Opinions differ as to when a voluntary purchase into the pension fund is most worthwhile. Some say that the pension fund purchase is most worthwhile if you make it as late as possible. We are of the opinion that an early purchase is worthwhile. We show what argues in favour of one approach or another.
The simple return advocates for “as late as possible”
The tax you save when you pay into the pension scheme is higher than the tax you pay when you withdraw the money again. The return is highest if you pay in shortly before retirement.
| (Pruchasing amount: CHF 10’000) | 20 Years | 10 Years | 5 Years | 3 Years |
| Tax savings: Voluntary Purchase | 2’000 | 2’000 | 2’000 | 2’000 |
| Capital Withdrawal Tax | -800 | -800 | -800 | -800 |
| Net Tax Savings | 1’200 | 1’200 | 1’200 | 1’200 |
| Return in % p.a. | 0.6 % | 1.2 % | 2.4 % | 4.0 % |
Assumptions: marginal tax rate income tax of 20%, capital gains tax of 8%, simple return
The holistic view argues for “as early as possible”
In our opinion, the calculation of the simple return is not enough. What is being disregarded are other tax-saving effects.
No wealth tax on pension assets
The cantonal average wealth tax is 0.5 %. Without income, you lose almost 10 percent of your assets over 20 years. This is not the case with pension schemes, where assets are tax-free. The tax savings are therefore significantly higher than originally thought.
| (Purchasing Amount: CHF 10’000) | 20 Years | 10 Years | 5 Years | 3 Years |
| Tax Savings: Voluntary Purchase | 2’000 | 2’000 | 2’000 | 2’000 |
| + Tax Savings: No wealth tax | 1’000 | 500 | 250 | 150 |
| Capital Withdrawal Tax | -800 | -800 | -800 | -800 |
| Net Tax Savings | 2’200 | 1’700 | 1’450 | 1’350 |
| Return in % p.a. | 1.10 % | 1.70 % | 2.90 % | 4.50 % |
Assumptions: marginal tax rate income tax of 20%, capital gains tax of 8%.
No income tax on the income generated
It must also be taken into account that no income tax is paid on the income generated in the pension scheme.
We assume that an average return of 3 percent* per annum is generated on pension assets; two-thirds of this is in the form of dividends and interest and one-third with capital gains. This distinction is relevant because capital gains are also tax-free in the free assets, so no tax can be saved.
*3 % is hardly possible in a normal pension fund due to the redistribution which is taking place, but it is possible in 1e management plans or in the 3rd pillar.
The performance on the pension assets also increases the capital withdrawal tax, but tax savings continue to increase. In 20 years the tax savings are almost twice as high as in three years.
| (Purchasing Amount: CHF 10’000) | 20 Years | 10 Years | 5 Years | 3 Years |
| Tax Savings: Voluntary Purchase | 2’000 | 2’000 | 2’000 | 2’000 |
| Tax Savings: No wealth tax | 1’000 | 500 | 250 | 150 |
| + Tax Savings: No Income Tax | 1’075 | 459 | 212 | 124 |
| Capital Withdrawal Tax | -1’403 | -1’044 | -900 | -849 |
| Net tax savings | 2’672 | 1’915 | 1’562 | 1’425 |
| Return in % p.a. | 1.34 % | 1.92 % | 3.12 % | 4.75 % |
Assumptions: marginal tax rate income tax of 20%, capital gains tax of 8%.
Saved taxes can be invested
Last but not least, you can invest the tax savings you make with your pension provision in your free assets. If you achieve the same high return in your free assets as in your pension provision (our assumption: 3%), then there is a further tax-saving effect:
| (Purchasing Amount: CHF 10’000) | 20 Years | 10 Years | 5 Years | 3 Years |
| Tax Savings: Voluntary Purchase | 2’000 | 2’000 | 2’000 | 2’000 |
| Tax savings: No Wealth Tax | 1’000 | 500 | 250 | 150 |
| Tax Savings: No Income Tax | 1’075 | 459 | 212 | 124 |
| + Performance achieved on the taxes saved | 1’909 | 702 | 298 | 167 |
| Capital Withdrawal Tax | -1’403 | -1’044 | -900 | -849 |
| Net tax savings | 4’581 | 2’617 | 1’860 | 2’592 |
| Return in % p.a. | 2.29 % | 2.62 % | 3.72 % | 5.31 % |
Assumptions: marginal tax rate income tax of 20%; 2/3 dividends and interest, 1/3 capital gain; capital gains tax 8%.
Conclusion
The annual return in percent is highest for purchases made shortly before retirement. However, if you want to save the most tax, it is recommended that you pay into your pension plan early on. Effective tax savings increase with the duration of the pension plan, since no income and wealth taxes need to be paid on pension assets. If you also invest the tax savings in your private assets and achieve a corresponding performance, the tax saving effect increases significantly over time.
Continue reading: When does a voluntary purchase into the pension fund make sense?