How come 2nd pillar is way more for other people?

[OxygeN]

Hi.
How is the 2nd pillar built up? Is every company deciding on their own how much money they are paying into the 2nd pillar of their employees? Or how does this work?
I'm wondering and questioning this, because I found out that a guy has 7x what I have on my 2nd pillar and he started working in Switzerland I think like 10 years before I did...

Thanks.

 

[Baptiste Wicht]

Hi

There are three components to second pillar growth:

• The employee contribution, there is a minimum % per age group
• The employer contribution, it cannot be lower than the employee contribution
• The returns of the second pillar. Some second pillar are MUCH better than others.

The first two components are probably the most important and are based on a % of your salary. So, the more salary you earn, the more you will have in your second pillar after N years. And of course, if your employer contribute more than the minimum, it will grow faster. And if the pension fund is better than average, it will grow faster, everything will compound wel together.

 

[OxygeN]

Thanks.
So how are the employee and employer contributions determined? Is it something each company can arbitrarily set/define for itself?
Returns on my second pillar are actually more than conservative (20% stocks - yield 1.1% p.a.!!!)

 

[Baptiste Wicht]

The minimum contribution is based on your age:

1. 25 to 34 years old: 7%
2. 35 to 44 years old: 10%
3. 45 to 54 years old: 15%
4. 55 to 65 (64 for women) years old: 18%

I explain the system in some detail here:

Second Pillar: All You Need To Know To Retire In Switzerland - The Poor Swiss

The second pillar is an occupational pension that every Swiss worker contributes to. It will pay you an annuity after retirement, or a lump sum.

thepoorswiss.com

And yes, most second pillar have very conservative returns.

 

[Max]

Hi.
How is the 2nd pillar built up? Is every company deciding on their own how much money they are paying into the 2nd pillar of their employees? Or how does this work?
I'm wondering and questioning this, because I found out that a guy has 7x what I have on my 2nd pillar and he started working in Switzerland I think like 10 years before I did...

Thanks.

My 2 cents: Employee may also make voluntary contributions to the 2ns pillar. And quite many employees consider it a good investment, since the performance is higher than for savings accounts and the contributions are deductible.

 

[Baptiste Wicht]

My 2 cents: Employee may also make voluntary contributions to the 2ns pillar. And quite many employees consider it a good investment, since the performance is higher than for savings accounts and the contributions are deductible.

Very good point, this can make a huge difference to a second pillar!

 

[OxygeN]

My 2 cents: Employee may also make voluntary contributions to the 2ns pillar. And quite many employees consider it a good investment, since the performance is higher than for savings accounts and the contributions are deductible.

True dat. I've contributed to my second pillar once (last year) as well. But I will not do it anymore, as I think that money is better put in an ETF. What do you guys think?

 

[justatreeinthesea]

True dat. I've contributed to my second pillar once (last year) as well. But I will not do it anymore, as I think that money is better put in an ETF. What do you guys think?

To simplify, it depends on whether you're within 10 years of your retirement (because of the taxes savings) or whether you want to buy your own property in the near future. If that doesn't apply to you, you're better off putting your savings into an ETF and transferring that to your pension fund a few years before you want to withdraw your 2nd pillar.

 

[Baptiste Wicht]

True dat. I've contributed to my second pillar once (last year) as well. But I will not do it anymore, as I think that money is better put in an ETF. What do you guys think?

It depends on multiple factors, like @justatreeinthesea mentioned.

I have covered that in this article:

Should You Contribute To Your Second Pillar In 2024? - The Poor Swiss

Should you contribute to your second pillar? Find out the advantages and disadvantages of investing into your second pillar with several scenarios.

thepoorswiss.com

Personally, we are still going to be contributing in the next few years because we have a very high marginal tax rate and because we should be able to move that money to a vested benefits account in the next 10-15 years.

 

[OxygeN]

To simplify, it depends on whether you're within 10 years of your retirement (because of the taxes savings) or whether you want to buy your own property in the near future. If that doesn't apply to you, you're better off putting your savings into an ETF and transferring that to your pension fund a few years before you want to withdraw your 2nd pillar.

