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.
Très souvent le rentier en herbe cherche à optimiser sa fiscalité pour pouvoir augmenter sa capacité d'épargne. Investir dans la prévoyance professionnelle est un moyen extrêmement efficace pour faire baisser sa fiscalité en tant que salarié. En effet, les transactions dans le but d'améliorer old age provision (2e et 3e pilier) sont déductibles du revenu imposable.
Néanmoins, quand on est en quête d'indépendance financière, il faut se méfier de tout ce qui touche à la prévoyance vieillesse. C'est paradoxal alors même qu'on recherche justement à prendre sa retirement, même si c'est de façon anticipée.
Le problème des différents systèmes de retraite, c'est qu'ils sont très fortement réglementés par l'Etat. Ce dernier essaie par plusieurs moyens de capter votre argent pour assurer non seulement vos vieux jours, mais aussi ceux des autres. Pour ce faire, le moyen le plus évident pour l'Etat c'est bien entendu les cotisations obligatoires aux différents systèmes de retraite, comme l'AVS et la LPP en Suisse. Mais il y a aussi des moyens plus subtils, où l'on vous encourage, par différentes incitations fiscales, à mettre de côté de l'argent pour vos vieux jours. C'est par exemple le cas du 3e pilier, toujours en Suisse.
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.
En plaçant votre argent sur les systèmes de retraite réglementés par l'Etat, vous privez une partie de votre épargne d'être placée directement sur des actifs qui vous apportent immédiatement des revenus performants, tels que les actions payeuses de growing dividends. Racheter des années d'assurance de son 2e pilier, ou investir dans un 3e pilier, signifie que votre capital sera indisponible jusqu'à l'âge de votre retraite. Vous ne pourrez donc pas utiliser cet argent en vue de devenir financièrement indépendant bien avant cette échéance (il est possible d'anticiper sa retraite de seulement 2 ans pour le 1er pilier, 5 ans pour les 2e et 3e piliers).
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).
La seule possibilité pour échapper aux systèmes de retraite étatiques, c'est d'utiliser son 2e et 3e pilier pour amortir son propre bien real estate. Vous faites d'une pierre, trois coups. Vous devenez propriétaire d'un actif, vous récupérez une partie des sous que vous avez durement gagné et qui vous ont été arbitrairement perquisitionnés pour êtres placés sur un compte à faible rentabilité et vous optimisez votre fiscalité. C'est la seule voie possible pour un futur 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).
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Hi Jerome,
This is exactly the reasoning I used when buying my apartment. For this purchase, I withdrew my entire 2nd pillar. I do not intend to make redemptions to replenish my 2nd pillar, although this would allow me to recover the taxes paid when withdrawing. I will buy more dividend-growing stocks as an investment and as an annuity for retirement (in three decades). This is a lower-risk strategy than relying on state pension systems, but the expected returns are much higher.
My reasoning is similar for the 3rd pillar: the tax saving is "immediate", but it only occurs once, i.e. the year of payment. The increasing dividends are paid, if the company is solid, each year or quarter.
I wonder what tax optimization you are referring to in connection with the acquisition of real estate: with the taxation of the rental value it seems to me that the tax advantages are not great. Please enlighten me on this point.
Jean-Louis
Hi Jean-Louis,
glad to read you again!
I am also pleased to see that others think like me on this subject, because we are constantly being told everywhere, whether in the media, banks, insurance companies or the State, that the 3 pillars of retirement are the panacea. It is quite normal that they make a vocation of it… they are directly interested, except for the media (there I think it is rather ignorance). In fact this whole system is a gigantic organized theft.
Regarding real estate, I find it interesting from a tax point of view for several points:
– the rental value you are talking about is modest, much more than the real rental value
– interest on the debt can be deducted from taxable income
– work on the property can be deducted from taxable income
– we can amortize the debt on a 3rd pillar, which can then be deducted from taxable income and wealth. Since it is money that does not belong to us anyway, we do not care…
– last but not least: we can take out the money that is on our 2nd pillar to buy a property. This is one of the very rare ways to recover the money that was stolen from us. This is true, it is not tax optimization, since you will be taxed on the amount you receive (but you will be taxed later anyway). It is just optimization from the point of view of financial independence 😉
Very interesting article, thank you.
