Pension or Lump Sum? That Is the Question
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Pension or Lump Sum? That Is the Question

Lump sum, pension, or a combination of the two? Financial planner Massimiliano Tagliabue discusses when is the best time to plan your pension, and where practical difficulties may be encountered.

The outlook for AHV is more uncertain than it was 10 or 20 years ago. The 2nd pillar has become even more important. One-third of retirees choose the lump-sum withdrawal – but is this the right choice?

It depends on each individual situation. Needs vary based on factors like family relationships or health. Someone with a very high life expectancy would do better with a pension. Cautious people with a regular pension until death also don't need to worry about whether there will be enough money. They don't need to attend to the management of the assets either. Many people opt for a combination. A pension, together with the AHV, serves as a secure basis; with the addition of the lump-sum withdrawal, you also gain a greater degree of freedom, and can save on taxes.

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.

The topic is not as simple as it seems at first glance.

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 with a partner. Since this is not regulated under the law, it always depends on the relevant regulations of the pension fund.

We recommend creating an initial plan at 50, and seeing where the person stands. At this point in time, you can still make decisions.

Massimiliano Tagliabue

What do you advise?

This 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 knows what you need to pay attention to in the pension fund's regulations.

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 reaches 64, it becomes difficult to find an optimal solution. We recommend creating an initial plan at 50, and seeing where the person stands. 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.

And then come the unpleasant surprises.

We point out that you need reserves for medical and dental expenses, or renovations to residential property. 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 question of the affordability of a mortgage is different than before, at retirement age with a lower income. And the current generation of retirees immediately spends money on expensive desires like world travel right at the beginning.

How can you calculate the 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 combined variant, or a pure lump-sum withdrawal would appear. Using concrete figures, the person concerned can see how much money will be received, and for how long – and how living conditions might need to be adjusted. This is very helpful.