Should you use your Retirement Savings for a Down Payment?
| Updated: |
(Disclosure: Some of the links below may be affiliate links)
In Switzerland, you can use your second pillar and third pillar to pay for the down payment of your house. This can help reduce the cash you need to accumulate for the 20% down payment.
But is that really a good idea? Does it make sense in the long term? It is essential to consider everything rather than simply do it to avoid piling up more cash.
In this article, I review the pros and cons of using pension savings for the down payment of the house.
Retirement savings and down payment
As a reminder, we should see what we can do with retirement savings for the down payment.
When you buy a real estate property in Switzerland, you have to put down 20% of the property value; this is called the down payment. The bank will only finance up to 80% of the property value. There are some exceptions, but in most cases, this will be the default.
At least half of the down payment (10% of property value) must be in cash. The other half can come from the second pillar. It is interesting to note that the third pillar will count as cash. So, the second and third pillars are not treated the same way in this system. Since most people do not have a large amount of money available, they use their retirement savings. A friendly loan (no interest and no repayment date) also counts as cash and so does a lombard loan. What matters most to remember is that the first 10% cannot come from the second pillar.
It is important to mention that this is only possible for the primary residency. Other mortgages will need the entire down payment in cash. And other mortgages have different conditions as well.
Furthermore, some mortgage providers (like insurance providers) will not allow you to use retirement savings for your mortgage. They will require 20% in cash.
Using your second pillar for a down payment
Generally, you can use your second pillar for your down payment.
If you are withdrawing before the age of 50, you can withdraw your entire second pillar. And if you are doing it after 50, you can only withdraw the amount you had at 50 or half of your assets, whichever number is higher. This is a measure to protect people from depleting their retirement income too much.
When withdrawing from your second pillar, you will pay some withdrawal tax. This tax is significantly lower than the income tax saved when contributing to the second pillar.
Generally, it is best to withdraw from the second pillar over multiple years to save on taxes. So, you can save some taxes by withdrawing some money from the second pillar before retirement.
However, there is a great disadvantage to withdrawing from the second pillar: you will not be able to do tax-free contributions to it until you have paid back the withdrawal. So, if you withdraw 100K CHF from your pension fund, you will need to pay it back entirely before you can do any tax-free contribution. This is crucial to know if you are planning to do any contributions to your second pillar.
Another disadvantage of the second pillar is that most people rely a lot on the second pillar for their retirement. So, withdrawing from it means significantly reducing the pension one would get in retirement. And if you rely on it significantly, a reduction may make an important difference to your quality of life in retirement.
To decide, we should also compare free assets and second pillar assets:
- Assets in the second pillar are very safe.
- Free assets can grow much faster than the assets in the second pillar.
- Wealth is not taxed for your second pillar assets.
For me, the first question is whether you need your second pillar income in retirement. If you do, it is better not to touch your second pillar. Or at the very least, you should not withdraw too much from it.
The second question is whether you are planning to do any voluntary contributions in the future. If you are planning to do so, you should not withdraw from your second pillar. Otherwise, you will have to pay it back and then only later be able to do a voluntary contribution.
Finally, if you do not need the income (or can afford a reduction) and do not plan a voluntary contribution, a withdrawal from the second pillar makes sense. Indeed, in this case, you can generate more returns on your free assets since the second pillar is generally very conservative. If you do not invest your free assets, it may be more difficult to choose, but the tax savings in the long term may be interesting.
| ✅ Pros | ❌ Cons |
|---|---|
| ✅ Lower cash necessary for down payment | ❌ Need to pay back for voluntary contributions |
| ✅ Helps stagger withdrawals | ❌ Reduced retirement income |
Using your third pillar (3a) for a down payment
In most cases, you can use your third pillar for your down payment. The main limit is that you can only do that until five years before official retirement age. Thereafter, you will not be able to withdraw it for a home purchase.
When you withdraw from your third pillar for your down payment, you will pay an advance withdrawal tax. This withdrawal tax is lower than the income tax. This is the main advantage of the third pillar.
Contrary to the second pillar, withdrawing from your third pillar does not prevent you from continuing to get tax savings from your contributions. You do not have to pay back what you have withdrawn.
So, there is actually an advantage to using your third pillar money. By withdrawing early, you are spreading your withdrawals more. To optimize the taxes from your third pillar, it is generally advantageous to withdraw money over multiple years (we call this staggered withdrawals). Normally, you can only stagger withdrawals for up to five years. But by doing a withdrawal early, you will reduce your future withdrawals and potentially reduce your future taxes.
There is no maximum for withdrawing from your third pillar; you can withdraw your entire assets. Usually, there is no minimum either. However, some third pillar foundations have fees for withdrawing for a mortgage. Therefore, you should take this fee into account.
On the other hand, there is a disadvantage to withdrawing the 3a. Indeed, we are not paying net worth taxes on our retirement assets. As a result, by withdrawing from the 3a, we may increase our net worth taxes. However, this also depends on the taxable value of the house, so it is difficult to calculate.
We should also compare free assets and third pillar assets:
- You can invest both very aggressively.
