An important decision has to be made before retirement: Pension or lump-sum withdrawal? This article gives you a clear overview of both options and helps you to make the right choice for your situation. Our calculator will help you compare the two options.
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Contents
Pension or lump-sum withdrawal: important differences at a glance
The pension provides a monthly income that replaces your salary. Although it is typically lower than your last earned income, it can be planned for and is guaranteed for life.
When you take a lump-sum withdrawal, you receive all your retirement assets at once. It is your responsibility to manage these funds wisely, whether you choose to invest or keep the money in the account, while also covering your living expenses, including AHV and any other sources of income.
There are also differences regarding benefits in the event of death. For a pension, the assets in the pension fund are not counted as part of the estate. However, this is not true for lump-sum withdrawals. The money withdrawn is included in the estate, which means you can use a will to specify who will receive those funds. You can find out more about pension funds in the event of death in the linked article.
| Pension | Capital withdrawal | |
| Payout | Lifelong income in the form of a pension | One-off payment of the retirement assets |
| Plannability | Good predictability thanks to a guaranteed pension until the end of your life | No reliable planning, as there are many unknown factors (e.g. remaining service life, return on investment) |
| Taxes | 100% taxable as income | Capital withdrawal tax is payable on withdrawal, after which the capital is taxable as assets |
| Protection for the spouse in the event of death | in the mandatory scheme: pension of 60% of the deceased person’s retirement pension1, or lump-sum settlement in the amount of three annual pensions | falls into the estate and is distributed to the heirs in accordance with the will |
| Protection for children in the event of death | in the mandatory scheme: 20% of the retirement pension2 | falls into the estate and is distributed to the heirs in accordance with the will |
| Cover for other persons in the event of death | as a rule, the pension expires | falls into the estate and is distributed to the heirs in accordance with the will |
2An orphan’s pension is paid until the age of majority or until the completion of education (maximum until the age of 25).
How to decide between pension and capital?
What makes the most sense: a pension, a lump-sum withdrawal, or a combination of both? There is no one-size-fits-all answer. By asking yourself the right questions, you can make an informed decision.
- What is my life expectancy?
- What is my pension conversion rate?
- Do I have experience with financial investments?
- How much security do I need?
- What are my basic financial needs?
- How important is tax optimisation to me?
| An annuity makes sense if… | A lump-sum withdrawal makes sense if… | |
| Life expectancy | You expect to reach an advanced age | You anticipate a shorter life expectancy |
| Pension conversion rate | Your conversion rate is high | Your pension conversion rate is low |
| Knowledge and experience with financial investments | You have little experience with financial investments | You are familiar with financial investments |
| Basic financial needs | You are dependent on a secure, regular income | You can cover your basic financial needs without the PF pension |
| Need for security | You need stability and predictability | You can deal with fluctuations |
| Tax optimisation | Your taxable income and marginal tax rate are low | Your taxable income and marginal tax rate are high and you want to optimise taxes |
Let’s look at how you can clarify these questions for yourself in detail.
Life expectancy
Swiss people are living longer and longer. On average, men live to 82 and women to 86. For 65-year-olds, this means an average remaining lifespan of 20 and 23 years.
You may be familiar with the term “longevity risk.” This refers to the possibility of living longer than anticipated and finding yourself with insufficient funds to support your lifestyle. To be cautious, it’s advisable to plan as if you will live longer rather than shorter.
Pension conversion rate
Determine the applicable conversion rate for your pension fund. If you have accumulated retirement assets in the non-compulsory portion, the conversion rate may vary based on the pension fund.
Knowledge and experience with financial investments
Consider the following questions: Have I already invested my assets, and do I feel secure in those investments? Alternatively, might a solution with an asset manager be suitable for me?
It’s also crucial to assess whether you are ready to handle investment matters as you age. If you’re unwilling or unable to take risks, a pension might be a better option for you. However, if you’re prepared to accept fluctuations and take on responsibility, you may want to think about a lump-sum withdrawal.
How much security do I need?
How important is a steady monthly income to you? If the idea of receiving a guaranteed pension for life—without the stress of managing financial investments—brings you peace of mind, there are many reasons to consider a pension.
What are my basic financial needs?
Before deciding, realistically assess your basic needs. Even if you live significantly longer than expected, your expenses must be covered, especially when considering a lump-sum withdrawal.
Determine your monthly fixed costs after retirement, including all regular expenses such as housing, food, transportation, and health insurance premiums. Additionally, consider the taxes on your pension. You can utilize the Federal Tax Administration’s tax calculator for this purpose. The total of these monthly fixed expenses represents your personal basic financial requirement.
To create a budget, start by using our budget planning template as a guide. Ensure that your essential financial needs are met every month. If your AHV and other fixed income sources are insufficient, you may need to supplement them with funds from your pension plan or your pillar 3a account.
It is important to establish a financial cushion to handle unforeseen expenses.
Comparison of taxes on pension and lump-sum withdrawals
Pensions are considered taxable income and must be reported on tax returns. A one-time reduced tax applies to lump-sum withdrawals, known as the lump-sum withdrawal tax.
