Second Pillar Contribution
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Compute whether you should contribute to your second pillar or invest the money.
How does this work?
This calculator will simulate a contribution into a second pillar and compare it with an investment into free assets (outside retirement benefits).
In the first year, the second pillar contribution gives us a tax rebate. This rebate is invested just like free assets.
Each year, the second pillar assets will grow according to the average second pillar returns. The free assets grow each year according to the investment returns. Additionally, wealth tax must be paid on the free assets but not on the pension assets.
There are a few limitations to this simulation you should be aware of:
- In this model, the income marginal tax rates are fixed. But in practice, if you do a considerable buyback, this will also lower your marginal tax rate.
- In this model, the wealth marginal tax rate is also fixed. But again, in practice, the wealth tax will grow as your net worth grows.
- In practice, returns will vary from year to year. Since we do not know the future, our model only uses average returns.
If you want more details on this question, read my article on whether you should contribute to your second pillar.
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Hello Baptiste,
Thank you for the useful article and tool once again. I was aligning these insights with vested benefits accounts and staggering withdrawals.
I am considering a voluntary contribution in addition to my ETF investments (rather than putting it all in ETFs), and it aligns very well for the 1) high income, 2) high marginal tax rate (zurich) and 3) good pension returns (3.5%). Only the official time to pension can be long. However, as I am also planning for early retirement, it looks like a good choice to contribute.
It does seem the only/best option to put the pension then into a 2 vested benefits accounts upon retirement and then 1) hope I will not live more than 100 years and 2) pay close attention to my main domicile at time of withdrawal regarding tax rate (which Swiss canton, or abroad). As this would be handled as capital tax (Like dividends) and not income tax? Am I missing anything else very important?
Hi Kirsten
Thanks for sharing your thoughts on the subject.
I don’t think you have missed anything. But I am not sure if I understand your last sentence. You mention that dividends are taxed like capital tax, but they are taxed as income, not capital. Second pillar withdrawals are taxed neither like income nor capital; they are taxed at a special withdrawal tax.
Hi Baptiste,
Thanks for the reply. Indeed, I am confusing the different type of taxes in Switzerland! As I am considering moving abroad upon retirement, I am also looking into taxes for other countries, which are often differently structured and can really complicate choices about investments already now. From income tax, wealth tax, capital tax, or even US estate tax of ETFs (if there is no treaty with that country).
Indeed, considering a single country for taxes is already complex enough, but considering several can become very complicated.
I have a suggestion to improve the simulation:
Adding an option to cash out the free assets and use that to contribute to the 2nd pillar ~5 years before retirement. That gets you the benefits of both methods (better returns on free assets + tax savings on buyback).
There is the caveat that it may not be possible to invest it all, depending of the fund used by the company at that age.
Hi John,
Thanks for sharing, this is a good idea.
I am afraid that it would complicate the tool, though. Your technique means that before 5, it’s better to keep in invested assets and then after that, it’s worth putting in second pillar, which basically agrees with what the tool says if you put a large number of years and then a small one.