Few decisions in life are irreversible. You must answer one of these before you retire, namely how to withdraw your pension fund assets: pension or lump sum – that is the question. “So many factors go into making the best possible individual decision that, in most cases, it makes sense to get individual advice,” explains Alexandra Zünd. The UBS pension expert believes that your family situation is one such factor. Do you have children? Are you married? And your budget also plays a crucial role: How much will you be paying on fixed expenses such as housing, food, taxes and health insurance when you retire?

For the longest time, all that mattered to the Bauers was the present. The parents to two children, now adult, were devoted to their family and equally successful at running a small consulting agency. The matter of how to arrange their retirement suddenly became a more pressing concern on the occasion of the planned transfer of their company to Rita’s brother, Herbert, three years ago. They also had to answer the question: pension or lump sum?

The right mix makes the difference

The Bauers were starting from a comfortable financial position. They owned a condominium worth 700,000 Swiss francs, which was encumbered with a mortgage of 300,000 francs. Rita and Anton also had 700,000 francs in freely available assets. Anton held 650,000 francs in his pension fund, and Rita held 50,000 in hers. On top of this, the couple had paid 100,000 francs into multiple pillar 3a accounts while running their consulting agency.

“100% of a regular pension is subject to tax as an income every year, whereas a one-time disbursement tax at a reduced tariff is levied on a lump-sum withdrawal, so this option is more attractive from a tax perspective,” explains Zünd. Moreover, pensions are not protected against inflation, which means that the pension fund is not adjusted to price increases, and you may be able to afford less and less from your pension. In fact, withdrawing only part of your capital can make sense if you want to afford a little bit more in the early years of retirement, such as travel or a special hobby. On the other hand, a monthly pension payment is similar to your previous wage, which speaks in favor of a regular pension, as this can be easier to manage. You'll also be receiving this regularly for the rest of your life.

Lump sum or pension: What did the Bauer couple decide? Pension expert Zünd presented them with multiple options. A comparison between the couple's planned budget and their monthly pension without making a lump sum withdrawal showed clear surplus income, which would also result in a higher tax burden. In the end, Rita and Anton decided on the mixed option of "pension and lump sum." They wanted to cover their annual fixed expenses of 60,000 francs with pension payments from their AHV fund and pension funds.

They structured the rest of their capital in the proven asset concept in which their assets were divided into three different asset pools for separate functions (see graphic). The first pool served to cover the couple’s short-term income gaps and as their emergency reserve. In the second pool, the Bauers adopted a balanced investment strategy to cover any extra expenditure over the long-term and to realize their lifelong goals. The last pool was aligned to a long-term investment horizon and focused on asset growth; it included the portion that the Bauers didn’t need for themselves and hoped to pass on to their children.

“Essentially, every client has to feel comfortable with their individual financial planning. This often outweighs mere calculations,” says Zünd. The plan should be checked regularly and adjusted as needed. “In my work financial planning means providing trustworthy support before and after our clients retire,” adds the UBS pension expert.

Don’t forget pension fund regulations

Something that was important over the past three years while helping the Bauers to prepare and implement their asset concept was to keep in mind the specific conditions in their respective pension fund regulations. Zünd points out that many future retirees are unaware of the relevant conditions, such as submission deadlines, payout conditions and legal provisions for a lump-sum withdrawal. Submission deadlines could, under some circumstances, take as long as three years.

However, the Bauers have also mastered this hurdle. These days they manage their retirement assets with entrepreneurial passion. “They’re implementing their plan with great care. This way, they indirectly keep their entrepreneurial spirit alive in their retirement. At the same time, they’re able to enjoy a well-prepared and indeed well-deserved retirement,” says Zünd with satisfaction.

*Client name has been changed

“I’ll have both, please”

If you’re faced with the choice between pension and/or lump-sum withdrawal, you should first answer and consider these initial questions:

  • How high have your expenses and earnings been (current budget)?
  • What will your life after retirement actually look like and will you need more or fewer financial assets (future budget) to finance it?
  • What are the pension fund regulations, for example, death benefits or in other important details (from pension fund regulations)?
  • How secure are you and are you interested in investing (own responsibility)?
  • What are the deadlines for withdrawing lump sums from pension fund capital (pension planning)?

UBS Pension planning

An approaching retirement poses many financial questions. Three elements are essential to planning your retirement:

  1. Create transparency about the financial situation of your pension provision and determine your personal wishes for retirement.
  2. Create a finance plan to optimize pension assets, for instance with pension fund purchases, staggering and the decision whether to draw a pension and/or withdraw a lump sum.
  3. Work out an individual investment concept for paid-out pension assets.

It’s also essential to execute and regularly review your plan consistently. This allows you to adapt to personal life changes in time. UBS pension planning will support you on this path with long-standing experience and competence.

This article was written by NZZ Content Solutions on behalf of UBS.