Ready for retirement?

We should be making important decisions on retirement from our mid-50s at the latest.

Retirement is just a few years off for me. What should I be thinking about?
The combined benefits from the state system (AHV/AVS) and the obligatory part of the pension fund usually only come to 60 to 70 percent of your previous salary. If this is not enough, you should start closing the gap, for instance by paying into your pension fund and pillar 3a (maximum 6,739 francs in 2013 for people with a pension fund). These contributions can be deducted from your taxable income. Tax savings can be optimized if you distribute your pension fund contributions over several years. But beware: after you've paid into the fund the money cannot be accessed for three years. When you reach retirement, the state pension does not start automatically. You have to register your claim with the compensation office three to four months beforehand. Depending on the pension fund, accessing pension fund capital may even require up to three years' advance notice. Timing is very important, especially for married couples: make sure you spread the withdrawal of funds from pillar 2 and pillar 3a over several years to reduce progressive taxation.

Should I take a pension or capital from the pension fund?
Weigh the pros and cons of these options carefully. If you opt for the capital, you cannot switch to a pension later, and vice versa. The best option for you depends on your family status and your financial situation. Generally speaking, drawing a pension provides more security since you know exactly how much you'll receive for the rest of your life. While withdrawing the capital gives you more flexibility, and you may be able to earn higher returns than the pension fund, there are corresponding risks. There are also differences between taking a pension and taking capital in terms of survivors' benefits and taxation. Pension benefits are taxable as income. And in the event the pensioner dies, the surviving spouse as a rule receives only 60 percent of the original pension. Ask your pension fund in good time about the options for drawing benefits. By law, you are allowed to withdraw at least a quarter of your BVG (occupational pension plan) as capital. In many cases it is also possible to withdraw a part as pension and the rest as a capital sum.

I would like to take early retirement. Can I afford to do this?
It all depends on your planning. In principle, early retirement reduces benefits from both the first and second pillars. If you start drawing your state retirement pension early, you will always have to deal with lower benefits. At the same time, you must continue to pay state pension contributions until you reach ordinary retirement age. Early retirees have significantly less retirement capital from the second pillar because they pay into their pension fund for a shorter period and earn less from interest and compound interest. With early retirement you have to anticipate an income gap and a reduction amounting to several thousand francs in your pension fund benefits. This gap can be closed wholly or in part by making additional payments into your pension fund and into pillar 3a. It is to be recommended that you make a detailed financial plan to avoid unpleasant surprises.

The pension specialist

Nils Aggett is responsible for Pension Services and the topic of retirement planning at UBS. He provides answers on pension issues in UBS magazine.

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