So what would be the strategy to adopt regarding the 3rd pillar? For example, contribute as much as possible with a view to purchasing a home and then no longer contribute at all?
To what extent is it possible to rent out a home that you have purchased using the 2nd and 3rd pillars when this is normally reserved for the purchase of your main residence?
Thanks in advance.
The best thing is to buy via a bank loan that is repaid on a pillar 3a.
You can finalize the repayment of your main home by withdrawing your 2nd pillar or a pre-existing 3rd pillar, then when it is done, move and rent it out. In the event of a sale, the money withdrawn must be returned, but not in the event of rental.
Earn an annuity or rent an apartment? Interesting article in Le Temps:
https://www.letemps.ch/economie/2017/05/21/fautil-opter-une-rente-preferer-rendement-dun-appartement
Anyway, all this will soon be over, at least for retirees, the trend is clearly towards a ban on capital withdrawals. So this amount must be taken out of the LPP before retirement.
Yes, unfortunately I see it the same way you do. My dream of withdrawing 100% of my capital and investing it in solid and growing dividend stocks will soon no longer be possible, and I will become "against my will" a real estate owner...
I have already taken out a part to invest in property. This generates income that I reinvest in the stock market. That's how you square the circle!
Hello Jerome,
I read with interest all the articles on your site dividendes.ch because I am at the same level of reflection as you must have been a few years ago.
I am responding to your discussions with Dividinde on this post relating to the 2nd and 3rd pillars...
because I bought my RP in 2020 with my wife by unlocking 3a pillar + a little savings (i.e. 10% of the value of the property). We therefore took out a mortgage on 90% of the property by pledging the 2nd pillar (possible because we bought below our maximum purchasing capacity).
Currently, for the "mandatory" amortization required by the bank, we must pay two 3a bank loans over 15 years to reduce our debt to 65% of the value of the property.
I have 2 questions regarding your experience on your RP(s):
1) we have the possibility of buying back years of LPP as we have gaps in our pension plans, is it wise to do this in // of our payments into our 3a bank accounts to accelerate our amortization of our 2nd rank mortgage and no longer have an obligation to amortize the bank at the next renewal of our mortgage (in 8,.. years)?
2) As you suggest, we could start with a plan to rent this 1st RP (so that it generates real estate income) then buy back a 2nd RP using our LPP assets (max 10% value of the new property if the law does not change...) + use 3a/savings.
In doing so, we gradually recover our 2nd pillar and 3rd pillar assets by putting them into these 2 real estate properties... and in // we buy back years of LPP which will serve as a contribution for the 2nd RP or the depreciation of the 1st property in ~10 years...
Of course, all this in // building up a stock portfolio over the amortization period to live partially off our dividends in the long term + benefit from a real estate income with the rents from our 1st RP.
In the scenario where we stay in our 1st RP, we could in any case take out our 2nd pillar to amortize our 1st RP in a much more significant way to reduce our mortgage...
What do you think?
Thank you for sharing your experience.
Greetings
Sebastian
Hi Sebastian,
Personally, as you know, I am not at all friends with the LPP. It is institutionalized theft, nothing else. Every month, they steal part of your salary, to pay handsomely civil servants who are incapable of paying you more than 1% for your assets, even though the stock market is soaring. So, from my point of view, you have to get everything out of it that is possible, never to put it back in. Think in terms of opportunity cost: any money placed in a 2nd pillar account is money that is not optimally invested.
Of course, the institutions will make you look good by blinding you with the tax mirage, thanks to the possible deductions during redemptions. Don't forget, however, that when you withdraw your assets again, you are taxed again, not to mention that you will have to pay fairly significant fees to your fund for each redemption/withdrawal. Above all, the short-term tax gains highlighted do not weigh heavily compared to the opportunity costs mentioned above.
