The 40th-ranked Pospisil, who played his quarter-final a day earlier after treatment for a stiff neck, suffered his second career loss against Federer. He lost to Federer at Montreal in 2011.
"It's not easy to play someone you basically worshipped growing up," said Pospisil. "You want to win but you have a great amount of respect.
"It's tough to compete if you give too much respect. I was battling with myself a bit."
Pospisil put up a huge fight on Saturday, breaking the home hero as Federer served for the win leading a set and 5-3 in the second. Federer sent a forehand long to make it 5-4, with Pospisil then winning a tiebreaker for a set each.
It took a ten minute game in the third set, with Posipisil saving three break points, before Federer could move into position to close out the match.
"I calmed down a bit in the second set and started playing better," said Pospisil. "Physically I was very tired but there were no new injuries.
"Roger is a champion and he came up with some really good shots when he needed them, That made the difference. he played great on the big points."
Pospisil still takes away huge confidence heading to Paris and the final event of the ATP regular season starting Monday. He is trying to lift his ranking into the top 32 to insure a seeding at January's Australian Open.
With a victory in Sunday's final, the sixth-ranked Federer will also secure his place at the ATP Finals in London in just over a week, closing his most difficult season beset by back injuries and shocking defeats to lower-ranked opponents.
Federer improved his season record to 40-13, his fewest wins since he posted a 49-21 mark in 2001, the year he turned 20.
Pospisil was playing his third career semifinal and could not have asked for a more demanding challenge as Federer is a five-time Swiss Indoors champion. Pospisil has a 17-17 record this season.
Earlier, defending champion Juan Martin del Potro also let the second set slip away against an unseeded opponent before beating Edouard Roger-Vasselin of France 6-4, 4-6, 6-2.
Federer seeks to reclaim the title taken by the fifth-ranked del Potro last year.
"It's always a pleasure for me," del Potro said about the prospect of playing Federer. "I know all the people are waiting for that final and it would be like a rematch for him."
Del Potro has a 4-13 career record against Federer, though he has won their past two meetings, both on indoor hard courts at Basel and London a year ago. He also clinched his only Grand Slam title, the 2009 U.S. Open, against the Swiss star.
Asked about Federer's comments this week that he needed to improve, del Potro suggested: "It doesn't matter what he says — it's Roger Federer and he is playing in his hometown."