How to optimize your 2nd pillar?

Once you understand the basics and how the 2nd pillar works. The question is how to optimize your 2nd pillar? 😉

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Before reading this article

Before reading this article, I recommend reading the article ”the basics to understand regarding the 2nd pillarr”.

Indeed, the aim of this article is to complete the article concerning the bases of the second pillar.

2nd pillar in Switzerland

Financing of the 2nd pillar

Regarding the financing of the 2nd pillar. In Switzerland, it is enough to work in a declared manner to contribute monthly.

👉 In fact, every month, when you receive your salary. In reality, your 2nd pillar is automatically filled by 2 intermediaries:

A portion is automatically deducted from your salary
A part is a contribution from your boss

👉 In reality, you contribute together, month after month, to filling your 2nd pillar.

⚠️ Note that if you are an employee, the employer only contributes to your 2P if your annual salary is greater than CHF 22,050 per year.

Investing in your 2nd pillar

👉 Regarding the investment of the 2nd pillar, it is the same principle as with the 3rd pillar. That is to say, it is possible to:

Either keep the money in cash and benefit from the bank's interest of around 1,% per year.

Either invest the 2nd pillar in products offered by pension funds.

For people like me, who prefer to take “risks” with their 2nd pillar. In fact, I prefer to invest my 2P in stock market investments.

👉 In my opinion (this is not investment advice), I prefer to invest in stock market and diversified investments with a past return of around 7% annualized, rather than keeping my 2nd pillar money warm, with only 1% annualized.

Example

I made an example with a simple graph.

I imagined Pascal and Jaquier who added 400 CHF per month into their 2P pension fund, for 30 years. In their 2 respective pillars.

That is to say, they contributed 144,000 CHF to the total of their relatives!

On one side, there is Pascal, he just received bank interest of 1% annualized. On the other side, there is Jaquier, who invested his 2P and he received an average of 5% annualized, net in commissions.

What will be the final amount of each person's 2P?

	Pascal	Jackfruit
Bank interest with an average of 1% annualized	167,871 CHF in total therefore 23,871 CHF in compound interest
Investment of its 2P with an average of 5% annualized		327,543 CHF in total therefore 183,543 CHF in compound interest

We see that Jaquier received around 160,000 CHF more than Pascal.

Let's note an important aspect. Jaquier earned more money in compound interest than the 144,000 CHF that Pascal contributed!

However, both contributed exactly the same amount from their own pockets: CHF 144,000.

What are your favorite 2nd pillar products?

👉 My 2 favorite free passage products (2nd pillar) are:

Global 100 Viac -> 7.2% annualized over 10 years with 0.40% fees, as of this writing

Global 100 Finpension -> 7.1% annualized over 5 years with 0.49% fees, at the time of writing

I would like to point out that if you do not want to invest your entire second pillar, there are products that combine cash and other financial investments, such as real estate. In case you want to diversify your 2nd pillar assets.

Redemption of 2nd pillar years?

One day, you will surely receive a letter from your pension fund informing you that you have a ”lack of foresight” or a ”contribution gap”.

Without jargon, the "lack of foresight" or "gap in foresight" means that you have not contributed during a period of your life. Because of for example:

Studies
Gap year

Since you are missing years of contributions, this means that you will not receive an optimal pension when you retire.

👉 If you decide to buy back your missing years (pension buybacks), you will have 2 advantages:

More money in retirement
Benefit from tax reductions the year you buy back your 2P

Should I buy the missing years of the 2nd pillar?

Obviously, we have to look at each case individually.

Personally, what bothers me about this system is that the taxpayer will benefit from tax reductions in the year of the buyback. And then, when he withdraws his second pillar, the taxpayer will have to pay taxes on the money he added.

In my opinion (not advice), I think it is better to invest in an SP500 ETF and let your money grow, compared to buying back years of 2nd pillar.

On the other hand, if the taxpayer is close to sixty. In this case, the buyback is more questionable. Because the money in the SP500 does not have time to grow.

Should you withdraw the capital or receive an annuity from your 2nd pillar?

When you turn 65 (retirement age), the pension fund will offer you 3 options to receive your 2P:

Withdraw the capital from your bank account at once
Receive a monthly income
A mix between receiving part in capital and part in monthly income

Note that it is also possible to benefit from this proposal from the age of 58. But with penalties depending on the pension fund.

👉 Is one strategy better than the other? In my opinion (not advice), without hesitation, I prefer to withdraw all my capital at once!

Indeed, for me and for the readers of this blog, we know how to manage our money.

👉 In reality, I prefer to manage my 2P money wisely from my bank account and, on the day of my death, leave my fortune to my loved ones. Rather than receive a monthly annuity that may never be fully distributed during my lifetime.

Buying your home with your 2P?

With the 2P, it is possible to buy your main residence in Switzerland.

This is positive because it is an investment possibility with the 2P.

However, each pension fund has different withdrawal conditions. Therefore, it is important to find out before buying the property!

Create your business with your 2P?

It is possible to use the money from your 2P to create a business.

However, some pension funds may have conditions.

Taxation with 2P?

In reality, the taxation of the 2nd pillar is not very different from the 3rd pillar. That is to say, the withdrawal is at a percentage!

On the other hand, unlike the 3rd pillar, in some cantons. With the 2P, it is not possible to stagger the 2P in order to benefit from tax reductions.

In addition, the taxation of 2P varies from one canton to another. For example, a Vaudois will not be taxed in the same way as a Lucernois.

Not to mention that each canton differs in taxes according to the 2P amount. That is to say, you will not be taxed the same percentage if you have 50,000 CHF or 200,000 CHF.

I took some examples from this VZ article¹ to give some examples of taxation. For a single person.

Canton	2P Withdrawal Amount	Taxation
Vaud	250,000 CHF	17'506 CHF
Zug	250,000 CHF	11,565 CHF
Vaud	500,000 CHF	42'126 CHF
Valais	500,000 CHF	45'327 CHF

In addition, the 2P tax rate varies depending on whether you are married or single. And, broadly speaking, married people are at an advantage in almost all cases.

Canton	Single or married?	2P Withdrawal Amount	Taxation
Vaud	Bachelor	250,000 CHF	17'506 CHF
Vaud	Married	250,000 CHF	15'188 CHF
Lucerne	Bachelor	500,000 CHF	39,714 CHF
Lucerne	Married	500,000 CHF	38,586 CHF

It is important to know that taxation can save thousands of Swiss francs!

Conclusion

The second pillar is a supplement to the first pillar (AVS) and the third pillar (3a). The three Swiss pillars have the objective of maintaining the financial standard of living in the long term, in retirement.

Every month that you work, you and your boss (or just you if you are self-employed) contribute to financially filling your 2nd pillar.

Depending on the pension fund, it is possible to either keep your 2nd pillar with bank interest or to invest your 2nd pillar.

Each pension fund has different commissions and different investments. Therefore, the client receives different returns depending on the pension fund's investment.

👉 In this article, we found that depending on the pension fund, the differences in returns can be significant! Sometimes, with a return 7 times higher!

However, unfortunately, Swiss federal law does not allow employees to change pension funds if they are currently working for an employer. This is unfortunate because employees should be free to choose their BVG.

When withdrawing the 2P, according to the pension regulations of some pension funds. It is possible that they will apply penalties if you withdraw before the age of 65. Because it is an early withdrawal. Therefore, before withdrawing, it is important to find out about the penalties of the pension institution!

Also, regarding Swiss taxation. When you go to withdraw your pension assets. Don't forget the 2nd pillar taxes. Between 4 to 11% depending on the canton.

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