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Should You Contribute to Your Second Pillar in 2024?

Baptiste Wicht | Updated: |

(Disclosure: Some of the links below may be affiliate links)

In Switzerland, you can make a voluntary contribution to your second pillar. These contributions come with tax advantages since you can deduct them from your income. Therefore, you have a return equal to your marginal tax rate. And this return is almost instant.

However, the money is then blocked into the second pillar. And the returns on that blocked money have been very low in recent years. Finally, you can only withdraw the money from your second pillar if you retire, buy a house, start a company, or leave the country.

Many ask whether they should contribute money to their second pillar or continue investing in stocks. In this article, I answer this important question.

Second pillar contribution

The second pillar of the three pillars
The second pillar of the three pillars

So, how does a voluntary contribution to the second pillar work?

Usually, you pay each month some amount of your salary to the second pillar. And this is matched by your company. You do not have a say in this. So, there is no way to optimize that.

However, you can contribute some amount to cover the holes in your second pillar. If you had a low salary when you started, you will surely have holes in your contributions. When you contribute, you can deduct it from your taxes, just like the third pillar. The second and third pillars are among the best tax deductions.

How much of a reduction in taxes this will realize is challenging to calculate correctly. It depends on your marginal tax rate. The amount will depend on your income, your wealth, and where you pay your taxes. In most cases, this will be between 30% and 40%. That means that the immediate rate of return of this contribution will be 30% to 40%. We can view voluntary contributions as a form of investment.

Now, the invested money will be blocked until you can take it. In the second pillar article, we have seen only four cases when you can take this money out: building a house, starting a company, retiring, or leaving Switzerland. In those cases, you will lose out on the part of the second pillar as taxes. But this is not as much as your marginal tax rate.

Voluntary contributions are always blocked for three years (only the amount of the voluntary contribution is locked, not the entire second pillar).

As long as it is inside the second pillar, your money will get some interest rate. Unfortunately, the interest rate is currently low now. You can expect about a 1% interest rate in most pension funds in Switzerland. Nevertheless, it is a safe interest rate for now. It cannot go down. So, you can consider the second pillar as a place to allocate your bond.

However, if you are lucky, you will get a better pension fund. Some pension funds have average of up to 5% per year, but they are quite rare.

There is a second tax advantage to the second pillar. You do not have to pay taxes on the second pillar assets. So, if you have a large net worth, you will not have to pay wealth tax on your second pillar assets.

But this is a smaller advantage than the first one. It will still reduce your taxes a little further, but where the first tax advantage can be up to 40%, the second advantage is about 1% in the best case. Nevertheless, it is still important to know that you do not pay any wealth tax on your second pillar.

Scenarios

The obvious alternative is to invest in stocks. We can check how the same sum behaves if invested in stocks or contributed to the second pillar. First, we run some scenarios to see how that works. We will simulate a one-time investment of 10’000 CHF.

We start with a return per year of 3% for the stocks. This is a very conservative estimate. For the second pillar, we will consider 25%, 30%, 35%, and 40% marginal rates. The current interest rate on most second pillars is 1%. So we will take that as the reference.

The tax savings of the second pillar will be reinvested in stocks directly. So, if you have a marginal tax rate of 30%, 10’000 CHF invested in the second pillar will also result in 3000 CHF in stocks.

Here are the results for twenty years.

Second pillar vs Stocks (3% returns per year)
Second pillar vs Stocks (3% returns per year)

As you can see, it takes about 15 years for the stocks to catch with even the lowest marginal rate. And it would take more than 20 years for the stocks to catch up with the high marginal tax rates.

In that case, a 3% return per year on the stock market is slow to catch up with a substantial interest rate as a tax deduction. So, if you expect 3% from stocks, you should probably favor your second pillar.

But generally, stocks are returning more than 3% per year. So, we will see what happens with a 5% return per year. This is what I expect on average from the stock market.

