I am in the fortunate position of being able to pay excess money into my 2nd pillar (BVG) each year to reduce my tax burden (saves me 15-20k tax per year). I hope to do the same this year.

However, I also plan to buy a house this year using cash from my 3rd pillar accounts as part of the deposit.

Has anyone any knowledge/experience, whether by withdrawing from my 3rd pillar accounts in the same year would affect the tax reduction I would normally expect this year from paying into my 2nd pillar.

Thanks.

It depends what you mean by effect...

Whilst loosely related the BVG and 3rd pillar accounts are treated differently as far as your handling of them is concerned but generally not as far as tax is concerned.

Perhaps the best indication of the answer to your question is this. If you cash in a 3rd pillar you can still pay money from your taxable income into a new or different scheme.

The principle behind the 3rd pillar is that it is a restricted savings account designed to top up your savings for those years ahead where you do not work. It often also has a very limited insurance scheme attached to it but this is not designed to do anything other than protect the savings amount.

The BVG on the other hand has three distinct components 2 of which are insurance policies. The first insurance policy is designed to provide for you in the event of injury and the second is a life assurance policy designed to provide for your family in the event of death. The BVG has a defined benefit payable dependent on the amount of money paid in and this is visible through a statement sent annually.

Taking money out of a BVG is not really to be advised as this takes from your family in the future in the event of an unwanted event. Therefore many banks will lend directly against a guarantee to pay from the BVG.

The 3rd pillar is different as in the event of a death it is simply paid out. Indeed you can cash the 3rd pillar in to buy into the BVG.

So for your situation.

When you plan to use money from your 3rd pillar you must sign documents to close the account to pay into a deposit account for the purpose of purchasing a house. You are then taxed on the amount of money you receive at a reduced rate. For this reason it is advisable to have multiple 3rd pillar pots and cash these in 30Kish at a time. You can still pledge the 3rd pillar as if it was cash without cashing it in. Practically all banks will accept this pledge (Raiffeisen might not). Dependent on your age the cashing in of these pots might or might not be advisable, but paying in at least one shows willing...

Assuming that your 3rd pillar amount cashed in is for the purchase of a house, any additional money paid into a BVG is tax deductable. Indeed you can additionally pay 6566 (2009/10 rate) into a 3rd pillar and receive tax benefits.

How to handle the "Vorsorge" (old age saving schemes) monies is really something to discuss with the bank you are looking to have the mortgage with. Ultimately the holding of debt caused by owning a house is not a bad thing as this removes very much of the potential for wealth tax and reduces the taxable part of your income through the interest payments deduction - this in turn offsets the "Eigenmietwert" (effective rental value to yourself).

Its not possible to give advice on this subject as to the best route for you as there are many things to consider but hopefully the above will provide some useful input.

Withdrawals in capital from 3rd or 2nd pillar are taxed separately anyway (at a reduced rate). Therefore you will anyway pay taxes on the withdrawal from your 3rd pillar, even if you have no other taxable income. Additional contribution to your second pillar will only help to reduce your tax liability for your other income (salary, etc.). Such process is accepted by tax authority if that was your question.

Great replies, many thanks (esp. Richard).

So my plan is...
I need 10% cash as deposit, plus another 10% which can be cash or pledge.

I actually can scrape together 20% in cash (just about - it's not an expensive house), but would like to pay a large lump of this into BVG this year to lower my taxable salary, thus save a significant amount of income tax. I know there are limitations on this, but I will be repeating what I did in the past 2 years, and there is space in the BVG for it.

So I will cash in existing 3rd pillars to get much of the cash for the deposit. I have checked the tax liability on this withdrawal on the ZH steueramt website (<5%). My understanding is that taking this now is not a bad thing, as the tax on that amount will not reduce over time and increases according to the amount withdrawn in one tax year. I also understand that having made this withdrawal (ie by closing the accounts) I will not be able to make another 3rd pillar withdrawal (from any other account) within 5 years (can you confirm that?).

From your comments, if I have a spare 6k left over I can also open a new 3rd pillar this year.

It all seems remarkably civilised and un-taxman-like.....

Thanks for your comments

I can confirm the opposite
Okay, lets explain from another angle. The 3rd pillar accounts are government backed savings schemes. I say government backed as the Swiss authorities allow taxable income to be deducted for them and do not tax the growth (aka interest).

In order to make them worthwhile you need to have several. The Swiss are good at this. With several you have saving pots that you bring up to be each worth around 30K. You then cash one in per year when you want the money. In that way it is tax optimized. The first 30000 of this money is at a relatively tax free rate of around 1%. Thereafter you pay progressively more. For this reason cashing the whole lot in at once is not to be advised. Once you have touched the money in a pot you are prohibited from taking from it again for 5 years. However if you have several pots you can take successively from each once per five years meaning you can effectively have a second income of circa 30000 per year for several years. Of course until you are five years before retirement you are restricted on the use you can put the money to.

What this means is that your statement "My understanding is that taking this now is not a bad thing, as the tax on that amount will not reduce over time and increases according to the amount withdrawn in one tax year." is not necessarily correct.

