Table of Contents
- Pillar 3A Types Ranked: Worst to Best
- Investing in Stocks in a Pillar 3A vs Taxable Account
- History of Pillar 3A Investing Alternatives
- RIP and Finpension
- External Resources
Hi dear RIP friends, last week I completed the 3 post series on “trolling a financial advisor”.
The “season finale” was about how not to fall for an Insurance Policy Pillar 3A, and how to identify snake oil salesman tactics.
Today I’m going to show you better alternatives available for your Pillar 3A, and I’m also going to tell you what I’ve done with my and my wife’s Pillar 3As.
Before we even start: I’m not going to tell you yet another time what’s a Pillar 3A. I assume you know what we’re talking about. This post is probably only useful for Swiss residents, so if you’re not living and, more importantly, paying taxes in Switzerland… see you on Monday January 4th, 2021 for the first MLJ 😉
Pillar 3A Types Ranked: Worst to Best
There are essentially 3 types of Pillar 3A accounts. Insurance Policy (usually linked to an investment plan), saving account, and investing account.
Let’s review them, and let’s also list the ranking criteria within each category.
Worst – Insurance Policy
We’ve already seen how bad a Policy 3A can be. No need to dig further. Just try to stay away.
Ranking criteria: they all suck, no need to find the “best one”.
Ok – Saving Account
If you’re not contributing into a Pillar 3A of this kind or superior (see below), and you earn more than 100-120k CHF per year and save at least 10% of it, you’re doing it wrong.
I’ve explained the tax saving aspects of a Pillar 3A here, even though the post is a bit outdated.
If you only care about the tax saving benefits and you don’t intend to invest your money, then a 3A saving account is your best option.
You can open a 3A saving account with any “real bank” (no Revolut, no millennial-friendly-high-referral banks like Neon or Zak) that I’m aware of, but given the relatively narrow spectrum of returns (0.05-0.35% in December 2020) it may be simpler to just open a Pillar 3A saving account with your bank, unless it’s a the very bottom of the Comparis list:
Anyway, it’s probably not worth to go shopping for “the best 3A saving account”, they’re all similar: close to zero interest rate, and zero custody fee. Where they differ is in the canton of domicile (useful to save on taxes in case of early withdrawal while you’re abroad), and the fee for early withdrawal in case of purchasing a property, pledging, becoming self employed, or moving abroad.
As I said, the extra hassle of handling yet another account is usually not worth it. Stick with your current bank.
This has been my strategy for a while. We’ve kept our 3A money in cash at UBS (2013-2015) and at PostFinance (2016-2018) before starting investing it in Pension75 and Pension100 at PostFinance.
Best – Investing Account
The most efficient way to make use of your Pillar 3A accounts is to consider them part of your broader investment strategy and your asset allocation.
When evaluating if it’s worth investing your Pillar 3A money, two factors should come in play: extra costs compared to invest your taxable money, and extra benefits of investing your tax deferred money.
Unless you wanted to invest 100% of your NW into stocks, if your Asset Allocation has room for liquidity or “bonds”, and you’re ok with a 0.05-0.35% yielding bonds (and you should be, given that bonds in Swiss and EU have negative yields), keeping your Pillar 3A in cash is not necessary a bad option. As I said, it comes down to the two factors above.
When I started contributing into a Pillar 3A there were not many cheap ways to invest your voluntary pension contributions. UBS and PostFinance funds exhibited an intimidating 1% TER, and a Swiss-centric investing strategy with no more than 45% of stocks.
Investing your Pillar 3A this way while holding bonds or extra cash above your emergency fund in your taxable accounts was fiscally inefficient.
Luckily, things changed for the better!
Today we have much cheaper and almost 100% customizable strategies, with extra tax savings on US withholding tax, no taxes on dividends (and of course no capital gain tax), and no wealth tax.
Investing in Stocks in a Pillar 3A vs Taxable Account
For example, what’s the marginal cost of investing 6826 CHF in Vanguard VT (MSCI ACWI – All World Stocks) on a brokerage account for me this year?
- 0.08% VT TER
- 0.60-0.90% Income Tax (2-3% VT dividend Yield, 30% marginal tax rate on 200k+ CHF Taxable Income, Kanton Zurich, Gemeinde Zurich)
- 0.22-0.33% Wealth Tax (0.20-0.30% marginal tax rate on 1M+ CHF Taxable Wealth, Kanton Zurich, Gemeinde Zurich)
Ouch, it’s a lot! The TER is almost irrelevant… Ok, if you don’t earn 200k per year, and if your taxable wealth is below 1M your total costs are lower. For example, for someone with 100k CHF of taxable wealth and a 120k CHF taxable salary the wealth tax disappears, and the income tax goes down to 0.40-0.50% (assuming a 20% marginal tax rate).