The term "pension gap", invented by the pension funds, makes me laugh. The LPP is in itself a pension gap...
I know that I think outside the system and that most financial advisors will advise you on the contrary to buy back these famous gaps.
Tell yourself that if people became rich with their LPP, it would be known. It's actually quite the opposite...
Thank you Jerome, I completely agree with you regarding the LPP as a retirement pension... but regarding the use of the LPP in the amortization of the RP, how do you see it in relation to my questions? Do you ultimately remain in debt on your RP or do you think that it is better for the money contributed to the LPP to be used as amortization of the RP upon purchase but also every 5 or 10 years to reduce the debt?
Yes, exactly, you use your LPP when you have the possibility, either at the time of purchase, or later, or both. If you insist on keeping debt, it is possible in any case by buying a new RP and re-renting the old one.
So the rule is simple: every opportunity to take money out of your LPP is a good one to take AND never buy back the “pension gaps”.
Hello Jerome,
I am completing your post on the issue of the LPP vs. the path to financial independence.
In my personal case, I am considering not touching my LPP assets until my RP has been reassessed (this will be the case at the end of my fixed mortgage in 5/6 years).
The reason is to first take advantage of the revaluation of my property to be able to take out my 10% of equity that I had at the time of purchase (in cash) because from now on there is a latent capital gain, to be seen in 5/6 years...
Because, it seems to me that once you use your LPP assets to depreciate your RP, you can no longer "revalue your property" and "take out cash" to invest it, for example, in a yield asset or something else...
The equity from the RP would then be used to amortize a second income property that I plan to buy this year (but which nevertheless requires 20% of equity in cash today) to reduce my debt.
What do you think about this scheme/strategy?
In my case, I do not plan to move out of my RP in the next 10 years as it is adapted to my family needs for the next 10 years... so I cannot do the setup you suggest i.e. "rent out the 1st RP and buy a 2nd RP). Hence the diagram above.
The question that arises for me is simply whether I should invest my own funds in cash in a yield asset today (20-25% of the asset) vs. waiting 5/6 years and the revaluation of the RP which will produce a similar amount but linked to the valuation of the asset... and // use these own funds in investments other than a yield asset in Switzerland.
Hi
I'm not sure I understand your financial plan, but it doesn't matter. In any case, for the moment the question is not posted since you are stuck with your fixed rate until 5/6 years from now.
Then, at that point, you take out your second pillar and pay off your debt. Contact your bank and your pension foundation early enough (at least 6 months) to let them know your intentions.
If there is still debt, you start again with a new loan, for example with a mix of 5-year rates and saron (or only saron). Why not longer? Because an early LPP payment can be requested at least every 5 years, so you might as well take advantage of it as soon as possible.
The goal is to release your LPP gradually, every 5 years, because:
– the LPP yield is poor
– it allows the taxable burden to be reduced (taking out more capital less often drastically increases taxation)
In 5/6 years, your debt will have significantly decreased and you will also pay much less in monthly payments to repay it. You earn more on the monthly payments no longer payable than on the return on the LPP!
Before the time comes to buy a new RP, if it is in more than ten years, as you say, you will still have been able to carry out a new amortization of your RP via an early LPP withdrawal.
If you have a third pillar you can also do it by the way (but obviously do it at a different time than for the LPP, so as not to be taxed too much).
During all these years, helped by the significant reduction in mortgage payments, you should be able to accumulate a nice capital, which will allow you to finance the equity of your future RP, without having to "take out cash" from your first loan as you say. If necessary, even if you are a little short, given the low debt that you will then have, you will easily find a solution with your banker, especially since your first RP will finance the monthly payments of your 2nd RP.
This is how I would do things. In fact, that's what I did :)
Hello Jerome,
Thank you for your feedback.