Second pillar vs Stocks (5% returns per year)
Second pillar vs Stocks (5% returns per year)

This time, it takes less than ten years for the stocks to increase as much as the second pillar, with the lowest marginal tax rate. But it almost takes 15 years to catch up with the highest marginal tax rates.

This exponential growth is the power of compounding. Even 5% per year can return a lot in the long term. 5% per year is what I expect from the stock market.

Obviously, in practice, you will not get 5% per year. You may get 10% one year and -20% the next year. But this is how the stock market works, and I am prepared for this. You can only expect average returns over the long term.

Now, some people are counting on about 7% of yearly returns. So, here is how that will go:

Second pillar vs Stocks (7% returns per year)
Second pillar vs Stocks (7% returns per year)

With 7% of stock returns per year, the return on the second pillar contributions is dwarfed. Even the highest marginal tax rates would be beaten after less than ten years. Compounding gets stronger and stronger as the returns increase.

So, we can draw a few conclusions from these results:

  1. The second pillar is interesting if you have a high income.
  2. The second pillar is interesting if you reinvest the tax savings in stocks
  3. If you expect very high returns from stocks, you should avoid the second pillar
  4. Over ten years, the second pillar is interesting
  5. Over more than 20 years, the second pillar is rarely interesting

However, there are other considerations. First of all, it will depend on the term of your investment. If you are investing long-term, it is probably better to stick with stocks. But if you are to get access to your second pillar soon, it may be a solid investment. It could be a good investment if you retire soon, build a house, or start a company in the medium term.

But do not forget that voluntary contributions are blocked for three years. So, if you intend to buy a house in the next three years, you should not invest in the second pillar (unless you already have enough in the second pillar without the voluntary contribution). If you plan to buy a house without the second pillar, you can continue your contributions if you have enough cash for the downpayment.

Another thing you need to take into account is whether you have a great second pillar account or not. If you have a good second pillar account invested in stocks, it will become more interesting to invest in it! But most people in Switzerland will not have access to a good second pillar.

The other consideration is whether you need bonds in your net worth.

Your bond allocation

Due to its safe nature and the guaranteed interest rate, I consider my second pillar bonds. I integrate my second pillar into my net worth as bonds.

So, another reason to buy into the second pillar depends on your allocation. If your bond allocation is too low for your current allocation, you can voluntarily contribute to increasing it. Given that it also has a nice tax advantage when you purchase, it is probably better than bonds.

When Swiss bonds are negative, the second pillar is also much more interest than Swiss bonds. If I need to increase my bond allocation, I will invest more in my second pillar instead of bonds.

At the start of 2021, we had 5.2% allocated bonds in our net worth. Since we aim for 10% bonds. So, it shows that we should contribute a little to our second pillar. Unfortunately, it is not a good time for us, as we will see in the next section.

Proper Timing

There are some cases where it becomes very interesting to make such contributions.

  • When you know that you will retire or buy a house in the medium term (but further than three years). Since they are short-term investments, it is good to use them as such.
  • When you know that you will leave your company and switch to vested benefits account. This could be the case when you are retiring early or leaving Switzerland. These accounts are often much better than second-pillar funds. So it could be interesting to max out your contributions to have them invested properly.

On the other hand, there is one case where you should not contribute to your second pillar: when you do not get any tax advantage. When you withdraw money early from the second pillar (for a house or business), you will not get any tax advantage until you have paid back the withdrawn money. So, as soon as you withdraw money from the second pillar, it becomes pretty much useless to put more money into it.

This is the case for us. We just withdrew money from our second pillar and cannot get any tax advantage until we contribute at least 50’000 CHF. So, without the tax advantages, it does not make sense for us to invest in the second pillar.

These examples show that timing is important for second pillar contributions.

Conclusion

From an investment point of view, contributions to the second pillar can be a good medium-term investment. However, you should only do them if you have a high income.

On top of that, if you expect very high returns from your stocks, the second pillar becomes less interesting. And you should try to reinvest your tax savings in stocks. Even though they have a substantial initial return on investment, they have very low returns per year after that.

