Pillars 2 and 3: optimizing everything
No, splitting Pillar 3 is far from being the most important thing.
And yet it's the most common piece of advice you'll find on the web.
Splitting your Pillar 3 into 5 accounts will save you around 20k in tax.
Here's the most important part
Each of the following actions will save you several hundred k-:
contribute the maximum annual 7k- to your Pillar 3, without interruption, from the beginning till the end of your career
choose a low-fee Pillar 3 account invested in global stocks
invest by yourself in stocks over the long term, in a separate account, instead of contributing more to a low-return Pillar 2
if the opportunity arises, withdraw money from your low-return Pillar 2 into a vested benefits account or cash out to invest in stocks over the long term
#0 Split your Pillar 3 into 5: win 20k-.
To minimize tax on Pillar 3 withdrawals at retirement, it's best to create several accounts. Why should you do this? Tax is progressive, based on the amount of Pillar 2 plus Pillar 3 withdrawn that year, and each account must be withdrawn in full.
Since withdrawals can be made as early as 5 years before retirement age, and Pillar 2 can generally be withdrawn only once, this leaves 6 distinct withdrawal years, including 5 for Pillar 3.
It is therefore efficient to split your Pillar 3 into 5 equal parts.
For example, a married person living in Geneva who has contributed 7k over 25 years will have accumulated, with a 7% return, around 450k-. If she withdraws this amount all at once, she will owe 33k in tax. And if she withdraws it in 5 pieces of 90k, she will owe a tax of 5x2.7k=13k.
The tax saving is therefore 20k.
If the two members of a couple are close in age, certain pillars will have to be withdrawn in the same year and taxed together. The total savings for a couple will therefore be around 30k, rather than double 20k (40k).
Whatever the duration of the contribution and the canton, these savings amount to 20-30k.
Source: Credit Suisse calculator
#1 Invest without interrruption in Pillar 3 and max it out: earn 200k-.
Winning 20k is always nice.
But what's most striking about the above table is the extent to which the final capital rises with time. There's a huge difference between a retiree who as an employee contributed the maximum 7k- since he was 40 (so only over 25 years), compared to the one who started 5 years earlier. 200k.
And even if we only account for the capital gains number (in bold in the table).
Of course, the difference is even greater for someone who has been contributing since he was 25 (over 40 years), with a 1.1m- capital gain.
Not to mention the self-employed person for whom contributions are not limited to 7k- a year (the limit for self-employed people not affiliated to a 2nd pillar is the minimum of 35k- and 20% of income)!
These cases are unfortunately quite rare...
#2 Choose a Pillar 3 that brings returns: earn 200k
Assume again that you max out contributions over 25 years. Then choosing a Pillar 3 with a high net return (around 7%) will bring you 200k more than a standard account (around 3%). To achieve this, you'll need to invest in global stocks, accept more short-term fluctuations, and look for low-cost suppliers with around 0.5% in total costs.
The two best-known Pillar 3 accounts that meet these criteria are Viac and Finpension. They allow you to invest almost fully in global stocks, through low-cost ETFs and index funds. Viac and Finpension's own management costs are very low.
Under these conditions, investing in your pillar 3 rather than in a low-cost investment account (0.2% instead of 0.5% total costs) will bring you an additional 100k and 150k thanks to the triple tax advantage of pillar 3:
tax savings of 20-30% of amounts invested (marginal income tax rate)
wealth tax exemption on capital invested in Pillar 3
no dividend tax over the investment's life (replaced by tax on withdrawal)
#3 Contribute the minimum to Pillar 2: earn 150k-.
Pillar 2 is both a blessing and a curse.
A blessing
Contributing to Pillar 2 has two advantages:
a tax advantage: tax savings of 20-30% of the amount invested (marginal income tax rate)
employer matching: the employer must contribute at least as much (for mandatory contributions). Jackpot!
A curse
Yields are very low compared with what can be expected over the long term (about 1% instead of 7%).
Fortunately, this double benefit compensates for the lack of return, at least over an 18-year period. And anyway, there's no choice: there's a minimum that every employee must contribute to his or her Pillar 2.
It's best not to contribute more than the minimum.
An employee can choose to contribute more than the minimum. But as you only benefit from the tax advantage and not from the employer's matching, it is not wise to do so, unless you're sure of withdrawing your contribution in exactly 4-5 years' time:
after 6-7 years, the annual 7% return of a non-pillar 2 investment exceeds the 25% tax advantage
any additional contribution is frozen for 3 years before you can withdraw it
If she chooses to make an additional contribution and withdraw it only after a long period of time, say 20 years, she will lose about 150k for every 100k of additional contribution - compared to investing outside of Pillar 2.
#4 Get money out of Pillar 2: earn 150k
If your Pillar 2 is low-yield like most employees', you may have a unique opportunity to make your money grow, if you give up your employee status for at least a few months.
Some examples: unemployment, setting up a self-employed business, early retirement.
This allows you to withdraw money from your Pillar 2 into one or two vested benefits accounts.
There are low-cost vested benefits accounts invested in global stocks, such as Viac or Finpension, whose returns are similar to that of a non-retirement investment account. Over the long term, a vested benefits account fully invested in global stocks has an expected annual return of around 7%.
But beware: if you become an employee again, you'll have to transfer the money back from your vested benefits accounts to your new employer's Pillar 2, which likely also has a low return. At least the mandatory part.
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It's a good idea to transfer your Pillar 2 into a vested benefits account with a low share in stocks. The longer the planned interruption and the less risk-averse you are, the more you can increase your share of stocks and bear the loss of a market downturn when you have to transfer your money back to your new employer's Pillar 2.
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It's a good idea totransfer your Pillar 2 assets into two vested benefits accounts, with the proportion of stocks depending on when the funds are needed. Using two accounts instead of one minimizes withdrawal tax.
What's more, in certain cases when you start a self-employed business it is also possible to withdraw the money in cash, and to dispose of it freely, as long as you withdraw the entire amount of a Pillar 2 or vested benefits account.
Let's take a look at these 2 other cases:
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It's best to cash it all out and invest it with a variable proportion of stocks, depending on when you need the funds. Otherwise, you'll have to transfer your money to your new employer's low-yield Pillar 2.
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A balanced strategy is to transfer your money into two vested benefit accounts, withdraw only one in cash, and invest both the cash and account into a variable proportion of stocks depending on when you need the funds. This will minimize withdrawal tax and protect you from the "risk" of an unexpected return to employee life.
In cases b), c) and d), 300k invested fully into global stocks can be expected to earn 150k to 200k more after 10 years than if the money had been left in Pillar 2.
About the author
Hello, you can call me Margot.
I'm a French expatriate living in Switzerland. I've been investing for 15 years.
With assets in the low millions, I'll probably never have a family office, so I have to stay in the driving seat. How can I grow my assets further and pass them on to my children?
AskMargot is my testimonial, that of a peer, to go further in wealth management.
You'll find unique content, more advanced than what you'll find on beginner investment blogs or in the wealth reports of French or Swiss asset managers.
Don't hesitate to contact me if you'd like to discuss your wealth strategy with a peer.
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