Pillar 3 is very popular in Switzerland because offers a tax advantage. The providers are heavily promoting their 3a stock funds. Unfortunately, these funds don’t make a lot of sense because the entire tax savings advantage goes to the banks. The reason is the high fees.
In recent years, banks have been advertising the positive returns for their pillar 3a stock funds. One notable example are the Credit Suisse ads that can be seen on every street corner, on the internet and on the CS ATM machines. They promote 3a stock funds by claiming they offer a return of 5.28%. At UBS this number is 5.1% and at ZKB it’s 5.0%.
Great outlooks then. But what does this cost? A visit to a bank advisor quickly shows that they don’t like to talk about the fees. “Everything is included”, she says. That’s understandable, because at the end of the day, the bank fees are what’s paying her salary, and these fees are not exactly low. At CS, customers pay an annual fee of 1.39% to 1.51%, at UBS it’s 1.38% to 1.62%, and at Migros, it’s 0.75% to 1.1% of the value in the 3a account. At VZ it might only be 0.68%, but they also add third-party costs for the ETF providers. At ZKB, the fees are only 0.79%, but you have to buy in with 2.5% and you pay 1.0% for dissolving your account. That means the ZKB fund costs 2.5% more than its value, and you receive 1% less than its value when you sell it.
These percentages might sound low, but they add up to a lot of money. If you save the pillar 3a amount of 6,768 francs with Credit Suisse for thirty years until your retirement, then you wind up paying a total of 117,700 francs to the bank (at the promoted 5.28% return with the CS fund). 117,700 are a whopping 81% of the return after taxes. In other words: The bank receives almost as much money as the saver, but the saver carries the entire risk. The bank is only the mediator and won’t assume any liability if things go wrong. At least that’s what it says in all the ads.
Even with the cheaper offers from Migros and VZ, the amount that is taken out of the savings account over time is still over 80,000 francs. Migros therefore takes between 32% and 52% of the savings after taxes. With the VZ solution, 48% are going to the financial institutions.
“The future will be great” is what the CS ad says – yes, especially for the bank itself, because for every 3a customer, one CS employee can buy a Tesla for their retirement. At Migros, VZ and ZKB, they can at least afford a Mercedes or a BMW. Why does a non-profit cooperative like Migros have to take away a sedan from a pensioner? In case of VZ, you can tell that you’re no longer being consulted in a neutral way since they became a bank. The 3a saver, who carries the entire risk, receives less of the savings amount than the banks.
The investment might still be worthwhile for the savers because pillar 3a is subject to favorable taxation. Unfortunately, with the CS offer, the entire tax advantage and even more is going to the bank. If you don’t pay the pillar 3a amount but instead manage it yourself and pay all the taxes for it, you still have more than in the 3a account of Credit Suisse.
With a 20% tax on all deposits and all dividends and after deduction of trading costs, the saver has around 360,000 francs in the portfolio after thirty years. If you save the same amount with the tax-favored CS in the pillar 3a stock fund, you will have less than 350,000 francs in the end. The net tax advantage has disappeared and a little more besides:
The stock funds are therefore hardly worthwhile in the third pillar. Those who want to bear the risk of stocks do better without pillar 3a, because the banks charge such high fees that the tax advantage is long gone even for large taxpayers.
The problem is that the fees pile up over the years. Every year you pay fees on all deposits and returns, slowly but surely eating up your profits. For example, a 5% annual return with a 1.0% management fee (typical for the cheapest providers) has gone to the bank after five years. The saver has nothing left of this annual return and has to hope for future returns.
The stock funds in the third pillar are only worth it if you: first, pay high income taxes, second, live in a community with low taxes on capital payments, third, use a cheap bank (ZKB, VZ, Migros) and fourth, immediately leave after five years. Today, this is only possible if you use the money to pay off your mortgage or if you leave the country.
However, this hasn’t yet taken into account that you can invest more intelligently on your own than the fund companies, because the best long-term saving strategy is solely based on stocks. This is especially true for all employees in Switzerland because they already have many fixed-income investments in the second pillar.
Saving only through stocks is not even possible in pillar 3a products. As half of the amounts in pillar 3a are invested in fixed-income assets, it offers significantly lower average returns in the long run than if you invest in stocks on your own. If this fact is taken into account, then pillar 3a is definitely not worth it; no matter how high the tax advantage and how low the bank fees.
Besides: If you forget to leave after five years and the money stays on the account, things will get expensive. If the government decides to stop subsidizing home financing (which is discussed in politics) or if the tax rates for capital payments rise, the 3a calculation won’t add up anymore. In that case, you’re in the pillar 3a prison and you can’t get out. These risks are almost impossible to anticipate, and there are already communities today that tax payments from the third pillar with almost 20%.
Who knows which developments the future will bring for the pillar prisons? What looks like a prison that at least offers a tax advantage can quickly lose even that benefit. The better approach is to manage the money yourself, outside of the pillar prisons.
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