When is a voluntary purchase into the pension fund most worthwhile?

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 Years10 Years5 Years3 Years
Tax savings: Volun­ta­ry Purcha­se2’0002’0002’0002’000
Capi­tal With­dra­wal Tax-800-800-800-800
Net Tax Savings1’2001’2001’2001’200
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 Years10 Years5 Years3 Years
Tax Savings: Volun­ta­ry Purcha­se2’0002’0002’0002’000
+ Tax Savings: No wealth tax1’000500250150
Capi­tal With­dra­wal Tax-800-800-800-800
Net Tax Savings2’2001’7001’4501’350
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 Years10 Years5 Years3 Years
Tax Savings: Volun­ta­ry Purcha­se2’0002’0002’0002’000
Tax Savings: No wealth tax1’000500250150
+ Tax Savings: No Inco­me Tax1’075459212124
Capi­tal With­dra­wal Tax-1’403-1’044-900-849
Net tax savings2’6721’9151’5621’425
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 Years10 Years5 Years3 Years
Tax Savings: Volun­ta­ry Purcha­se2’0002’0002’0002’000
Tax savings: No Wealth Tax1’000500250150
Tax Savings: No Inco­me Tax1’075459212124
+ Per­for­mance achie­ved on the taxes saved1’909702298167
Capi­tal With­dra­wal Tax-1’403-1’044-900-849
Net tax savings4’5812’6171’8602’592
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?

writ­ten on 03.04.2020


Cur­r­ent­ly, fin­pen­si­on offers solu­ti­ons for vested bene­fit savings with secu­ri­ties and indi­vi­du­al manage­ment pen­si­on plans 1e. A 3a secu­ri­ties app is under deve­lo­p­ment.