- You will pay more fees on your third pillar assets.
- Dividends and wealth are not taxed for your third pillar assets.
Whether you should use your free assets or your third pillar boils down to whether you invest your free assets or your third pillar:
- If you invest both your free assets and your third pillar, you should withdraw from your third pillar first (to optimize taxes).
- If you only invest your free assets, you should withdraw from your third pillar first (to let your free assets grow).
- If you only invest your third pillar assets, you should use your free assets (to let your 3a grow).
- If you invest in neither, you should use your third pillar assets (to optimize taxes).
Overall, in most cases, using your third pillar assets for a down payment is a good idea. Since we do not have to pay it back later and it helps reduce withdrawal taxes, there are very few disadvantages to withdrawing from the third pillar.
| ✅ Pros | ❌ Cons |
|---|---|
| ✅ Lower cash necessary for down payment | ❌ Less returns in real estate than in 3a |
| ✅ Helps stagger withdrawals | ❌ Less capital available in retirement |
| ✅ No need to pay the withdrawal back |
What about pledging?
Until now, we have talked about withdrawing the retirement savings. But there is another option. Indeed, you can also choose to pledge your retirement savings instead.
Pledging means not withdrawing but giving the bank a right to some assets in case of bankruptcy. If you pledge some retirement assets, you can reduce the size of the down payment. With that, you can get up to a 90% mortgage instead of a 80% mortgage.
We can make a simple example with a house of 1’000’000 CHF and 10% in cash and 10% coming from the retirement savings:
- If you withdraw the retirement savings, your mortgage will be 800,000 CHF and your down payment will be 200,000 CHF.
- If you pledge the retirement savings, your mortgage will be 900,000 CHF and your down payment will be 100,000 CHF.
If you cannot pay the mortgage anymore, the bank can seize the pledged assets to remedy the situation. If you reach retirement, you may also have to use some of these assets to amortize the mortgage, depending on the situation.
There are some disadvantages to pledging:
- You have a bigger mortgage, and therefore you will need to pay higher interest payments every month.
- You will also need a higher income to be able to qualify for this. Generally, this option is reserved for high-income earners.
- A bigger mortgage means bigger risk since there is more leverage.
- You will still need to amortize two-thirds of the mortgage in the first 15 years, meaning you will amortize more heavily with pledging (you also have to amortize the 10% pledge).
On the other hand, there are some advantages to pledging:
- Your assets can keep growing inside your second and third pillars instead of being locked into a real estate property.
- Your pension and retirement savings are not touched, so you may have higher income in retirement.
- Since you do not have to withdraw, you do not pay any withdrawal tax until retirement.
Pledging or withdrawing is a difficult question. Mathematically, it can make sense to pledge to optimize future returns. But on the other hand, this also means taking more risk and paying more in mortgage for many years. I do not believe that the difference is so significant in the long term, on average.
Moreover, it is important to note that requirements for getting a mortgage in Switzerland are quite tough. Therefore, for most people, income is the limit to real estate. And pledging will make that even harder. Pledging is therefore not an option in numerous instances.
| ✅ Pros | ❌ Cons |
|---|---|
| ✅ Lower cash necessary for down payment | ❌ More mortgage interest to pay |
| ✅ Money can keep growing in retirement accounts | ❌ More income necessary for mortgage |
| ✅ Can continue contributing to retirement accounts | ❌ More risk with more leverage |
Do not forget your retirement
Whether you are thinking of withdrawing from your second or third pillars, you should not forget to think about your retirement.
If you are withdrawing too much from your retirement savings, you may not have enough to live in retirement. So, it is essential to consider your retirement needs and your retirement income.
I believe this is especially true for the second pillar. The second pillar is the component on which people rely the most for retirement. Without the second pillar income, most people would not be able to retire in Switzerland. So, withdrawing a large portion of the second pillar may put your retirement at risk.
Unfortunately, some people want a property at all costs and deplete their retirement savings to buy a home because they cannot save the necessary cash. But then, at retirement, they are either living worse than they thought or even cannot afford their home anymore. So, while it is not great to think about it, it may mean that some people simply cannot afford to buy a property and retire in Switzerland.
Therefore, you should make some simulations of how much you will get from the 3 pillars so that you have an idea of your level of life in retirement with and without your retirement savings.
Conclusion
In Switzerland, we can use our retirement savings to fund a mortgage down payment. This helps many people because they do not have to accumulate too much cash in this case.
However, using retirement savings for a down payment is not always a good idea. This may encourage people to buy property they cannot necessarily afford, at the expense of their income in retirement. So, we have to be really careful.
A young household is more likely to be interested because they may have many years to reconstitute their retirement savings. But as people grow older, they should be more careful with using their retirement savings since they may need this money soon. And if someone plans to do voluntary contributions to the second pillar, it is best to avoid withdrawing from it since the gap would need to be filled again.
In the end, there is no black-and-white answer to this question. You need to weigh all the pros and cons of the situation and make your own decision.
For buying our first house, we had used a significant portion of our second pillar and some from our third pillar as well. In this case, we should not have used the second pillar because we ended up paying it back to do some voluntary contributions later. But it was a good idea to use our third pillar at this time.
