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Compare the advantages and disadvantages of withdrawing your pension fund assets from pillar 2 as a regular annuity, a one-time lump sum payment or a combination of both.
Pension funds generally pay their benefits in the form of annuities. However, upon retirement, you can choose between receiving your pillar 2 funds as a regular pension (annuity), a one-time lump sum or a combination of both.
If you are looking for a secure income, you should choose a pension, while a lump-sum withdrawal will give you greater financial freedom. Weigh up the pros and cons of each alternative, or a combination of the two, and investigate your options as early as possible.
The payout options offer you various possibilities and differ in terms of taxation, flexibility and in the event of death.
Category | Pension | Lump-sum withdrawal |
|---|---|---|
Income |
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Flexibility | None | Capital can be used as desired |
Financial market knowledge | None necessary | Recommended (possibility to consult an investment advisor) |
Protection for surviving dependents (statutory benefits) |
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Taxes | Taxation of the full amount as income |
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When does a lump sum make sense and when is a pension the better option?
Pros and cons | Lump-sum payment | Pension |
|---|---|---|
Advantages |
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Disadvantages |
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A UBS study shows that when prices are rising sharply, neither of the two withdrawal options for pillar 2 assets clearly outperforms the other. Since pensions are generally not indexed to inflation, their purchasing power is continuously eroded. With a lump-sum withdrawal, on the other hand, your assets lose value if returns do not keep pace with inflation.
There is one difference, however, which is that unlike with a pension, a lump-sum withdrawal allows you to decide for yourself how the money is invested or held. Cash and savings account balances lose purchasing power particularly rapidly during periods of high inflation. Investment portfolios, on the other hand, have historically been better at offsetting the effects of inflation.
You can find the complete analysis and further background information in the study.
All of a pension fund annuity is taxable as income. However, if you take a lump sum, a reduced rate is applied once. This capital payout tax is calculated independently of income and assets and is below the rates for income tax.
Most cantons determine the tax progression level based on the sum of withdrawals from pillar 2 and pillar 3a. For married couples, this calculation is based on the sum of their withdrawals. You can mitigate the effects of this progression by planning the withdrawals from your pension fund and pillar 3 in different years, or by retiring in stages.
The disbursed capital and the income generated from it are subject to annual wealth and income taxes.
Past returns are no guarantee of future performance. Depending on the economic and interest rate environment, a dividend strategy may lag behind at times. Investors who focus too heavily on dividends in their portfolio risk insufficient diversification – and thus higher potential losses if individual sectors or companies come under pressure.
A balanced mix of income- and growth-oriented investments can improve diversification and have a positive impact on net returns, especially if you pay a lot of tax.
You can find the complete analysis and further background information in the study.
From a financial perspective, a combination of annuity and capital withdrawal is worth considering. The split should be according to the following rule: current income should be enough to cover regular expenses. Any additional free capital can be invested and used to increase your budget as needed, for example to finance large projects or to pass on to your descendants.
Let your personal situation determine the optimal payout of pension and capital. Analyze your wishes and goals for retirement as well as your family and financial situation.
With an individual mixed form of pension fund withdrawal, you draw the amount you need to cover your living expenses as a pension. The remainder of the accumulated assets is paid out as flexible capital.
Alternatively, you could also consider a capital withdrawal plan for your financial planning. Controlled asset consumption gives you financial flexibility during your lifetime. Our pension specialists can help you make a decision based on your individual situation.
Whether pillar 3a, retirement or home ownership, we offer personal advice and help you plan and save for your retirement step by step according to your goals.
Pension or lump sum? The ideal combination depends on your personal income and asset situation, for example which other sources of money are at your disposal after retirement. One option would be to use a regular annuity to cover your ongoing needs. You can use what you withdraw as a lump sum to finance the extras in your life after you retire.
Arrange an appointment for a nonbinding consultation, or if you have any questions, just give us a call.
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