On top of that, the money in a second pillar is an excellent alternative to bonds. They have a guaranteed (at least for now) interest and offer an excellent tax reduction. These tax reductions would be quite interesting as one is nearing retirement. But remember that you can only contribute to your second pillar if you have a salary or have your own company.

But it is not necessarily the best investment at all times. Like every other investment, it will depend on your context and your situation. You should consider every element before you decide on any investment. And never make any rash decisions!

Since our marginal tax rate is increasing, I wish I could contribute a little to the second pillar. Unfortunately, we just withdrew 50’000 CHF from it. So, we would need to contribute 50’000 CHF back without tax advantages before we could get tax advantages. So, we will first put that 50K CHF back into the pension fund before having benefits.

If you are interested in saving money from taxes, you can read my article about the best tax deductions in Switzerland.

What do you think about this? Are you contributing to your second pillar?

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Baptiste Wicht started thepoorswiss.com in 2017. He realized that he was falling into the trap of lifestyle inflation. He decided to cut his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

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136 thoughts on “Should You Contribute to Your Second Pillar in 2024?”

  1. Another circumstance in which voluntary contribution to Pillar 2 does not pay is if you are a US person. The IRS does not consider Pillar 2 a qualified pension plan (perhaps because of the option to withdraw capital before retirement), so contributions are not tax deductible. The tax savings you make with Helvetia, you hand over to Uncle Sam. :>(

      1. Au contraire. I would save on Swiss taxes, but that reduces the foreign-tax credit against my US tax liability. As a result, I would pay more in US taxes, and marginal rates at higher income levels go higher there than they do in Switzerland.

      2. @Scott
        That is correct if you do FTC, but not with FEIE. I don’t know your exact tax situation. Did you run the comparison between them? For low taxed countries like Switzerland FEIE might be the better choice. In my case it was, but I only need to pay taxes for 2023 as well in the US as in 2024 I have no more Greencard.

  2. Hi Poor Swiss,
    At the moment i have 50k allocated on my original pension fund in Italy and, since is declared, i’m sure it contributes to increase my Swiss taxes.
    Do you think is worth move that money into my 2nd pillar and benefit of tax reduction instead of paying additional taxes because of it?.
    Do you think it makes sense to invest all those 50k in 2nd pillar or better to invest a smaller sum and invest the rest in stocks/etf…?
    Thanks 😊

    1. Hi Julbio

      You have to make sure that you can transfer this money to your 2nd and deduct from your taxable income. Maybe if the money comes from a pension fund, it’s not deductible (I don’t know, you need to check).
      As for whether you should put in your second pillar or in stocks, only you can answer that. It depends on your risk capacity and asset allocation.

  3. Hi Baptiste
    Thanks for sharing such interesting content, lots to read and to learn. Question from my side, as I am not getting any clear answer – can I contribute during the same year to the 3rd and 2nd pillar? Just simulating my tax declaration… it has quite a nice and positive impact. So far, I am using the 3rd only. Thanks a lot!

  4. Hi, thanks for a great article.
    It would be worth mentioning that there is a great difference among pension plans. Although the 1% is the actuarial guaranteed minimum returnt, the actual return will depend on the Pension’s performance, the overfunded/underfunded status of the plan, and a bit on the demographics of the company staff.
    People should ask their pension plans to provide a historic performance. I was shocked to learn my fund’s performance averaged 3% over the last 5 years. This seems to low for me compared with stocks, which is where I allocate my long term (retirement) investments

    1. Hi Tomy,

      If you got 3% average, you should be happy, this is among the good pension plans.
      It’s entirely correc that there are some great pension plans out there, but the majority will not yield much. But I will mention that more in the article, good point.

  5. Thank you for this interesting article.

    In your computation, you should include the Lump Sum Tax when getting money out of a Pillar 2 or 3. But that’s where things become difficult since there lots of variations here.