For buying our second house (replacing the first one), we did not use any of our retirement savings. We want to continue contributing to the second pillar. And our third pillars are simply too low in value to justify the trouble of withdrawing from them.
What about you? What is your strategy for a down payment? Are you using your retirement savings?
More reading
Selling a house in Switzerland: the complete guide
Selling a house is an important step in a life. It should be well prepared. We just sold ours, and here is everything we learned!
Imputed rental value is going away – What changes?
Imputed rental value is going away in the next few years. Should we do anything differently now? Here is what will change and our strategy.
A short history of Cryptocurrencies
From Bitcoin to today. Explore the history of cryptocurrencies, how they started, and how the market has evolved over the last decade.
Learn easy ways to optimize your finances and save thousands in Switzerland with our exclusive e-book. Learn about the most cost-effective financial services tailored for savvy residents and expats!
Get Your FREE Swiss Money-Saving Guide
Hi Baptiste,
When you pledge your 2nd pillar you do not only increase your interest rate payments (because of higher mortgage) but also increase your amortization rate. Normally you are expected to amortize 13% over 15 years which becomes 23% in case of pledging. Although amortization is investment in real estate, it still has much lower return than the stock market. So I am wondering why would pledging be a more attractive option unless especially for people who are far away from retirement?
Hi Hur
You are right, I did not consider this in my article. Yes, with that in mind, it makes pledging less interesting because you have to reimburse it over 15 years.
However, in both cases, after 15 years, you end up with the same amount in “real estate investment” and the same amount in mortgage. So, you don’t really amortize more, but pay back the pledge.
I will improve this part of the article.
Hi, I’m looking for a clarification of what it means to pay back an amount which was withdrawn from the Pillar 2 for purposes of buying a house.
Does it have to done by an explicit, additional payment which you make, or can it be paid back gradually by the normal monthly contributions of employer/employee?
What typically happens if you’ve withdrawn money in the past, and you switch to a “plus plan” with your employer, where you contribute more than the standard amount each month?
Thanks in advance for any info.
Hi Oliver
Good question. It has to be done by a voluntary payment, it cannot be done gradually by standard contributions.
If you have withdrawn money in the past and switch to a plus plan, it makes no difference to repaying the withdrawal, all contributions are considered standard.
Interesting since I’m mulling about the question myself. We won’t be able to buy without either using 2nd or 3rd pillar. If we buy, the question is: which?
I was under the impression that the returns of 2nd pillar are not great and buying a house is a way to unfreeze the funds and invest in something better (although a house is not an investment for us).
We still have ca. 25 years to fill up 2nd pillar again (if we continue to work; salaries will rise; perhaps we will work more when the kids are older; contributions to 2nd pillar will rise in age…). Once we have the mortgage, cashflow should be fine to buy into 2nd again. But I agree, there are risks involved and it requires discipline.
Hi Michael,
For both the pillars, it may be interesting to unfreeze as you said.
But if you are going to do any contributions in the future, you should avoid the second pillar since you would prevent yourself from further contributions (until you fill back the gap without tax advantages). This is where using the 3a is better in my opinion.
And in all cases, you need to be careful about what you will need in retirement.
In my opinion the more pertinent question that should be raised is whether or not it is wise idea to buy a house or flat in Switzerland? The prices are exorbitant, especially near cities. It seems more prudent instead to invest in low cost index funds and become financially independent. The opportunity cost (versus equities) of a typical down payment for a Swiss property is staggering and would be enough for a house in many counties.
And taking money from retirement funds, especially the second pillar, should be illegal.
All this does is encourage people to become life long debt slaves and support an overpriced Swiss property market. Not to mention also face the prospect of poverty during retirement!
I strongly disagree that it should be illegal! It’s a financial choice like any other. Even less people could afford property in Switzerland if you would declare it so, compounding the already small ownership rate here. The max. 10% ‘weiche Eigenkapital’ from 2nd/3rd pillar of the 20% is already enforced and limitation enough, enacted back in 2012 I think.
We took money from the 2nd pillar to get a house and mortgage. Important is to put a payback plan in place that’s realistic (e.g., 5-10 years). In our case we plan for complete payback within 5-6 years until we hit 40 years of age; so enough time until pension age.
In some cases you can even get the taxes back after paying back in. So there are clear incentives to do so!
But I get it, there are properties out there where realistically you could never pay it back before pension or before it (e.g., Geneva and Zürich regions), however…
I also agree that there is value in doing that, but not at the expense of poverty in retirement.
And I also agree that, unfortunately, the market is quite overpriced, but I am not sure it will get any cheaper.
Hi Rebecca
That’s a good question, but a totally different one :)
From an investment point of view, I agree that it makes little sense to invest in overpriced real estate. But often, we buy real estate not before of finances, but because of emotions.
And people should be careful about not using too much of their retirement money if they need it in retirement.
The second paragraph is a bit extreme: if you live and retire in Switzerland you can either pay the rent or your mortgage. If you buy a property now you effectively secure your monthly rate and are not exposed in your old age to your landlord / market prices.