:24
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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This only would apply if you missed payment because you were not eligible to contribute to pillar 3a (not working). Repayment of withdrawals to finance real estate is explicitly excluded.
Yes correct.
Sorry I wasn't thinking in that scenario.
Just the possibility of paying in for missed years.
Now that I read back I was probably off topic.
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Old 21.09.2020, 15:39
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

OP, perhaps consider buying a home and paying back the mortgage using pillar 3a money, aka "indirekte Amortisation". You can do that every five years, the calculation looks something like:
3a pay-in is 6826 annually, for simplicity the assumption is zero return while it sits in the 3a account or elsewhere. Payout tax rate should be 5-10%, my assumption here is 10%. To caculate the return, both pay-in and pay-out (transfer, rather) are assumed to happen in the middle of the year.

You pay in 5 * 6'826 = 34'130, after five years the mortgage is reduced amortisation by 34'130 * 0.9 = 30'717 due to 10% 3a tax at payout. Without 3a the 33% income tax would have reduced that to 34'130*.67 = 22'867, thus the indirect amortisation yields 34%.

The annual pay-in has been in the 3a account for 1, 2, 3, 4, and 5 years, respectively, or about 2.5 years on average. That gives a guaranteed(!) annualised return of about 13% (more like 16% if you assume for the pay-out to happen in January).

Over the next 25 years you could amortise ~131k mortgage this way, plus what you already have in 3a.

------------------------------------

Whether buying into pillar 2a is available to you depends on your Pensionskasse, so you need to enquire whether they offer that in the first place. If they do you need to distinguish two cases, this is especially relevant considering your income level:
Talking about ordinary deductions from the monthly salary
- ordinary contributions based on an annual salary of about ~24k to ~130k is federally regulated. The "Mindestzinssatz" the federal council publishes each year refers to this portion only. Same for the 6.8% conversion rate to calculate your annual pension.
- ordinary contributions based on a salary above the ~130k threshold fall under ordinary insurance law and regulation, as opposed to pillar 2 regulations. You may be more or less free to invest as you see fit (or not), subject to internal regulations by your Pensionskasse, but there is no minimum return, and conversion rate to calculate the pension is probably 5% at most, possibly less (enquire). Also, you may want to enquire how much you get back if you, say, leave the country in a few years, and what happens if you lose your job.

You may want to enquire which of the two your buy-ins would be allocated to.

Further, you may want to distribute your voluntary pay-ins over multiple years. The more years this is distributed over the higher the average tax bracket you avoid.

On the other hand, the amount in pillar 2 also increases the protection for wife and kids if you were to die, or become unable to work due to an accident, etc. This cost is usually, and falsely, ignored when people compare to ordinary investments e.g. in the stock market.

That said, keep in mind that capital gains are tax-free here. The longer the money is bound the more likely ordinary stock investments will beat the tax savings. At around age 40 I wouldn't consider pillar 2 for what are essentially savings (unless interest rates return to 3-4-5%, which is not on the horizon at all, in which case I'd see it as the interest-bearing portion of my portfolio). If the increased insurance protection is relevant you're most probably better served by getting insurance that covers the risks only. The advantage is that such a contract is (should be) cancellable (or adjustable, if wanted) each year, i.e. whenever your situation changes.
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Old 21.09.2020, 15:46
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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OP, perhaps consider buying a home and paying back the mortgage using pillar 3a money, aka "indirekte Amortisation".
Indirect is when you do not reduce the principal of the mortgage.
If you use the money to lower the mortgage it is considered direct.

Real indirect via 3a does not make any sense.

Paying the money first into 3a and then use it to reduce the principal is still direct and one of the most economic use of pillar 3a as you profit the most from the tax reduction.
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Over the next 25 years you could amortise ~131k mortgage this way, plus what you already have in 3a.
And that is why it is considered direct and not indirect.

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- ordinary contributions based on an annual salary of about ~24k to ~130k is federally regulated.
Only up to CHF 85k (four times the lower amount) is the mandatory part with fixed interest.
Free investment of the part above 128k (6 times the lower amount) is only available in rare cases.
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Old 21.09.2020, 15:49
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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Voluntary contributions become part of your Pillar 2 pot, therefore low growth (1%) and either a lump sum distribution or a fixed income when you retire.
And what about if you donít make it to retirement? If you were to fall down a stairs tomorrow morning could not work again for the rest of your life how would you be fixed then and how would those that depend on you be fixed?