    Another remark: the money can be used to pay back an existing mortgage. For those that have a house or apartment, it could be interesting to keep or increase the mortgage a few years before retirement and use it to get money out of the pillar 2 the year before retirement. This is another way to split the withdrawal of pillar 2 money into different fiscal years.

    1. As you said, it depends on too many factors: the canton and the marginal tax rate at least, which are both very personal.

      Indeed, that’s a good strategy to take money out. But you have to careful with the details because it will only be interesting if the returns on your mortgage are higher than the returns on your second pillar.

      1. I know… the tax differences between various cantons can be huge, but ignoring taxes can be very misleading. But for correctness sake, you should have probably tried to use a range between some minimal and maximal tax. And the federal tax is the same for everyone anyway. I’ve found this page very informative: https://finpension.ch/en/capital-withdrawal-tax-compared/

        About the 2nd pillar: that would be only 1-2 years before retirement, a) to get rid of a mortgage to avoid refinancing and b) to move the money out of the 2nd pillar anyway.

        About the mortgage vs 2nd pillar returns. I assume that while being employed those would be fairly similar. The only way to have a significantly different return on the second pillar is either having a 1e plan (but those are usually only available to the top management) or having the second pillar on a vested account that is invested in shares.

      2. For your last point, there are some great second pillars out there, with people getting 5% yearly returns. It’s not the case for me, but these great pillars are usually for large companies and you don’t need a 1e to get a good plan. But it’s true that the majority of second pillars will simply give you the minimum legal interest and that’s it.

  6. Hello Baptiste, first of all thank you very much for your work and commitment, I have been reading your blog for a long time and have learnt many things! I wanted to ask you if it makes sense to invest in a third pillar with a short time horizon (2-3 years) as I would like to buy a house later. I thought of doing it with TrueWealth, 100% cash so I have 1% Interest on cash and 0% Management fee. Bonds have negative returns and investing in stocks for 2-3 years I see it as risky.

    1. Yes, it makes sense if you keep it at 100% cash. There is no locking in the third pillar like there is for the second pillar, so there is no drawback to contribute a few years before buying the house.

  7. When you say high income, do you mean in terms of tax brackets? I have a low income, but my husband has a fairly good income. Would it be a good idea for me to buy back 2nd pension because we will gain on the income tax return?

    1. Yes, taxable income. What matters if you marginal tax rate (how much taxes you will pay on new income). I would say the second pillar gets interesting somewhere in between 100K and 150K annual taxable income.

  8. Hi TPS,
    Wonder if in your calculations you have taken into account the “compounding effect” of wealth tax. It may be just 1% or less, but it takes place every year on the same money, whereas in the 2nd pillar it does not count as wealth.
    Suggestion: could you run simulations with withdrawals from the 2nd pillar? Thanks!

    1. Hi Luis,

      I have not because for most people (unless you have a very large second pillar or a very large net worth), it wont’ make any difference. Also, it will highly depend on each canton. It will be much less than 1% on the numbers I have used for this simulation.

      What do you mean by your suggestion with withdrawals? We can’t do multiple withdrawals from the 2nd, it has to be withdrawn as one withdrawal. Are you saying the final withdrawal taxes should be taken into account?

      1. Hi TPS,
        I mean that you could make simulations when somebody withdraws 50K, 100K, 150K…etc for a downpayment to buy a house after 5 years, 6 years, t years…etc and see what the outcome is at 10, 15, 20 years…so that we can see perhaps a mroe real life scenario where one needs to tap into the 2nd pillar just like you did into yours

      2. Hi luis,

        I will consider it, but I don’t think that second pillar contributions fare well with property since then you have to repay it back becore you can get tax advantages.
        If you know you will buy a house in more than 3 years, you should put some money into your second pillar now. But this will likely block you from any further interesting contribution.

  9. Great article as always!

    It’s clear that extra Voluntary Contributions to Pillar 2 do not make any sense if you made an early withdrawal, as those will NOT be tax deductible. But you are still making contributions with your salary (and so your employer), those are NOT tax deductible either?

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