OK, I didn't know. I'm far from my retirement (at least 20 years!) and I already have bought my own apartment (for which I emptied my 3A, 6 years ago, and was able to downpay 35% so that I don't have any amortisation to do).
If I get it right, it's not useful to fill up the second pillar in my situation - right?

 

[OxygeN]

Personally, we are still going to be contributing in the next few years because we have a very high marginal tax rate and because we should be able to move that money to a vested benefits account in the next 10-15 years.

OK, so your situation and your goal(s) are different than mine: you're aiming at F.I.R.E. I guess, whereas I am not.

 

[Baptiste Wicht]

OK, I didn't know. I'm far from my retirement (at least 20 years!) and I already have bought my own apartment (for which I emptied my 3A, 6 years ago, and was able to downpay 35% so that I don't have any amortisation to do).
If I get it right, it's not useful to fill up the second pillar in my situation - right?

Likely not that interesting indeed. 20 years is a long time. The only exception would be if you have a very high marginal tax rate (40+%) AND a great second pillar (high average returns).

 

[OxygeN]

Likely not that interesting indeed. 20 years is a long time. The only exception would be if you have a very high marginal tax rate (40+%) AND a great second pillar (high average returns).

I have low returns on my second pillar and... the marginal tax rate: I think I remember you explaining how to calculate it in one of your posts, right?! How important is this parameter at all?

 

[Baptiste Wicht]

For second and third pillar contributions, it's very important. It's basically a factor of your income and your tax domicile.

Your Marginal Tax Rate And All You Need To Know About It - The Poor Swiss

Your marginal tax rate is an important metric that will help you know how much taxes you are going to pay for more income and more!

thepoorswiss.com

 

[justatreeinthesea]

OK, I didn't know. I'm far from my retirement (at least 20 years!) and I already have bought my own apartment (for which I emptied my 3A, 6 years ago, and was able to downpay 35% so that I don't have any amortisation to do).
If I get it right, it's not useful to fill up the second pillar in my situation - right?

Even with a high marginal rate, you would need to have an exceptional return from your pension fund and have very low expectation from a World ETF to go for the 2nd pillar if you're 20 years away from retirement.

You can get the double benefit of better returns from the stock market over a long period of time and tax savings when contributing to your 2nd pillar, by converting what you would put into your 2nd pillar a few years before retiring, because you can re-invest the tax differences and have a lower tax on the lump sum that you withdraw.

A few caveats:
1) You don't know what your pension plan is going to be at that time
2) How much you can add depends on your pensionable salary. This is also a clue as to why some people have more in there without doing anything. Some plans take into consideration your whole salary while others stick to the strict minimum
3) Tax rates are not so low when you have 7-figure in your pension and it depends a lot on where you live at the time.

 

[OxygeN]

You can get the double benefit of better returns from the stock market over a long period of time and tax savings when contributing to your 2nd pillar, by converting what you would put into your 2nd pillar a few years before retiring, because you can re-invest the tax differences and have a lower tax on the lump sum that you withdraw.

Can you explain this? I didn't get it...

 

[justatreeinthesea]

Can you explain this? I didn't get it...

I can try

Let's say that you have an income of 200k and that if you don't make any contributions you have to pay 50k in taxes and you're left with a 150k.
Now if you take a 100k out of your ETF to put in your 2nd pillar, your amount of income tax will be lowered. You might only have 18k to pay now and would be left with a 182k. Why not, but it's better to re-invest the tax savings if you want to keep things equal (150k left to enjoy life) and maximise your returns, so instead you put a 143k in your pension (43k from your income) and now you only have to pay 7k in taxes and are left with a 150k.
So, part of your retirement fund just went from a 100k to 143k, thanks to tax savings. Of course, the returns will be lower now and that's the reason you should only do it when you're close to retiring or the ETF you were using might outperform the returns you get from the pension fund and you would have done all this for nothing.
And there is usually a catch and taxes have to be paid at some point. In this case, it's when you withdraw the amount from your pension fund, but the tax rate is much lower, so in effect, you can manage to increase your retirement fund significantly by moving things around, if you have the right pension plan at the time.

Disclaimer: Those are just my observations. I invite you to verify with your own data and calculators . There are also lots of variations possible if one wanted to optimise based on market conditions, etc.