Dear Mr. Aggett,
My wife (42) and I (44) have found a dream home for us and our daughter. We’d like to use our retirement savings for the financing. The house costs 800,000 francs. We have to contribute equity of 160,000 francs (20 percent). We can put in 60,000 francs from our own savings. We’d also like to make an early withdrawal of 80,000 francs from the pension fund and 20,000 francs from our Fisca account (pillar 3a). But we don’t want to jeopardize our retirement savings. What should we bear in mind when making an early withdrawal?
Marc D., Lausanne
Dear Mr. D.,
I’m delighted that you’ve found your dream home – and that you’re concerned about the financial consequences.
As far as your savings go, apart from the amount you’ll be investing in your home, I assume you have sufficient cash or equivalent to cover other major expenses such as taxes, vacations or dentist’s bills. And don’t forget the acquisition costs – for instance notarial and handover costs – which is incurred with the purchase of a house. In addition, you must be confident that you can keep up the mortgage payments if mortgage rates rise. As a general rule, you should not spend more than a third of your gross income on housing.
Indirect amortization is worthwhile
Using capital from your Fisca account (pillar 3a) is basically a good idea. The capital payout is equivalent to staggering the withdrawal and so helps you break the tax progression, which results in noticeable savings. Using your Fisca account for indirect amortization of your second mortgage is even more highly recommended: you pledge your pillar 3a account to the bank and agree to pay at least the mortgage amortization amount into pillar 3a each year. Once the agreed repayment period of say 15 years has expired, you can use your 3a capital to repay the mortgage in one go.
This lets you benefit the whole time in several ways: your payments into pillar 3a are tax deductible, the preferential rates on your Fisca account are tax-free during the accrual period, and the mortgage debt and debt interest are tax deductible. When your 3a savings are paid out later, these are taxed separately from your other income at a special rate.
Covering the risks of disability and death
With pension fund capital, both an early withdrawal and pledging your savings are possible. Think carefully about which option makes more sense for you. Early withdrawal means a lower retirement pension, and many pension funds reduce disability and death protection. To avoid gaps in this coverage, the pension scheme will offer supplementary insurance or refer you to a provider. UBS also offers mortgages with insurance protection. On top of that, to ensure full protection on retirement, you should build up your savings again over the years. Repaying the early withdrawal will allow you to reclaim the taxes paid. Voluntary, tax-deductible top-up payments to the pension fund do not qualify for tax relief until the early withdrawal has been repaid in full.
There are no disadvantages associated with pledging your assets, as long as the pledge does not have to be realized. Your risk coverage remains intact. What’s more, the pledged capital earns interest, thus helping your assets to grow faster. In contrast to an early withdrawal, there are no taxes to be paid. This spares your liquid funds and gives you greater freedom to design your new home.