In fact, I have a SARON mortgage in addition to a fixed mortgage on my RP so I can withdraw my LPP this year to amortize part of the saron, same thing in 5 years. And I also have my amortization plan for my RP by amortization every 5 years offset by the LPP of our 3a. As you say, this allows to smooth the "tax burden" of the withdrawal of LPP and 3a assets. So I am aligned with your strategy 😉
What I wanted to get to in my first comment was on the best strategy to adopt if you don't sell your first RP, if you want to buy a second property (to make a bit of income) but which requires at least 20-25% of equity on the value of the property.
I thought I could leverage the revaluation of the RP by increasing the mortgage to "bring out" cash that would be put into equity for a yield asset (if it increases in value, during the revaluation by the bank) but this is blocked with the bank because I have put or will put contingency funds into amortization of the RP so it does not come into play. Basically, the bank does not want to take into account the latent capital gain of the RP even if substantial so that I can get cash out even if my mortgage debt is < 65% of the value of the property...
Then there remains the "classic" option that the bank asks for, namely providing 20-25% of cash for this income property and whether it is worth it vs. investing this 20% of cash in other media (stock markets or others).
I hope this message is clearer :)
Yes, clearer ;)
So indeed, if we could do what you say, namely use our 2nd pillar to amortize the debt of our RP and reuse the cash to buy a yield asset, that would be the end of pension funds!!! 🙂 lol
So, the only trick is to swap assets, by depreciating your RP and moving, which makes the RP become the yield asset, as I mentioned above. But I understand that you do not want to move for the time being.
Finally, regarding the choice between investing these 20% of cash in real estate or the stock market, I would say the latter, because it will be easier to obtain cash in about ten years if you then want to acquire a new RP. In addition, over about ten years, in principle, the investment horizon is long enough to invest in the stock market. I say in principle, because there have already been unfortunate episodes in history where stock market returns were mediocre over such a period of time. This is particularly the case when the markets are high…. So, follow the basic rules: buy quality, at a reasonable price and diversify assets (stocks, gold, bonds, etc.). This can even be a real estate ETF like SRFCHA if you absolutely want to stay in real estate.
Thank you Jerome for your explanation,
Your feedback makes me think of another "possibility" if I cannot "exchange" 2 RPs in the short term and get cash (indeed the bargain was too easy!) while remaining invested in a yield asset and in stocks.
Once my debt is reduced below 65% of the value of the RP within 1 year (after withdrawal of my LPP assets + 1st 3a bank amortization after 5 years on my RP), my bank should be able to release me from the "obligation" to amortize my mortgage as I will be more than in 1st rank.
In doing so, I could from this moment, indirectly repay each year my mortgage of my RP in a 3a stock market this time of the VIAC Global 100 type to be invested in the stock market (ETF approach) and in // have this yield property next to my home with my 20% of cash. I immobilize cash but in // the cash put into the repayment of my RP goes into 3a stock market + every 5 years, reduction of the mortgage via the LPP…
even if the 3a VIAC is not as efficient as an IBKR portfolio, it seems to me to be a good solution / 3a banking over 15 years. It allows to diversify the supports and use the mortgage as an investment solution on stocks where you finally use it for your 1st RP…
In both cases, “yielding” real estate and 3a stock market, my time horizon is 15 years.
Then in 15 years, we will see if I change RP if I rent the 1st like you while having passive income via other investments (I will then normally be in the zone of "financial independence/freedom" 😉
The idea on paper also seems to hold water. I just have a little doubt about the 3a, because as far as I'm concerned I had to link it to life insurance, therefore with a risk portion. To my knowledge, this is hardly compatible with the approach you mention, but hey it may be linked to my family situation. A solution, if necessary, would perhaps be to subscribe to pure risk insurance, and in // to amortize on a 3a account like VIAC.
Yes, that's right. I already have a pure risk in // of my 3a bank that I had chosen when purchasing the RP to avoid "tying" myself to an insurance 3a...
You did well, it's a pure scam. Insurers are thieves. Even worse than bankers :)