The longer a pension is received, the more advantageous a lump-sum withdrawal can be from a tax perspective. In many cases, a lump-sum withdrawal may be more appealing than receiving a pension. If you’d like to learn more about this topic, please refer to our article on taxes on lump-sum withdrawals and pensions.
Many people choose to withdraw their funds as a lump sum due to potential tax savings. While this can be a valid reason, it’s important not to base your decision solely on tax considerations.
Pension fund pension or lump sum in the event of early retirement
Retirement can begin at the age of 63, although some pension funds allow for early retirement before this age. Additionally, partial retirement is available starting at age 58. If you are considering a lump-sum withdrawal, you can optimize your tax situation by opting for partial retirement and making several withdrawals, which can help mitigate tax progression.
Early retirement results in significantly lower pensions due to missing contribution years and an extended payment period. It can also affect survivors’ and disability benefits.
Whether early retirement is worthwhile largely depends on your financial situation. The key factor is whether you can meet your basic needs after retiring early. If you choose to gradually reduce your workload, some pension funds allow you to continue contributing based on your previous salary. This means that your retirement pension will remain the same as if you had retired at the standard retirement age.
What people with residential property need to consider
For homeowners, choosing between a pension, capital withdrawal, or both is crucial. After all, they need to ensure that their home remains affordable over the long term, even with a decreased income during retirement.
When you retire, the rules regarding mortgage affordability and amortization change.
- Mortgage Affordability: Some banks perform a new affordability assessment when you reach retirement. The way they consider the assets from capital withdrawals and any pensions varies by provider. It’s important to clarify early on whether your mortgage will still be affordable under these new conditions.
- Mortgage amortisation: From retirement age, banks typically finance a maximum of 65 percent of the property’s value. Additional amortization may therefore be necessary.
Do not use all of your pension fund to repay the mortgage. At retirement age, it becomes much more difficult to increase an existing mortgage if you later need money for renovations or other expenses.
Note: The rules for WEF advance withdrawals change from your 50th birthday.
Clarify the general conditions for capital withdrawal
The rules for lump-sum withdrawals differ by pension fund, so it’s important to clarify two key points early on:
- How much of my retirement assets can I withdraw as a lump sum?
- By when do I have to decide?
If you are married, you always need your spouse’s written consent for a lump-sum withdrawal.
How much capital can I withdraw?
The law allows for at least 25% of your mandatory retirement assets to be paid out as a lump sum. However, pension funds may permit a lump-sum withdrawal of up to 100%.
A full lump-sum withdrawal is therefore possible, but not mandatory. It is also permitted to withdraw only a portion as a lump sum and draw the rest as a pension. In this case, the pension is calculated on the basis of the remaining retirement assets.
Please note: The statutory entitlement only applies to the mandatory retirement assets. The rules of the respective pension fund apply to the non-mandatory portion.
By when do I have to decide?
Each pension fund establishes its own registration deadlines for lump-sum withdrawals. Once a decision to make a lump-sum withdrawal is made, it is binding upon registration. Changing this decision later may not be possible and could incur a penalty.
Many pension funds now offer relatively short registration periods, including large ones:
- Swiss Life: You must register the lump-sum withdrawal at least one month before retirement.
- Axa: You must register the lump-sum withdrawal before the first pension payment.
- Vita: If you take regular retirement, you do not need to actively register with Vita. Vita will contact you two months before you reach the reference age.
- BVK: With BVK, notification of a lump-sum withdrawal is possible at the earliest six months and at the latest one month before retirement.
Pension fund payout: How you can manage your assets
After the lump-sum withdrawal, you decide for yourself what to do with the assets. There are basically two options:
- You deposit the money at a bank, for example in a savings account.
- You invest the money in ETFs, shares, bonds or property, for example.
A savings account provides security and easy access to funds. However, the interest rates on savings accounts are typically low, often falling below the inflation rate. As a result, individuals who choose this option should be prepared for the possibility that their capital may lose value over time. Nevertheless, a savings account can still be a suitable choice for those with a strong need for security.
Another option is to invest the money. A well-diversified portfolio that includes various asset classes and maturities can help spread risks and mitigate market fluctuations. This approach requires knowledge or collaboration with a professional asset manager.
Some providers now offer what are known as withdrawal plans. These plans allow individuals to receive regular payments from their invested capital, similar to a pension. However, unlike a pension from AHV or a pension fund, these payments will cease as soon as the capital is depleted.
finpension also provides a withdrawal plan as part of its asset management, featuring transparent and low costs.
When does counselling make sense?
This article offers guidance on choosing between a pension and a lump-sum withdrawal. For additional information, consider the digital tools and resources provided by your pension fund.
If you are still uncertain or if your situation is complicated, it may be beneficial to seek personalized advice. It’s crucial to ensure that the advice you receive is as independent as possible to prioritize your interests, rather than those of the advisor.
Pension vs. lump-sum withdrawal: calculator from finpension
Use our lump-sum withdrawal calculator to determine if a lump-sum withdrawal is beneficial for you, and up to what age it remains worthwhile. Simply enter your details below. You’ll receive an overview as soon as all the information is complete, and it will adjust automatically if any changes are made.