Your second pillar includes an invalidity pension beefed up for dependents plus death benefits etc. And the more you have contributed the bigger the payouts. It comes for free with your pension.

We all expect to market it to retirement, but the reality is that some will not and most people are ignorant of the cost of loss of income coverage etc because it come as part of employment.
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Old 21.09.2020, 16:33
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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It is most worth if you can back the pillar 3a money within some years.
This is: near retirement, if you intend to leave Switzerland in a few years, become independent and start a business, or you can use it to finance self lived in real estate. Financing real estate is possible every 5 years.

It might also be worth if you see it as "cash" (in case of a pillar 3a bank account) as part of your overall assets and portfolio.

It can also be worth if you are the person who rather spends money and stock market gains on silly things than long term investments.

You can also use VIAC which allows you to invest your pillar 3a on the stock market. One draw back: the better your pillar 3a investments performs the more payout tax will you have to pay in the end when you cash in.
Biggest disadvantage and the great unknown is the actual pay out tax which will be used in a few decades. Currently it can be up to 10% depending on amount and place of residence (place of domicile of holding institution in case you are abroad). You can have up to 4 (may be 5) pillar 3a accounts which you can cash in in the years just before retirement. This lowers your payout tax rate.

How much it makes financially sense depends on your marginal tax rate, how much better an alternative investment performs, and duration of investment. Any potential payout tax cuts into the performance of your pillar 3a.

Considering a pillar 3a product vs. an alternative non-pillar 3a product we can look at each investment year individually:

Pillar 3a is better when
P_3a ∑ (1 + r_3a)^n ∑ (1-t_end) > P_3a ∑ (1-t_marginal) ∑ (1 + r_alt)^n

or
P_3a ∑ (1 + r_3a)^n ∑ (1-t_end) / [ P_3a ∑ (1-t_marginal) ∑ (1 + r_alt)^n ] > 1


P_3a : Is the amount you invest in pillar 3a.
r_3a: it the interest you get from pillar 3a.
r_alt: is the interest of the alternative non-pillar 3a investment
n : is the numbers of years you invest.
t_end : is the pillar 3a payout tax.
t_marginal: is the marginal income tax.

if we set r_alt = r_3a + delta and do some math using the above, we find a nice and easy formula how much better an alternative non-pillar Investment must perform, given we invest it now for n years.

It is: delta = (((1-t_end)/(1-t_marg))^(1/n) - 1) ∑ (1+ r_3a)

Notes: The higher the marginal tax is, the better the Alternative investment must perform to beat pillar 3a.
The longer you invest the smaller is the neede delta.
If the payout tax is higher than the marginal tax pillar 3a will never win.
The influence of r_3a on the result is rather small. For simplicity you could set it to 5%. The result is still correct, but a bit more conservative for any pillar 3a interest bellow 5%.

As shown on this table, where it shows the delta values (in %), vs marginal tax rate and investment years (pillar 3a payout tax is set to 5%). A negative value means, that your alternative investment can under-perform vs the pillar 3a and you would still have more money in the end.
Attachment 140252
How to read: If the marginal tax rate is 14% and we invest in pillar 3a for 7 years a non-pillar 3a must have plus 1.5 % interest vs. the pillar 3a to perform better.
If the marginal tax rate is 22% and we invest in pillar 3a for 7 years a non-pillar 3a must have plus 3 % interest vs. the pillar 3a to perform better.
It's not quite as good as that as the final value is not tax free.
My UK pension that I paid for 7 years grew 10 fold by the time I cashed it in between age 55-58, the tax payable at exit was multiples of the tax relief at inception.
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Old 21.09.2020, 16:42
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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It's not quite as good as that as the final value is not tax free.
A 5% final tax is included Which is roughly what a single persons pays in ZH for 100k. Can be as low as 2% in case of ZG and married.

https://www.postfinance.ch/de/privat...uszahlung.html
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Old 21.09.2020, 16:54
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Re: Oldest question of all: how to pay less taxes? Are Pillar2 contributions a good d

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A 5% final tax is included Which is roughly what a single persons pays in ZH for 100k. Can be as low as 2% in case of ZG and married.

https://www.postfinance.ch/de/privat...uszahlung.html
100k is way too small for a Pillar 2, if you have bought back years so 'worked' 40 years I would expect 400k to 1 million or more.
Withholding tax on my Swiss pension was about 5.5% 400k in Zurich is about 10% 1 million is 16%
5% on pay out would have been about twice the tax I saved over the 7 years when paying in, obviously final tax liability depends on where you are living & rules change.
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