The same amount invested in a Pillar 3A solution would only cost me the platform fee and the TER of the underlying instruments.
Let’s say I want to hold a bit of stocks and a bit of liquidity in my Asset Allocation. Both quotas larger than total Pillar 3A account. let’s say I have 1M CHF and I want (for some reason) 500k in stocks and 500k in liquidity (in CHF). How should I allocate the 100k I have in my Pillar 3A?
Case 1: Pillar 3A in cash
- + 0.20% interests (on average) on my 3A saving account.
- – 0.85% costs of investing extra 100k CHF in stocks (VT) in my taxable account. It’s the sum of TER plus expected Income tax. Excluding wealth tax since I’m depositing 6826 CHF into a Pillar 3A anyway. Also excluding trade fees: one off in their nature, and negligible on Interactive Brokers.
Case 2: Pillar 3A invested
- + 0.00% interests on 100k CHF cash at my bank… well, I’m lucky it’s not negative yet.
- – FEE: total costs (platform fees plus underlying instruments TERs) of investing the same money in stocks in my Pillar 3A account.
As you can see my break-even is at FEE < 0.65%, more or less. If a platform offered a lower FEE than 0.65%, I’d be incentivized to move my cash allocation outside the Pillar 3A.
My break-even point is very personal, and it might understandably frown you up: I’m assuming a high income tax on dividends/profits, a very conservative investment strategy with a lot of cash/liquidity, and ZERO returns on your cash in your taxable account. I’m also assuming the VT-like world index fund in the Pillar 3A account performs like VT instead of being heavily Swiss oriented, or currency hedged and inefficient for other reasons like “not being handled by Vanguard“: currency conversion hidden fees, tracking error, high bid-ask spread, hidden purchase and/or redemption fees, hidden stamp duties.
Since I feel safer with a non negligible amount of cash at hand, it’s not necessary a good idea to invest my Pillar 3A in stocks.
If you’re younger, braver, with a career in front of you… you might want to invest every Rappen you can put your hands on, so the entire math above is moot in your case.
If you’re going to invest every single Cent outside your emergency fund, your math should be different and the decisions to be made are (1) whether to deposit money into a Pillar 3A or not. It’s surprisingly not guaranteed that you always should 😉 I’m not digging into that today though – and (2) what’s the best 3A platform for my investments to grow.
We’ll be focusing on “what’s the best 3A platform for my investments to grow” for the rest of this post.
As I said, when I started putting my money into a Pillar 3A there was no cheap way to invest it. My salary was lower, and my total wealth was below free wealth tax quota.
With salary and wealth going up, I started considering alternatives.
Since March 2018 I’ve invested money into PostFinance Pension funds (Pension75 and Pension100). I’m a lazy person, I knew there were better options around. But given my black belt on procrastination, and the relatively small impact of our Pillar 3As I decided to stick with my bank.
1% TER is a lot, above the break-even point for a cash hoarder like I’m today. But back in 2018 I was a bit braver, with no room for extra cash beyond my emergency fund. So investing my Pillar 3A, even at 1% TER, was better than keeping it in cash.
History of Pillar 3A Investing Alternatives
Investing your Pillar 3A has recently become so popular that many startups and young companies launched their products in this field. Mostly Roboadvisors or pseudo-roboadvisors (funds of funds), i.e. “pick your strategy and we’ll handle everything for you”.
Before 2017 the options were very limited: banks offered 3A funds, or “funds of funds” with moderate TERs, capped stocks allocation, Swiss centric strategy, currency hedging, and who knows how many hidden costs (like currency conversion and subscription/redemption fees) down the line.
in 2017 a new player disrupted the market: VIAC (backed by WIR Bank): up to 97% invested in stocks, a partially customizable strategy, 0.52% platform fee (plus underlying assets TERs of 0.02%), and an annoying 0.75% currency conversion fee, that’s a bit hidden but that’s one off and not a recurring cost.
This was a clear killer app in 2017, and many people around me moved their 3A over to VIAC.
I was tempted, but lazy. The math in the previous section showed that VIAC was below break-even point, even for a conservative strategy with cash: investing in stocks in a VIAC account was more tax efficient compared to Interactive Brokers (wrongly assuming you can emulate VT in your VIAC account).
