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Old 25.05.2021, 04:02
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Taking a loan to fund voluntary contributions to 2nd pillar?

I've been making gradually increasing voluntary contributions to my 2nd pillar over the past years to (try to) close my pension gap.

Started with 25k CHF / year and now at 60k CHF / year

I am pleased with the tax advantage of doing so as well as diversification of my retirement benefits.

My salary has also been increasing so the gap hasn't really gotten much smaller though.

Due to the continuous low interest rates I am beginning to wonder whether it would make sense to take a loan from my bank (which would use a substantial equity portfolio as collateral) and fully use that to make additional payments into my 2nd pillar:
- interest rates are very low (<1.5%)
- even if (for the sake of the argument) i get no / low investment return on 2nd pillar, i'd get a substantial tax benefit (tax deduction as well as the tax benefit o the loan itself)

I was essentially thinking of taking a 200k CHF loan each year the next 3 years and each time with a 36 month length of the loan. Thus making 3 x 200k CHF additional 2nd pillar contributions (on top of my roughly 60k CHF a year).

Anybody ever done this? Did it work out OK? Does it trigger questions from tax authorities?

I am asking this question not to debate pure returns from pillar 2 vs. other investment opportunities but rather whether there's a - ceteris paribus - substantial tax benefit of taking a loan to increase 2nd pillar contributions.

Appreciate your advice.
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  #2  
Old 25.05.2021, 08:31
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

The tax benefits is essentially a postponement of taxes and you will eventually have to pay back the loans... so given the low rate of returns etc... I’m not really sure if it will make a big difference to your total wealth in the long run versus simply paying in additional contributions each year as you go.
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Old 25.05.2021, 19:24
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

When you retire you will pay tax on your income every year just as when you were working.

So you want your investments to payout enough, but not too much since the tax system in Switzerland is setup such that the more you earn the high the tax you pay.

I was advised for example to open multiple 3a accounts for that very reason. As I understood it when I retire and cash in the 3a account, they close the account any pay everything out that financial year.

So I open a new 3a account for every 40K I saved. When I retire I close 1 3a account per year, no more... paying the minimum tax.

I cannot see how borrowing money from the bank to invest in a retirement fund is going to save you money. Your going to be relying on the pension company making more money than the bank will want to charge you for the loan... and to be brutally honest many pension companies don't do so well.
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Old 25.05.2021, 19:46
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

The taxes you will pay later depend on your plan to withdraw your 2 Pillar. Will you take it as a lump sum or as an annuity? Will you withdraw it whilst CH resident or after leaving the country?
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Old 25.05.2021, 20:32
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

So your plan is to borrow money at interest to put it an asset which barely appreciates each year?

That's likely to be a really bad idea, unless you are super close to retirement.

If you aren't close to retirement, compounding is far more important than tax saved.

Also 200k a year - how much do you earn? It'd have to be (much) more than 200k to get the benefit of tax deductiblity.
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Old 25.05.2021, 21:11
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

Sounds like a financial perpetual-motion machine...

...and we all know how perpetual-motion machines work.
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Old 26.05.2021, 09:11
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

Beware. Rules may very well change. Especially with pensions and tax. One example is there's been talk of doing away with capital distribution.
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Old 27.05.2021, 09:56
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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The taxes you will pay later depend on your plan to withdraw your 2 Pillar. Will you take it as a lump sum or as an annuity? Will you withdraw it whilst CH resident or after leaving the country?
The taxes you pay will depend on your income from the 1st, 2nd and 3rd pillars as well as any other investments!
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Old 27.05.2021, 10:12
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

Where would you get a personal loan with interest rate less than 1.5%?

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I've been making gradually increasing voluntary contributions to my 2nd pillar over the past years to (try to) close my pension gap.

Started with 25k CHF / year and now at 60k CHF / year

I am pleased with the tax advantage of doing so as well as diversification of my retirement benefits.

My salary has also been increasing so the gap hasn't really gotten much smaller though.

Due to the continuous low interest rates I am beginning to wonder whether it would make sense to take a loan from my bank (which would use a substantial equity portfolio as collateral) and fully use that to make additional payments into my 2nd pillar:
- interest rates are very low (<1.5%)
- even if (for the sake of the argument) i get no / low investment return on 2nd pillar, i'd get a substantial tax benefit (tax deduction as well as the tax benefit o the loan itself)

I was essentially thinking of taking a 200k CHF loan each year the next 3 years and each time with a 36 month length of the loan. Thus making 3 x 200k CHF additional 2nd pillar contributions (on top of my roughly 60k CHF a year).

Anybody ever done this? Did it work out OK? Does it trigger questions from tax authorities?

I am asking this question not to debate pure returns from pillar 2 vs. other investment opportunities but rather whether there's a - ceteris paribus - substantial tax benefit of taking a loan to increase 2nd pillar contributions.

