Pension or lump-sum withdrawal? Ten tips to help you decide
Whether you opt to have your pension fund paid out on retirement or to withdraw your assets as a pension, your decision will have far-reaching consequences. Both the lump-sum withdrawal and the pension have advantages and disadvantages.
Enquire in good time about the registration deadline for a lump-sum withdrawal
You may need to register up to three years in advance, depending on the pension fund. Currently many pension funds are thankful for every insured member who opts for a lump-sum payment of their retirement assets rather than a pension. However, if you miss the registration deadline, you'll no longer be eligible for a lump-sum payment.
Pension analysis at VZ
Expect your pension to be lower than the amount shown in your current pension certificate
A study by VZ shows that occupational pensions are almost 40 percent lower today than 22 years ago.
Although OASI pensions have gained around 19 percent during this period due to inflation adjustments, this rise has not been sufficient to offset the decline in occupational pensions.
And because people are getting older and older, pension funds will be forced to reduce their pension conversion rate even further over the next few years. This means that the gap between people's last salary payment and their pension is widening, especially for middle- and high-income earners.
According to VZ's Retirement Barometer, a man earning CHF 100,000 a year would only receive around 52 percent of his salary as a pension today. If his income is CHF 150,000, the figure would drop to around 43 percent. Plan your budget to check whether your expected pension will be sufficient to maintain your standard of living after retirement.
Draw up a financial plan with different scenarios
In your financial plan, compare how your income and assets will develop over a relatively long period of time, depending on how you withdraw your pension fund assets. It's important that your assumptions are realistic – for example, for your return on investments or for inflation, which will increase your cost of living over the years.
Hardly any pension funds offset inflation. This means that you'll be able to afford less and less as the years go by. The purchasing power of a pension of CHF 5,000 today will fall to around CHF 4,500 in 10 years with annual inflation of 1 percent, to CHF 4,100 with 2 percent inflation and to CHF 3,700 with 3 percent inflation.
Lump-sum withdrawals are subject to less tax than pensions
Occupational pensions must be taxed in full as income every year. By contrast, lump-sum withdrawals are only taxed once as income. Moreover, tax on such withdrawals is calculated separately from other income in the year of the payout and at a lower rate. Hence, you pay less tax on a lump-sum withdrawal than on a pension in the long term.
Under no circumstances should you decide against a pension just for tax reasons
Other factors, such as flexibility, the level and security of income, protection for surviving dependants and life expectancy, are just as important as taxes.
Don't be swayed by the current situation in the financial markets
When stock market prices rise, prospective pensioners tend to have their assets paid out and invest them themselves. By contrast, many people favour a secure pension in a stock market crisis.
Information for new arrivals in Switzerland
Statistically speaking, 65-year-old men still have around 20 years of life ahead of them, while 64-year-old women can expect to live for around 24 years more. Given an investment horizon of 20 years or more, short-term fluctuations on the stock markets have only a minor impact on long-term performance.
Combine a lump-sum withdrawal and a pension
This is the best option for many pensioners, as both pension annuities and lump-sum withdrawals have significant advantages and disadvantages. A pension secures your livelihood into old age. The lump-sum payout allows you to fulfil your wishes at any time. In the case of married couples, one partner often draws the pension and the other the lump sum. The best solution for each partner depends on several factors.
Invest the lump-sum payment in a similar way to a pension fund
If you withdraw your retirement assets as a lump sum, you need to invest them carefully so that they last into your later years. One possibility is to follow the example of institutional investors such as pension funds.
Checklist for planning your retirement
Pension funds need to invest the retirement assets of their insured members in a way that ensures their retirement will be as worry-free as possible. Hence, pension funds consistently focus their investment strategies on long-term capital growth, without experimenting. VZ has launched the OPA-focussed asset management mandate for investors who want to benefit from the experience of these professionals.
Plan your estate
Estate planning is particularly important if you have your pension fund capital paid out as a lump sum. If spouses don't grant each other the maximum benefit, the surviving partner may get into financial difficulties. They may then have to sell their home in order to pay out the share due to any children. In accordance with the law on legal succession, children are entitled to half of their deceased parent's assets.
Cohabiting partners are not considered to be legal heirs. They will be left empty-handed if their partner doesn't take appropriate precautions while still alive.
Obtain advice from an independent specialist
VZ VermögensZentrum's independent retirement experts will help you take the right decision. Every year, they advise several thousand people on retirement planning and pension fund issues. Learn more here.
Checklist for planning your retirement
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