Pension or lump sum: An important decision on retirement

Drawing pension fund benefits as a pension or as a lump sum? That is the question.

Pension fund assets are often the most significant assets that Swiss people have. Before retirement, people face the important choice of whether to draw their benefits as a pension or as a lump sum. What are the practical implications of a lump-sum withdrawal from the pension fund, and why is an individual solution always best?

Look into the question of "pension or lump sum?" at an early stage

The pension fund statement is a very important document for most employees in Switzerland. The statement provides a calculation of the expected pension and of the retirement capital on retirement. By law, insured are entitled to request withdrawal of at least one-quarter of their mandatory BVG (Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans) retirement assets as a lump sum instead of a pension, although nowadays most pension funds offer the option to withdraw the entire amount as a lump sum. After the entry into force of the AHV 21 reform on January 1, 2024, it will be possible to withdraw retirement assets in lump-sum form in up to three stages, with each stage comprising all withdrawals within a calendar year regardless of whether they are from the same or different pension funds. Thanks to the reform, it will also be possible to make three partial lump-sum withdrawals in cantons that previously only allowed two. Retirement benefits in pension form can also be drawn in up to three stages, although pension funds have the option of offering more than three.

It is important to note that, when vested benefits are transferred, the pension fund must report compliance with the maximum number of lump-sum withdrawals to the new pension fund.

Depending on the pension fund and the applicable regulations, the insured must already make the decision regarding a lump-sum withdrawal several weeks or even up to three years before retirement. And the decision is irreversible. The short explanatory video and the expert interview with financial planner Massimiliano Tagliabue explain what the insured must take into account for this important decision, and why they should discuss this issue in good time in advance with an advisor.

Drawing pension fund assets as a pension or as a lump sum?

Our video explains in two minutes what you have to consider when making this decision.

Mr. Tagliabue, the future of the AHV (Old Age and Survivors' Insurance) is more uncertain than ten or 20 years ago. The second pillar has become even more important. One-third of retirees choose a lump-sum withdrawal – but is this the right choice?

It depends on each individual situation. Needs vary based on factors like family circumstances or health. Someone with a very high life expectancy would do better with a pension. Additionally, those who tend to be more cautious don't need to worry about whether they will have enough money to live if they opt for a lifelong pension. They don't need to bother about how to manage the assets either. Many people opt for a combination. A pension, together with the AHV, serves as a secure basis; with the lump-sum withdrawal, you also still gain a degree of freedom, and can save on taxes.

In general, a lump-sum withdrawal provides more freedom, and the money can be used freely.

Massimiliano Tagliabue

But ...

...single people, on the other hand, are more interested in a simple lump-sum withdrawal. This gives them the option to bequeath the capital to a third party in the event of death. In general, a lump-sum withdrawal provides more freedom, and the money can be used freely. However, the income is less regular, and there's a risk that the funds may be exhausted at some stage if you end up living a long time. Then all that will remain may be the AHV and any supplementary benefits.

The topic is not as simple as it first seems. 

Most people underestimate the issue. Every case is different. It depends on the family situation and inheritance law aspects, the ages of children and spouse, living situations, health, and tax consequences. Today, there are also more and more people cohabiting. As there is no applicable legislative framework, it always depends on the respective regulations of the pension fund.

pension or lump sum the two options over time

Pension or lump sum: The two options over time

In the case of a pension, the assets are paid out in regular installments, and taxes are due annually. If the assets from the pension fund are withdrawn as a lump sum, only a one-off tax payment is due – albeit for a very high amount. The entire residual capital is then at the free disposal of the insured.

Source: Credit Suisss

What do you advise?

Each situation requires a clear analysis and individualized financial planning. This should ideally be done with an expert who is familiar with the legal provisions and tax laws, and who knows what you need to pay attention to in the pension fund's regulations.

We recommend creating an initial plan at 50 to see where you stand. At this point in time, you can still make decisions.

Massimiliano Tagliabue

Many pension funds require you to declare whether you would like the lump-sum withdrawal up to three years before retirement. When should I start planning?

Unfortunately, most people deal with their retirement plans too late, which causes them to miss opportunities. When someone is close to retirement, it becomes difficult to find an optimal solution. We recommend creating an initial plan at 50 to see where you stand. At this point in time, you can still make decisions.

What types of experiences have you encountered?

In most cases, people have a number of questions – but they are usually not well-prepared. It's surprising how many people never set up a budget during their working life. This makes it all the more difficult for these people to assess what they will need once they reach retirement age. Many are convinced they will need less anyway, because they will be old.

Carefully weighing the choice between "pension and lump sum"

  Drawing a BVG pension Lump-sum withdrawal
Income Regular, guaranteed for life, dependent on the conversion rate Irregular, dependent on the investment return; once the capital is exhausted, only AHV remains (longevity risk)
Investment decisions Made by the pension fund Made individually by the insured; the insured bear the investment risk themselves
Flexibility No flexibility Flexible availability
Capital erosion Systematic As needed
Death (inheritability) The capital remains with the pension fund, at best reduced benefits (surviving spouse's pension), no statutory benefits for unmarried surviving dependants Remaining capital goes to the estate
Taxes Pension is fully subject to tax One-time taxation at pension rate (varies by canton); investment income is subject to tax

And then come the unpleasant surprises.

We point out that you need reserves for medical and dental expenses, or renovations for those who own their own home. Older people often use part of the lump sum to pay off their mortgage but forget that they still need reserves. Some also fail to consider that the issue of mortgage affordability is different than before because of the lower level of income earned in retirement. And the current generation of retirees in particular tends to spend money at the start of their retirement on expensive things like traveling around the world.

How can you calculate your pension?

First, you have to take stock of the current situation. A number of simulations make it possible to see exactly how a solution with a pension, a combination of both, or a pure lump-sum withdrawal would be. Using concrete figures, the person concerned can see how much money they will get, and for how long – and how living conditions might need to be adjusted. This is very helpful for finding a tailor-made solution. Because it's a one-time decision. So, don't just follow your gut feeling; base your decision on facts and figures.