Appreciate your advice.
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Old 27.05.2021, 10:54
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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Where would you get a personal loan with interest rate less than 1.5%?
That’s an easy one. He is pledging his equity portfolio.

I don’t think the OP’s idea is necessarily as stupid as others are saying. It would need some extensive modelling verging on financial advice to see if it makes sense in the OP’s particular financial circumstances.
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Old 27.05.2021, 11:21
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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That’s an easy one. He is pledging his equity portfolio.

I don’t think the OP’s idea is necessarily as stupid as others are saying. It would need some extensive modelling verging on financial advice to see if it makes sense in the OP’s particular financial circumstances.
Assume that if the port should suddenly drop in value that dough will have to be paid back.
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Old 27.05.2021, 11:39
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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Assume that if the port should suddenly drop in value that dough will have to be paid back.
Depends whether he borrows up to the maximum LTV. If the portfolio drops to exceed the maximum LTV then either additional funds would need to be added or part of the portfolio would need to be sold to bring it back in line.
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Old 27.05.2021, 14:45
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

More generally, the pension "gap" is a complete fallacy if you have investments elsewhere, and from what I can see is just a very dubious selling technique from the pension companies.

I'd say the consensus on EF (if there is ever such a thing) is to invest some moderate part in P2 for the security and tax benefits, use P3a also for tax benefits in a good investment fund, but to self-invest any extra in buy-and-hold funds (or stocks if you fancy) for much better long term growth.
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Old 27.05.2021, 15:28
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

It may also depend on whether or not you intend to retire in Switzerland.

The pillar 2 tax thing makes perfect sense inside Switzerland for the risk averse investor. But the tax offices in other countries may take a different view as to income from such a scheme. Possibly more favourable. Possibly less so.
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Old 27.05.2021, 15:28
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

If you have dependents then you should consider what happens if you die... (i don't know the details, but death benefits don't seem to change with the Gap, and you would have a big ass loan..)

How do you repay the loan if you lose your job or (insert any other big change in financial circumstances here)?

If you plan to leave Switzerland (or retire?) in the medium term (~5 years) then this may be a tax optimisation, but in the longer term I wouldn't even think about it.

And remember (as mentioned above) the rules might change before you have any chance to get your money back out.
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Old 27.05.2021, 16:13
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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If you have dependents then you should consider what happens if you die... (i don't know the details, but death benefits don't seem to change with the Gap, and you would have a big ass loan..)

How do you repay the loan if you lose your job or (insert any other big change in financial circumstances here)?

If you plan to leave Switzerland (or retire?) in the medium term (~5 years) then this may be a tax optimisation, but in the longer term I wouldn't even think about it.

And remember (as mentioned above) the rules might change before you have any chance to get your money back out.
This. 100% over.
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Old 27.05.2021, 16:37
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

I wonder why closing gap in the 2nd pillar is still popular pension saving advice with such mediocre interest rates present. Even people from e.g. AXA seriously wonder and debate why would people waste their money by doing so. Invest in anything else that grows. There are so many ways available. If one still believe in non risky investments and it must be Swiss for that matter, why not buy a stock of ABB or Nestle instead?
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Old 27.05.2021, 16:49
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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I wonder why closing gap in the 2nd pillar is still popular pension saving advice with such mediocre interest rates present. Even people from e.g. AXA seriously wonder and debate why would people waste their money by doing so. Invest in anything else that grows. There are so many ways available. If one still believe in non risky investments and it must be Swiss for that matter, why not buy a stock of ABB or Nestle instead?
Perhaps it‘s the pillar 1e that people see as relatively attractive? My contribtions on salary over a certain amount go into a globally diversified portfolio with 75% equities component with a management fee of something like 30bps. The capital and risk is all mine and there is no cross subsidisation of other fund members.
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Old 27.05.2021, 16:50
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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I wonder why closing gap in the 2nd pillar is still popular pension saving advice with such mediocre interest rates present. Even people from e.g. AXA seriously wonder and debate why would people waste their money by doing so. Invest in anything else that grows. There are so many ways available. If one still believe in non risky investments and it must be Swiss for that matter, why not buy a stock of ABB or Nestle instead?
If you are only a year or two from retirement and pay 40% tax then its clearly a good idea. From the "200k a year" comment, I'm guessing this guy's marginal rate is probably pretty high.

If you are 20 years away, and live in Zug on a low salary - yes capital growth and not tax saving is everything.
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Old 27.05.2021, 16:54
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Re: Taking a loan to fund voluntary contributions to 2nd pillar?

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If you are only a year or two from retirement and pay 40% tax then its clearly a good idea. From the "200k a year" comment, I'm guessing this guy's marginal rate is probably pretty high.

If you are 20 years away, and live in Zug on a low salary - yes capital growth and not tax saving is everything.
Understood. But if you are planning taking a loan to finance the 2nd pillar, one might as well take a Lombard loan invest wisely and pay high taxes as a professional trader while small taxes on loan itself.
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