If you time the taking of the money and have several pots then the tax burden is reduced. As I said before go with all the wealth you have laid on the table and ask the bank what the best option is. Tell them you want to minimize your tax burden but are quite happy to cash in 30K now and will open pledged 3rd pillars with them. In this way they are more than happy to bend a bit as they earn from each 3rd pillar... Also that you want to invest in your BVG but are also prepared to take money from savings to help with the deposit plus you are happy to pledge your BVG. All in all you should be able to offer them a good deal. Try the big 2 and the local cantonal bank. IF you are living close to two competing cantonal banks it is worth looking at the other one. You will find the interest rates will be competitive and the options with the cheaper banks(Coop and Migros for example) less flexible.

Got it, thanks. The 5 year restriction is per account. That's pretty cool, and means I really should make sure I get a new account this year.

What I notice from the tax calc on the Zurich Steueramt page is that yes, the rate does increase the more that is cashed in, but actually on the numbers i'm playing with not very noticably. At 30,000 it is 4.47% (incl.Bundesteuer), at 53,000 it is 4.63%.

This is a useful learning curve for planning for the future. I had always assumed it was good to amass a large pot of excessive BVG, then when I no longer need the annual tax break of making those contributions (eg i move to a simpler, less well paid lifestyle), there is the option to semi-liquify it (assuming the housing market is considered liquid) by cashing it all in to pay off the mortgage. It seems like cashing in several hundred thousand all at once can get expensive.

Thanks again for you comments.

Hi Then the calculator is wrong. You will pay about 300 for 30000. Where is the calculator you are using? For 53000 you will pay about 2000

I used the Kapitalleistungen aus Vorsorge on both the Staats- und Gemeindesteuern and Direkte Bundesteuer panels at http://www.steueramt.zh.ch/html/steu...e_personen.htm

Most of the tax is on the Staats- und Gemeindesteuern calculation. I used single person, non-church, Zurich city.

Hi Richard, how many 3rd pillar pension funds can anybody have a tone time. For instance, could i open up 10 in my name and load them up each year ?

You will get tax relief on only 6500 (approx) of savings in a single year. Additionally, as the interest rates are usually advantageous compared to normal savings accounts, and interest is paid tax free whilst held in the account, i'm sure there would be restrictions on opening and 'overfillling' in multiple accounts in the same year. Not sure how that would be policed though.

Yes you can. There are things to consider though. You only get tax relief on the savings paid against the declared income. The total amount paid into all 3a funds is capped at an amount reviewed annually and currently 6566 per annum. It is indeed policed by the tax authorities, in that you need to provide the official statements from each fund annually. They issue a statement even if you pay in zero. Failure to declare the existence of a 3. pillar account is an offence...

I have 60k I would like to put into an account here in CH for about a year and then pull it out to assist with downpayment on house here when I sell my current apartment here.
I understand correctly the CHF 30k in one account then another 30k in a second account and I can withdraw them both in about a year with minimal tax penalty?
Does this make sense in what I will earn on potential interest vs. the taxes?

No this is not correct. If you have 60K in cash lying about then you do not have to pay tax on it unless it is wealth tax, but you will have to pay tax on any interest. You are probably best served by asking a financial advisor about 1 year fixed term investments. If however you already have 3a investments you can withdraw the money for a house purchase.

Note that 3a investments are designed as a long term investment to save for your old age and not as a short term tax reducing vehicle.

Thanks.
I dont see the option on how to add the Thanks officially. Anyone care to assist on that as well???

so you put away 6-7k a year and save, say, 25% tax on this. a few years later you cash it out and pay 1% tax. so you save around 25% tax in the end.

what's the catch? sounds almost too good to be true!

You can't cash it out until you retire without paying major penalties and tax, except to buy your main residence (and NOT a secondary residence) or to permanently leave CH for a non-EU country.

That's the catch.

Tom

and if i want to use the amount to pay of the mortgage on my existing main residence, then this effectively removes the catch?

i never paid into it previously, but it seems if i can pay, ~7k into it each year now and say cash it in after, say, 4 years and use the funds to pay down my mortgage, then this would seem to be well worth doing. assuming the rules allow this.

If you have a mortgage where the interest payment exceeds the return on 3rd pillar then yes it makes sense. Do take into account though the income tax relief you get on that interest payment and the cashing-in tax on the 3rd pillar. You may find at the moment if you have a good mortgage you are actually getting a better return by staying in the 3rd pillar, especially taking these other items into account.

edit - now i read the second part - yes this is what the banks call indirect amortisation, except they would rather you don't cash it in after 4 years but hold indefinately - this is an option if you are currently paying direct amortisation, but check your mortgage terms - most mortgages here do not offer such flexibility to randomly pay capital payments - libor is often an exception as it is renewed on a regular basis - also any fixed term contract obviously can be paid down at the end of the term

cheers. i never previously paid into 3rd pillar because i didn't want to lock-up cash before retirement (i don't believe many investments will return well by the time i retire).

however, i will do so if there are good tax advantages and i have a way to pull out the money (i.e. to set off against the mortgage).

as you say, at the moment, it would make sense to keep it in the 3rd pillar, and take the tax advantage on the 3rd pillar and the mortgage, my only concern would be if the laws change which would then result in the cash being locked up and no longer being allowed to be used against a house purchase.

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cheers. will speak to the bank later this week. the LIBOR mortgage i have does have some flexibility in terms of re-payments: I can repay capital every 3 months.