I’ve been procrastinating the decision to move my Pillar 3A for more than 3 years. In the meantime a pack of new players showed up.
In 2019 Selma Finance (backed by Saxo Bank) joined the game. An inferior offer (in my opinion) compared to VIAC: a roboadvisor with 0.68% platform fee and 0.22% underlying products TERs.
VIAC was clearly dominating the game, and the new entries of 2019 just confirmed that. If you want to know more about VIAC, I recommend you to follow this incredibly good (and very long!) thread on MP Forum.
I was ready to move my 3A to VIAC in 2020, when two more players entered the market, this time improving the situation:
In March 2020, Frankly (backed by ZKB) launched with an offer comparable to VIAC:
0.48% 0.47% fee, 95% of stocks, very Swiss Oriented and CHF hedged.
VIAC was probably still the best option, mainly because Frankly charges you the 0.47% fee on the entire portfolio (even if you don’t invest 100% in stocks), for the active investing, and for CHF hedging being inefficient for stocks.
But it was a close call.
Thanks to all the market participants for improving the offering for us customers 🙂
In late 2020, Finpension (backed by Credit Suisse) was launched as a new Pillar 3A solution, and in my opinion the king has been dethroned:
- Roboadvisor / Self rebalancing portfolio of Passive Funds model.
- 0.42% All-in Fee (they advertise 0.39% plus VAT, i.e. 0.42%).
- Underlying ETFs TERs below 0.02%.
- 0.05% currency conversion fees (charged by their bank, with zero overhead on their part).
- Up to 99% of portfolio investable in stocks.
- Fully customizable portfolio. Yes, you can replicate VT if you want (a bit complex though).
- Moderate Swiss overweighting on the default strategies.
- No CHF hedging by default on stocks.
- Monthly rebalancing for free.
- Up to 5 different Pillar 3A portfolios (handy for tax savings at withdrawing time).
- Finpension foundation domiciled in Canton Schwyz: lower withholding tax if you withdraw your account from abroad (VIAC is domiciled in Basel).
- Sadly you pay the 0.42% fee on your entire account (VIAC still rules on this), so any strategy below 80% stocks is inefficient.
I discovered Finpension thanks to the MP Forum. As usual, an amazing forum for Swiss Mustachians.
Finpension immediately looked like a superior alternative to me, but I wanted to dig further before making the move. The abovementioned thread is a good place where to start: the Swiss Mustachians are extremely good at X-Raying financial offers.
Fun fact: even though TPS recommends Finpension, he listed few “Finpension 3A cons“. They are all questionable in my opinion:
- Investing in negative yielding Swiss bonds (-0.15%) is not a huge deal. Finpension is designed for those who want to invest their Pillar 3A in stocks. Full stop. Swiss bonds constitute 4% of the Global Equity 80 portfolio for example. Not a big deal.
- Only a mobile application no web interface. Fixed! They launched the web app in mid December 2020! The CEO himself promised a web app for Jan/Feb 2021 and… overdelivered! Kudos!
- No second-factor authentication on the mobile application. I enabled biometric (fingerprint), and I think I’m ok with this level of security on the app. I don’t think there will be enough incentive to hack Pillar 3A accounts, since they can only be withdrawn under specific circumstances, and only using target checking account to my name… but I do have some security and privacy concerns, more on this later.
- No referral program to reduce fees even further. This is actually a plus! Every referral program makes the referred product less efficient. No referral program means they can keep fees at a minimum. Referral programs “reduce fees even further” only to salespeople and bloggers, while being a net negative for everyone else 🙂 I’m much happier to recommend a product with a sustainable or no referral program at all, because I know they can keep up with their promises and they’re not playing the unfair game of conquering market share in an unsustainable way, only to raise their fees once reached a monopoly position. Yeah, I know, uncommon to hear that from a blogger…
Having said that, let’s take a look at some of the questionable aspects of Finpension.
Finpension is relatively young
Sure, the Finpension 3A product is young (late 2020), but the company behind (Finpension) is on the market since 2016 with the product yourpension (Pillar 1E, which is a completely customizable Second Pillar program for companies – yeah, 1E is a Pillar 2, it’s not confusing at all), and since 2017 with the product valuepension (a Vested Benefits Account where to park your Second Pillar when you don’t have an employer).
