Pension fund contribution or etf investment?

[tierras]

My company offers 2 levels of pension contributions: normal (x CHF/month from my salary) or plus (1.5x CHF/month), contributing with equal amounts.
Should I go for the plus option, or the normal option and put that extra 0.5x in VT and VOO?

 

[virtualhope]

@tierras As most pensions funds have a very bad return (1-3%p.a.) as far as I know, you should turn to ETF if you're okay with the risk.

If you're looking for a secure, low-risk investment increasing the pension fund contribution could be interesting with the tax benefits.

 

[hesmyrock]

@virtualhope What is interesting though is the employers match! Or did I get this wrong?

 

[virtualhope]

@hesmyrock Ah, I didn't see the matching! I have a similar choice to make than OP but there was no matching for me.

Then OP needs to dig deep to find it out (or send me the real numbers including home canton, better even city and I'll do it) because there's free money to get, but the profit is still very low.

Basically OP needs to simulate both scenarios separately with online calculators and then see which number is bigger.

 

[hesmyrock]

@virtualhope Why canton/city?
Taxes?

I guess I will calculate it through with excel too now lol. Alway wondered how many years it takes till the 8% average is better than the employers match with 3% average.

 

[virtualhope]

@hesmyrock Yes, for taxes. You need to calculate the tax benefit of both the income tax and the wealth tax if you want to make an accurate calculation.

 

[hesmyrock]

@virtualhope Ah true, income tax decreases as well which I did not have in mind
This gets pretty complicated to calculate accurately

 

[graymike91]

@hesmyrock Marginal tax rate i assume, so you can compare the taxes you'd have to pay on said income vs the pension funds which (at least partly) isn't taxed.

 

[javerys]

@tierras Depends on a lot. Your age, your marginal tax bracket, your salary, your saving rate etc.

Ik general i’d say vt and chill

 

[melinda2022]

@tierras Generally, if you are young, it's best to invest yourself as the returns are low, but there are a few considerations:

- If the employer matches your 1.5x, that's more likely to be a good deal

- If you are close to retirement (less time to compound and more volatility risk), that's more likely to be a good deal

- If you are going to leave the country soon to one in EU with less favorable taxation of capital gains (less time to compound but you can then move to a vested benefits account), that's more likely to be a good deal

- If you have a very high salary (higher marginal tax rate), it's more likely to be a good deal

- If you are risk averse, it's more likely to be a good deal for you

 

[tierras]

@melinda2022 Thanks! What is the 'marginal tax rate'?

 

[melinda2022]

@tierras That’s the tax rate that you pay for your last CHF earned. For example, you earn 105k, the first 100k are taxed at 20% and the next 10k are taxed at 25%. Your marginal tax rate would be 25% which is the tax you pay or save if you add/remove 1 CHF of taxable income.

Note that your average tax rate would be just slightly above 20% but for decision making, you should consider the marginal, as that’s what will effectively impact you.

 

[graymike91]

@tierras Others have pointed out all the calculations needed to accurately know how much the difference is over a long period, but also keep in mind the flexibility of both options. Sure VT is probably always gonna be a good option, but you won't be able to touch it before you're retired (outside a few exceptions). Whereas the money you'll invest yourself can be disposed as you see fit at (almost) any time.

 

[mcnelly]

@tierras I would say it depends on your age primarily: Under 45 I would go with VT, above 50 I would primarily put in to the 2nd pillar to bring down taxes and fill up the pensionslücke. IMHO.