Retirement planning
Pension or lump-sum payment?
Deciding whether to draw a pension or lump-sum payment from your pension fund – valuable tips on when which option pays off.
Content:
Content:
- Pension funds pay out pillar 2 retirement assets as a pension by default.
- If you want a lump-sum withdrawal, you must request it in advance. This process can take anything from a few months to several years, depending on the pension fund.
- A third option is the combination of a pension and a lump-sum withdrawal.
- The type of withdrawal that suits you best depends on your personal situation.
- To the conclusion
Pension funds generally pay out their benefits in the form of pensions by default. When you retire, however, you have the choice of whether to withdraw the assets from pillar 2 as a regular pension, a one-off lump sum or a combination of the two.
Pension fund pension
As a rule, your pension fund will pay you a pension when you reach retirement age. The entitlement lasts for life and is guaranteed by law. The only reductions that can be applied by the pension fund are cost-of-living increases that it has granted voluntarily. Pension funds that offer extra-mandatory benefits may stipulate that only a proportion of the assets can be paid out as a lump sum.
Once you have decided on the type of withdrawal you prefer, you can’t change your mind later on. When calculating pensions, pension funds distinguish between mandatory and extra-mandatory retirement assets. Extra-mandatory retirement assets are when the pension fund grants more than the mandatory benefits. Examples include insuring a higher salary or higher savings contributions. The statutory minimum conversion rate applies to mandatory benefits (2024: 6.8 percent). The rate for extra-mandatory benefits is generally lower. Many pension funds that offer extra-mandatory benefits apply a combined conversion rate to all retirement assets.
Lump-sum withdrawal
You should notify your pension fund in good time if you wish to have your assets paid out in full when you retire. With most pension funds, you must request the lump-sum withdrawal in advance. As the applicable deadlines vary from one pension fund to another, it’s worth finding out as soon as possible about the applicable conditions. You must withdraw the capital in full when you retire. Partial withdrawal in up to three stages is only possible if you take gradual retirement.
Combination of a pension and a lump-sum withdrawal
It is also possible to combine the two options. As well as drawing a pension, you can withdraw at least 25 percent of your mandatory retirement assets as a lump sum. This is specified by law. Pension funds are also permitted to pay out higher amounts, and most pension funds now allow a full lump-sum withdrawal.
Another combination is available to couples. Working couples contribute to two separate pension funds. It’s worth finding out whether one person can receive a pension while the other withdraws a lump sum. Many couples choose this solution. As women tend to live longer on average, they often opt for the pension. Other couples base their decision on which of the two pension funds has the highest conversion rate.
Pension or lump sum – or both?
If you are looking for a secure income, you should choose a pension, while a lump-sum withdrawal will give you greater financial freedom. Weigh up the pros and cons of each alternative, or a combination of the two, and investigate your options as early as possible.
The two options offer you various possibilities and differ in terms of tax, flexibility and benefits payable in the event of death.
A comparison between a pension and a lump-sum withdrawal
Category | Category | Pension | Pension | Lump-sum withdrawal | Lump-sum withdrawal |
|---|---|---|---|---|---|
Category | Income | Pension |
| Lump-sum withdrawal |
|
Category | Flexibility | Pension | None | Lump-sum withdrawal | Capital can be used as desired |
Category | Financial market knowledge | Pension | None necessary | Lump-sum withdrawal | Recommended (possibility to consult an investment advisor) |
Category | Protection for surviving dependents (statutory benefits) | Pension |
| Lump-sum withdrawal |
|
Category | Taxes | Pension | Taxation of the full amount as income | Lump-sum withdrawal |
|
What are the benefits of choosing a pension?
The major advantage of opting for a pension rather than a lump-sum withdrawal is that you will receive a secure, guaranteed income for the rest of your life. There are no investment risks. However, pensions are not protected against inflation; there is no statutory adjustment to take into account the cost of living.
In the event of death, your surviving spouse will receive a survivor’s pension. However, this usually only amounts to 60 percent of the original pension. If both spouses die without leaving any children, the unused retirement capital will be transferred to the pension fund. Only a few pension funds guarantee any restitution to surviving dependents, with lower old-age benefits.
A pension is more suitable for people who correspond to this profile.
I ...
- am married
- have a much younger spouse
- need a constant amount to cover my living expenses
- don’t have much experience with securities and am rather skeptical about market developments
- have limited financial resources
- appreciate security and predictability
What are the advantages of a lump-sum withdrawal?
The advantage of a lump-sum withdrawal is that you can plan your liquidity individually and invest the capital according to your personal investor profile. However, you also bear the investment risk and must be willing to accept fluctuations in assets and income.
Compared to drawing a pension, there are advantages in terms of taxes and benefits in the event of death. As part of your succession planning, you can specify in your will who should benefit from the unused capital, for instance. One disadvantage compared to receiving a pension is that the capital is finite, and your life expectancy uncertain. It’s impossible to know in advance how much money you will need in old age.
A lump-sum withdrawal may be more suitable for people who make the following statements about themselves.
I ...
- am single or cohabiting with my partner
- have heirs who can inherit the unused retirement capital
- don’t expect to reach a very old age due to poor health
- would like to have flexible access to my retirement capital
- am planning major investments
Pension fund pensions are taxed at 100 percent as income. However, a reduced rate is applied once when a lump sum is paid out. This capital withdrawal tax is calculated independently of income and assets. The tax rate is lower than for income tax.
Most cantons determine the tax progression level based on the sum of pillar 2 and pillar 3a withdrawals. For married couples, their combined withdrawals are taken into account. You can reduce the effects of progression by planning withdrawals from the pension fund and pillar 3 in different years or by retiring in stages, for example.
The capital paid out and the income generated from it are then subject to annual wealth and income tax.
From a financial point of view, a combination of a pension and a lump-sum withdrawal is worth considering. You should follow this rule when deciding how to divide up the payment: current expenses should be covered by current income. Any capital available in addition to this can be invested and, if necessary, be used to supplement your budget, for example to finance major projects or to pass on to your descendants.
Review your personal situation
Work out the best way to combine a pension with a lump-sum withdrawal according to your personal situation. Analyze your wishes and goals for retirement on the one hand, and your family and asset situation on the other.
By defining your own individual combination, you can set a pension amount that is high enough to cover your living expenses. The rest of the assets you had saved up will be available as a lump sum for you to use however you like.
Alternatively, you could consider a capital withdrawal plan for your financial planning. Controlled asset consumption will give you financial freedom throughout your lifetime. Our pension specialists can help you to make a decision based on your individual situation.
How is your retirement provision?
The free UBS Pension Check gives you a reliable overview of your current financial situation. Based on the results, you can optimize or increase your private retirement savings.
Should you opt for a pension or a lump sum? The ideal combination depends on your personal income and asset situation, for instance if you will have other sources of money available after retirement. One option would be to cover your current needs with a regular pension. Anything in addition to this could be withdrawn as a lump sum and used to finance the extras in your life as a pensioner.
Disclaimer
Disclaimer