Their VBA (valuepension) is pretty good, comparable but slightly inferior to VIAC VBA offering in my opinion. I’ll write about Vested Benefits Accounts in a future post, since we moved Mrs. RIP VBA from PostFinance to VIAC in December 2020 as well. Peanuts though, less than 4k, just to experiment with VIAC. I will need to move my huge Second Pillar (300k) into a VBA
if when I quit my current job, so better play with more platforms in advance 😉
Ok, 4 years on the market is a short amount of time, but let’s not forget that a Pillar 3A is highly regulated and your assets are held by a custodian bank, which is Credit Suisse for Finpension.
What I found weird was that the Finpension App on the Google Play Store is almost “unknown”:
Just 12 reviews (actually only 2 real reviews, the others are just “ratings”), and only 100+ downloads looks suspicious. I asked about it on the MP forum and got unsatisfactory replies. Maybe it’s because it’s a new app, or because Google doesn’t show real downloads numbers… Two months have passed, and I still see the same downloads range (100+).
Maybe that’s the price to pay for being an early adopter 🙂
“RIP, we are in Switzerland…”
“You’re the only one with a poordroid phone!”
Fair point. I only see iDevices here.
Identity and Account Creation
When I created my Finpension account in late October 2020, the account creation process was a bit weird.
First, you had to install the mobile app. No way you could create an account on their website. Things have changed now since they released a web app in December 2020 with which you can do everything. Awesome!
Anyway, during account creation I wasn’t asked for any proof of my identity. No ID scan. Not AHV (social security) number. Weird. What if I misspelled my name, or my date of birth? It seems to be a shared concern among Swiss Mustachians.
It seems KYC is not mandatory for pension foundations, and that they’ll ask you to produce a lot of documents at payout date. Still I have no idea how my wife should proceed in case I suddenly die, for example.
Not a minor issue.
Portfolios and Risk Assessment
With a Finpension account you can open up to 5 “portfolios”, which are separate Pillar 3A accounts, separately withdrawable at retirement (or expatriation, home purchase, self employment) time. Nice for tax saving.
Every time you open a new portfolio the app asks you to assess your risk tolerance and set a time horizon for your investments. I find it a bit annoying, but it takes less than a minute, and there might be reasons for which having different risk profile on different accounts make sense.
Not a big deal.
Maybe this is just a glitch, nothing serious, but due to high volatility and order placement on rebalance day (beginning o November in this case) someone (more than one) got >100% invested in stocks and a negative cash balance…
The official Finpension answer on the forum didn’t fully convince me: “when the orders are placed in advance, the price is unknown“… I understand that roboadvisor, roboadvisor-like, and index funds rebalancing orders must be market orders, but given the collective size of passive funds and the predictability of the rebalancing day I fear that someone could profit from it. A similar effect of the Short Squeeze. Hi Volkswagen 🙂
Ok, this is an issue with passive index investing becoming too big, not only limited to pension funds (especially small ones like this).
Let me explain what I mean: imagine Tesla joined the S&P500 (crazy, uh?), and as a consequence every S&P500 fund must buy Tesla shares. Say 20% of Tesla shares will be purchased by Index funds on the same rebalancing day (probably not true, they’re going to rebalance on different days I hope). If shareholders “agree” not to put shares on sale, the price can skyrocket and go to “infinite and beyond” to drop soon thereafter. Well, it kind of happened when Tesla joined the S&P500, but not as extreme.
With index funds you get inflated shares probably doomed to drop. With pension funds that issue market orders and invest 99% in stocks you get above 100% stocks, and negative cash balance.
Suggestion: pick a random rebalancing day each month, not always the fist trading day like everyone else is doing.
Anyway, seeing a negative cash position is scary, and that should be fixed. That’s why other 3A solutions only allow for 97% of stocks, to keep a 3% price fluctuation cushion.
Not fun. But not the end of the world.
Questionable Aspects Conclusions
I’m a bit concerned about the identity problem, but it might be a cultural issue. I wouldn’t trust an Italian “pension fund” that wouldn’t ask many questions when opening an account and receiving a deposit.
Their procedure at withdrawal seems sound, even though without a solid KYC at signup it might not be a pleasant experience. Triple check your personal data, and notify them as soon as you change address, phone number, or name (via marriage or gender transitioning).
About the “youth” of the platform, Finpension AG as a foundation (Finpension, Valuepension, Yourpension products) is accredited with Swiss tax authorities as a pension provider, and regulations and safety in Switzerland are top-notch. Their custody bank (Credit Suisse) is one of the too-big-to-fail Swiss banks.
Others are minor issues that won’t impact my final judgement.
Finpension is the best option for a Pillar 3A account, assuming you intend to invest at least 80% of your Pillar 3A in stocks.
