The false friends of tax optimization from the point of view of financial independence

Paying less tax is of course a way to achieve your goals more quickly when you are looking for financial independence. However, you should be wary of certain advice which, although it can be very effective when you are an average employee, can be counterproductive when you want to become a rentier.

Very often, the budding rentier seeks to optimize his taxes in order to increase his savings capacity. Investing in occupational pension provision is an extremely effective way to reduce his taxes as an employee. Indeed, transactions with the aim of improving old-age pension provision (2nd and 3rd pillar) are deductible from taxable income.

However, when you are looking for financial independence, you have to be wary of anything that concerns old-age pension provision. This is paradoxical when you are looking to retire, even if it is early.

The problem with the various pension systems is that they are very heavily regulated by the state. The state tries in various ways to capture your money to ensure not only your old age, but also that of others. To do this, the most obvious way for the state is of course the mandatory contributions to the various pension systems, such as the AHV and the LPP in Switzerland. But there are also more subtle ways, where you are encouraged, through various tax incentives, to put money aside for your old age. This is the case, for example, with the 3rd pillar, also in Switzerland.

All this is certainly commendable and a priori comes from a good intention: to ensure that you have enough to live on when you have stopped your gainful activity... at 65. The problem is that your money will end up drowning among the billions already invested collectively by the entire community of workers. In the best case scenario, this will result in assets that you will find again later, with a very modest capital gain (minimum LPP interest rate 1.25% in 2016... no comment!). For the rest, it will be money that will go directly to pay for the retirement of baby boomers. Even if it gives you the satisfaction of contributing to social cohesion, it hardly advances you on the path to financial independence.

By investing your money in state-regulated pension systems, you deprive part of your savings of being invested directly in assets that immediately provide you with high-performance income, such as stocks that pay increasing dividends. Buying back years of insurance from your 2nd pillar, or investing in a 3rd pillar, means that your capital will be unavailable until your retirement age. You will therefore not be able to use this money to become financially independent well before this deadline (it is possible to bring forward your retirement by only 2 years for the 1st pillar, 5 years for the 2nd and 3rd pillars).

By doing this, you are doing the exact opposite of what is necessary to become a rentier. You are blocking capital until your retirement age. The interest rate that will be applied to this capital is likely to be insignificant. You will have paid less tax, of course, but it would have been better to save up and directly invest this money in profitable investments (such as stocks that pay increasing dividends).

The only way to escape the state pension systems is to use your 2nd and 3rd pillar to amortize your own real estate. You kill three birds with one stone. You become the owner of an asset, you recover part of your hard-earned money that was arbitrarily raided to be placed in a low-yield account and you optimize your taxes. This is the only possible way for a future rentier.

Even better: if you move and rent out your old main residence for which you used your occupational pension plan, you do not have to pay back the money you took out of your pension fund (this would have been the case if you had sold).