Pension payout: tips
There are different ways to withdraw your pension savings. Here are the pros and cons of withdrawing the assets as a lump sum or pension.
23.10.2024
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1. Lump-sum payout or pension? Pros and cons
Withdrawing pension benefits from the second pillar has lifelong consequences: once you have made your decision for a pension or lump-sum payout, it is irreversible. Before you retire, think carefully about whether a regular pension or a lump-sum payout is better for you.
Lump-sum payout: more attractive from a tax perspective in the medium term
A lump-sum payment offers you maximum freedom: you’ll receive your retirement savings as a one-time payment. While the pension is taxed as income, you pay a reduced tax for withdrawing a lump sum. Another advantage is that the capital is inherited in the event of death.
But with freedom comes responsibility: you are responsible for the capital from the pension fund. You carry the risk of spending the money too quickly or investing it incorrectly. In addition, you don’t have the security of a lifelong pension.
Pension: lifetime security
The biggest advantage of a pension is financial security: no matter what age you reach, you’ll get a regular, guaranteed payment for life. This stability makes it easier to plan your lifestyle in retirement.
A disadvantage of a pension is the limited flexibility: you can’t dispose of all the capital you have accumulated. For tax purposes, the pension is generally more expensive than the lump-sum payout, since it is taxed as income. In addition, in the event of death, no payment is generally made to the heirs. The pension fund retains the remaining capital.
Mixed form: flexible security
For many retirees, the combination of a lump-sum payout and a pension is a good solution. A monthly pension will cover the basic cost of living until well into old age. The lump-sum payout is subject to a lower tax rate. In the case of married couples, one partner often receives the pension and the other the lump sum.
2. Pension payout: be aware of the registration deadline
Check the registration deadline for your pension fund in good time. This gives you enough time to decide between a lump-sum payout and a pension or, if necessary, a mixture of the two.
If you choose a lump-sum payout, you will usually not be able to revoke this decision after the registration period has expired.
How long does a pension payout take?
As a rule, the payout is made within a few weeks of the official retirement date. However, the exact time depends on the pension fund.
3. Financial planning: pension payout
Good planning pays off after retirement. Our tips:
Create a financial plan with different inflation scenarios
Compare the development of income and assets over a longer period of time depending on how you withdraw your pension assets. Assume realistic investment returns. Think about rising costs of living and health insurance contributions.
Expect a lower pension than stated in your current pension fund statement
Many pension funds will continue to reduce their conversion rates due to low interest rates and higher life expectancies. Draw up a budget and use it to check whether the expected conversion rate at the time of your retirement will allow you to maintain your standard of living.
Also check whether there are any contribution gaps in your professional career that result in pension gaps. These can be offset by voluntary contributions to the pension fund or pillar 3a.
Don’t be guided by short-term market trends
When stock market prices are rising, people approaching retirement tend to opt for a payout of their pension assets. When the stock market is weak, many find a monthly pension the safer choice.
Think long-term: the investment horizon immediately after retirement is around 20 years. The aim of your investment is to achieve long-term growth. A balanced diversification of investments is important.
4. Pension payout: taxes
A pension fund payout will affect the taxes you owe. A lump-sum payout is taxed once at a reduced tax rate. This can lead to a high tax burden depending on the amount of capital. If you receive your retirement savings as a pension, this leads to an even tax burden spread over every year. Early tax planning and expert advice can help you minimize unexpected tax burdens.
5. Pension payout: inheritance considerations
Provide for your partner as far as possible in your will or by means of an inheritance contract. Consider your spouse’s housing situation after your death. In the case of inheritance, your children are entitled to a quarter of the assets. In the worst-case scenario, the surviving spouse may have to sell their home to pay off the children. If you are a cohabiting couple and have children, the children are entitled to three quarters of the inheritance.
6. Withdrawing your pension assets early: how it works
There are a few clearly limited cases in which you can have your retirement savings paid out early from your pension fund in Switzerland:
You can use part of your pension fund for the construction or purchase of residential property that you occupy yourself. The same applies to major renovations or acquiring a share in a housing cooperative.
If you take the step into self-employment, you can withdraw all your retirement savings from your pension fund. You must submit your application no later than one year after you have started working as a self-employed person. This only applies if you don’t found a limited liability or joint stock company.
If you emigrate to another country, you can have all or part of your retirement savings paid out, depending on the country. The following rules apply:
If you emigrate to a EU or EFTA country, you can only withdraw the non-compulsory part of your pension fund.
If you emigrate to a country outside the EU or EFTA, you can withdraw all your retirement savings.
If you retire early at the age of 58 or over, you can withdraw money from your pension fund. To do this, observe the deadlines set by your pension fund. You must also continue to pay OASI and invalidity insurance contributions until you reach the statutory retirement age.
7. Discuss your personal situation with an independent professional
An independent specialist can help you better assess the situation, as they may see your options more clearly than you do.
This article was first published on 24.07.2019