Else, VIAC is a superior choice for a desired stock exposure between 20% and 79%, thanks to their all-in fee being prorated by the stocks percentage in your portfolio.
If you only want a 3A saving account, open one at your bank or shop on Comparis for the best interest rate. Current range for interest rates on 3A saving accounts is 0.05-0.35%.
Few extra considerations on the Pillar 3A market: like Julianek pointed out in the MP forum, this is becoming a commodity business. Everyone could offer a similar product, and the only discriminant would be the costs.
The players are essentially arbitraging between b2b available institutional funds, with TER close to 0%, and the customers, us, the retail investors.
Costs can only be brought down with extreme automation and economy of scale at this point.
Maybe a big fish (UBS? They are not playing this game so far) will decide to kill the competition launching a 0.15% all-in fee, and win this winner-takes-all competition.
Any takers? You’d be more than welcome!
Finpension is the current top Pillar 3A offering, but I suspect it’s a leadership that’s doomed to be smashed by the next big player.
That’s why if you’re already invested in VIAC I don’t think it’s worth to make the switch. In 2-3 years a better option will come. Babysitting the transfer process takes time, mental energy, and at least a month out of the market (it was November 2020 for us 🙁 ). Having another entity to notify every time you change address or phone number (been there, done that) is one of the thousand cuts you want to avoid dying for.
RIP and Finpension
So… I jumped on the bandwagon in late October, around the 28th or 29th. I opened an account for me and one for my wife. The goal was to have all our existing 3A accounts transferred to Finpension as quickly as possible.
I opened two Portfolios in my Finpension account because I already had two separate Pillar 3A accounts with PostFinance. Keeping multiple Tax Deferred Accounts helps saving on taxes at withdrawal time under some circumstances we’re no going to explore today. I only opened a single Portfolio for my wife.
I picked the same strategy (Global Finpension Equity 100) for the three accounts. It’s a bit overexposed to Switzerland (40%), but I didn’t want to micro-optimize here. In the end our Pillar 3As are a relatively small fraction of our total Net Worth (~7%).
Since we had both already deposited our maximum Pillar 3A amount (6826 CHF) for tax year 2020 into our PostFinance 3A accounts, we weren’t able to deposit any money in the new accounts before November 2020 rebalancing date (1st or 2nd day of the month) and we sat out during one the best performing market month of our time… I’m getting used to it 🙁
The transfer procedure from PostFinance to Finpension was smooth but slow. It required selling Pillar 3A investments at PostFinance (and waiting for them to settle), printing papers without a printer at home, filling forms, signing and sending them to PF Foundation. And wait… until November 9th (it took 10+ days end-to-end).
We moved ~95k CHF from PostFinance to Finpension: 68k Mr. RIP, 27k Mrs. RIP.
On December 1st the selected strategy has been rolled out, and funds have been purchased:
December 1st wasn’t a high volatility day, which means my actual Asset Allocation matches pretty closely the desired strategy. The Equity portion is 98.9%.
Here you can see each individual fund that’s part of the strategy:
Again, I stuck with one of their default strategies, I didn’t want to micro-optimize. But maybe next year I’ll set some time apart to make this portfolio look similar to an ACWI index, like Vanguard VT.
While looking at the above screenshot I’m questioning their answer to my “zero currency conversion fees” question on MP Forum: they said they don’t charge any currency conversion fee (above the 0.05% charged by their bank) when they buy USD or EUR denominated funds in our accounts, and that they always prefer to buy CHF denominated funds.
I see that all my funds are CHF denominated, so the currency conversion question is useless here. But that doesn’t mean my CHF money will hit the stock market unaffected! How are those CSIF (Credit Suisse Index Funds) handling their CHFs? They’re buying assets in every major currency, am I implicitly paying a hidden currency conversion fee? I would have preferred that Finpension invested in USD denominated funds on US stocks, explicitly charging me zero (or 0.05%) USDCHF fee.
Not a big deal, but I would love to know how Credit Suisse purchases US, UK or Asian stocks with the CHF they receive from us.
While writing this post, on December 29th, our portfolios are performing ok. In line with expectations, December market behavior, and USDCHF crappy performance.
I already mentioned this amazing thread on MP Forum, where I discovered this product and where you can interact with a Finpension representative directly (probably Beat Bühlmann himself). In this thread you will find answers to almost any question you could possibly have, from security (Esisuisse – deposit insurance protection, KYC regulation, FINMA and other controlling entities) to performance, from strategy customization to currency hedging. And much more, including “latest news”.
That’s all for today 🙂
Have a great 2021!