For many pension funds, a lump-sum withdrawal is not inconvenient as it means they do not have to bear the longevity risk.
What are the arguments in favour of a lifelong pension and what are the arguments in favour of a lump-sum withdrawal? This question can be considered from various points of view.
- Firstly, there is the tax treatment: a pension is taxed at 100 per cent of income. If, on the other hand, you opt for a lump-sum withdrawal, you pay a one-off tax at a reduced rate on payment and then pay wealth tax on the capital and income tax on the earnings.
- Another aspect is the question of what happens to the capital remaining in the pension fund after death. If the pensioner dies early and leaves no heirs entitled to a pension, the unutilised pension remains in the pension fund. If the lump sum is withdrawn, the pensioner is free to make gifts to their descendants during their lifetime and any assets that are available at the time of death go to their descendants as an inheritance.
- Which solution is more secure? The pension is guaranteed to be paid out for life. However, if you invest the withdrawn capital, you have to reckon with certain risks that cannot be avoided with experience alone, as the financial crisis has shown. There is also a risk that the capital will be used up prematurely.
- If the conversion rate [1] continues to fall, pensions may also fall sharply. In the event of a partial lump-sum payment , it is important whether the pension fund pays out the capital proportionally from the mandatory and extra-mandatory components or first empties the extra-mandatory 'pot'. The latter is advantageous because the conversion rate in the remaining mandatory portion is higher in most cases than in the extra-mandatory portion. This means that the remaining pension is higher.
- The amount of pension assets and the desired level of pension also play a role. As a rule of thumb, CHF 200,000 of pension fund money is needed to generate a monthly pension of CHF 1,000. If you want a pure pension fund pension of CHF 5,000 per month (without AHV), you need pension fund assets of CHF 1,000,000.
What is right in each individual case depends on the individual circumstances. Two examples may illustrate this:
Let's assume that Mr A. and Mr B. will both retire in the next 5 years.
Mr A. is married, his wife is 10 years younger and she is in excellent health. Apart from pension assets of CHF 500,000, he does not have too many assets and no experience of investing. A pension is recommended to him, as his wife will be paid a lifelong widow's pension in the event of his death. Mr B. is a widower, father of two adult children (aged 28 and 30) and in poor health. He has been following the stock market for years and has some savings and a rental property. He would like to withdraw his pension assets of CHF 1,000,000 as he fears that these assets will remain in the pension fund in the event of his early death.
When considering the question of 'pension or lump sum', you should first thoroughly study the pension fund regulations and your personal pension fund statement and answer the following questions:
- By when should the desired withdrawal be registered (often 3 years before retirement)?
- Is a lump-sum withdrawal even possible and if so, in what amount? The BVG [2] states that at least ¼ of the assets in the mandatory part of the BVG may be withdrawn as a lump sum.
- Has a pension fund purchase recently been made that violates the three-year vesting period, so that a withdrawal of capital is not possible?
- How high is the projected pension capital?
- Has the pension fund announced a reduction in the conversion rate?
- Is there confidence in the pension fund?
- What is the family situation?
- Is a lump-sum withdrawal in line with my risk tolerance?
Ultimately, it is important to consider the happy medium: withdraw the minimum required as a secure pension and the surplus as a lump sum.
If you have any questions, please contact:
Invethos AG
Stephanie Cuche,
Lic. rer. pol., financial planner with federal FA
031 311 62 39
[1] The conversion rate is currently 6.8% for the mandatory portion and has been reduced to well below 6.8% for the non-mandatory portion.
[2] Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans: The maximum insured annual salary under the BVG is CHF 86,040.
Image: Unsplash. Photographer: Ravi Patel