Pension or lump sum

Pension or Lump Sum?

Most people's pension fund assets amount to several hundred thousand francs, which makes them the largest asset for many Swiss people. One of the most important questions for everyone before retirement is: "Should I have the capital paid out as a lump sum, or draw a secure pension for the rest of my life? Or is a combination a better solution? An individual solution is always the best. 

When completing your tax return, the pension fund statement is at least as important as the tax statement. It displays how much the pension and the retirement assets are expected to be when you retire. By law, every insured person has the right to draw at least a quarter of the mandatory BVG retirement assets in the form of a lump sum. Roughly half of all pension funds even allow you to take everything. Those who choose the lump-sum withdrawal must declare this up to three years in advance, depending on the pension fund. You can only make this choice once in life, and must be absolutely sure of your decision. 

The two options over time

The two options over time 

Pension or lump sum: everything at once, or a secure pension until death?

Important: There is no right or wrong answer for the question of "pension or lump sum." The answer depends on a range of factors, such as your current health situation. If someone chooses the pension guaranteed until death but passes away soon after retirement, the assets could potentially remain with the pension fund. Anyone already facing severe health problems before retirement should factor this into their decision.

Furthermore, the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) is a "minimal" law. It only covers certain minimum requirements, which is referred to as the statutory BVG insurance. This means, for example, that only annual incomes between 21,150 and 84,600 francs must be insured. The legally stipulated conversion rate, currently 6.8%, only applies to this portion. So-called "extra-mandatory retirement assets" can arise when, for example, earners with higher wages are insured. Pension funds are allowed to disburse this type of retirement assets at a lower conversion rate and grant lower interest, among other things. 

Carefully consider the decision 

  BVG Pension
Lump-sum withdrawal 
Income Regular, until death, dependent on conversion rate  Irregular, dependent on investment yield 
Investment decisions Made by the pension institution  Made by the individual 
Flexibility No flexibility  Flexible availability 
Capital erosion Systematic  As required 
Death (inheritability) Reduced benefit (surviving spouse's pension), no benefit for non-spousal surviving dependents  Remaining capital goes to the estate 
Taxes Pension 100% subject to tax  One-time taxation at pension rate (varies by canton), investment yields are taxable 

Advantages and Disadvantages of Lump-Sum Withdrawal

Unique to lump-sum withdrawal: the recipient can freely dispose of all the assets, invest the funds, pay off a mortgage, or finance an expensive hobby. In the event of death, the funds are not lost as they would be with a pension, and can be bequeathed along with the other available assets. However, when lump sum recipients are very old and the capital has been used up, they must be content with the AHV and any applicable supplementary benefits.

For this reason, an increasing number of people are choosing a hybrid form: a pension combined with the AHV, together ensuring a secure foundation and covering fixed costs, plus a partial lump-sum withdrawal to create flexibility for individual needs. In addition to the personal situation, the legal and regulatory framework conditions must be taken into consideration.

Apart from the laws, the primary factor here is the pension fund's individual regulations. These determine how much money is permitted to be drawn and when your intentions must be reported to the pension fund. The tax situation must also be taken into account: A pension is taxed as income; a lump-sum withdrawal is taxed once at a reduced rate, after which the assets and their returns will still be subject to tax.

Advantages and Disadvantages of the BVG Pension

  • Regular
  • Secure
  • No expenses
  • Pension for surviving dependents
  • Inflexible
  • In the event of death, remaining money returned to pension fund

Advantages and Disadvantages of Lump-Sum Withdrawal 

  • Freely disposable
  • Funds can be inherited in the event of death
  • Investment risks / fluctuations in value
  • Longevity risk

Customized Solutions

Whether someone opts for flexibility and tax advantages or security and limited expenses thus depends on family circumstances (single, children), housing situation (mortgages), health, and personal financial situation, among other things. A customized individual solution is only possible with analysis, a budget, and a plan. Ideally, you should seek advice for the first time about ten years before retirement. Because this is a one-time decision, you should primarily base your decision on facts and figures in addition to your intuition.