Before deciding, you should take a long hard look at yourself, and be confident that you can accurately assess both your own needs and character. The choice to draw a life-long pension from the pension fund or cash out the total saved capital all at once will have a major impact on your life in retirement. For many, the pension fund is the largest pile of assets in their retirement provision.
Because the future and your personal evolution can't always be planned, there is no single, right decision. For some, however, the pension is a reasonably safe, desirable solution. It makes sense if you're approaching retirement, have little set aside for retirement apart from the pension fund, are in good health, have no experience in financial investment, are single and generally have a hard time saving money "for a rainy day."
High degree of planning certainty
In this case, drawing a pension can be attractive as a form of "continuing pay." For one, recipients get a guaranteed monthly pension until death. They also have a high degree of planning certainty and – based on the amount of capital, the conversion- and the tax-rate – can calculate fairly exactly how much money they will have left to live on. And they don't need to do or worry about a thing. The pension fund also bears the risk of a long benefit period. The ability to draw a pension is actually the basic idea behind the AHV and occupational pension, notes Jürg Walter, pension fund expert at Libera. He points to another advantage of a pension: in the event of the beneficiary’s death, the surviving partner would receive a spouse’s pension.
But drawing a pension also comes with disadvantages. The fixed, regular pension hardly allows for flexibility if you're planning major purchases or a trip. In the event of death, the portion of the pension that has not yet been paid out stays with the pension fund - the heirs get nothing. Depending on the fund, there is only a small adjustment for inflation, if at all. To make a judgment about this, you must first find out if the pension is indexed. Otherwise, a sharp increase in prices could become a heavy burden.
For these and other reasons, you may prefer to take management of your assets into your own hands or turn it over to a wealth manager. Someone who believes that by following their own investment strategy, they can achieve higher returns than the returns earned by the pension fund, and who also hopes they can better absorb any potential inflation in this way, should opt for the lump-sum payment.
Who gets to choose?
Before taking on this weighty decision, you should clarify to what extent you even have a choice. The beneficiary must check early on with the pension fund to confirm how much time they have before they must request a cash withdrawal and to what extent this is even possible. As this can be quite a few years, it pays to clear this up before reaching the age of 55. By law, at least one quarter of compulsory retirement savings must be payable in cash. With certain pension funds, you may be able to draw up to 100% of the retirement capital. On a sadder note, one argument for opting for the lump-sum might be that, because of declining health, a recipient expects to die before reaching average life-expectancy. By taking the lump sum, the beneficiary can afford a more luxurious life than on a pension, or bequeath the remaining funds to his or her heirs.
Managing the withdrawn funds is key. Someone parking their money in an account, intending to live solely off the interest, would do better drawing a pension. Broad diversification is also advisable; otherwise, you risk the loss of the vested pension capital and may find yourself having to eke out a living on modest AHV payments. Someone active on the market should carefully consider whether they will still be sleeping soundly if the market suffers a double-digit correction.
“You have to feel it in your gut,” says Jörg Odermatt, CEO of PensExpert. Meanwhile, people with an average income often choose a lump-sum payment of one third of the total capital (two thirds as pension). As a rule of thumb, Odermatt recommends a partial withdrawal if the retiree can obtain an annual pension income of around CHF 70,000 (42,000 from AHV and 30,000 from the pension fund). Jürg Walter from Libera agrees, adding, “If - together with the AHV - not all of the capital in the pension fund is needed for the pension, partial withdrawal can be entirely reasonable.” In the current low-interest environment, however, it's no easy thing to outperform the pension fund's investment success.
Beware of fees
Odermatt recommends investing the lump-sum payment in real assets. He describes the pension as a bond-like investment without correlation to financial markets. “Pensions are fixed, guaranteed and have never yet been reduced for retirees,” he adds. In view of the low returns in the current financial markets, it is worth paying careful attention to fees. A rough calculation reveals that with a 1% reduction in fees, the capital accrued will last for 30, rather than 25 years.
But an investment strategy is not enough: you also need to plan for liquidity. In the first years, pension income alone does not usually cover all household expenses. Gaps (if present) can be covered with a third pillar account or by dipping into your investment capital. With advancing age, you'll need fewer resources and can more easily handle the melting away of investment capital. Odermatt recommends including any mortgage in your planning. According to the PensExpert CEO, you should lower your mortgage to a bearable level, even if the interest rates rise sharply. This could easily amount to more than the amortization of the second mortgage. At the same time, you should not reduce your mortgage too much, since increasing it in retirement age is no longer possible.
The same decision, purchase or not
For early or partial retirement, the questions around choosing “pension or capital” stay the same, though you calculate from a lower base of retirement savings than in the case of regular retirement. Whoever has the opportunity should increase capital and heighten the compound interest effect through purchases – even if early retirement is not planned. A normal purchase will be credited to supplementary retirement assets and in some instances offer lower returns than the compulsory part. But Walter notes that most independent pension funds are designed as so-called “enveloping” pension funds, which do not distinguish between the compulsory and supplementary parts. Interest is accordingly paid at the same rate on the full retirement capital, including purchases.
Finally, you will also want to give some thought to taxes. Pensions are taxed up to 100% as income, capital payments are taxed at their own rate, and investment income and assets are also subject to tax. Alone the complexity of opting for a pension or withdrawing capital shows how much an average citizen stands to benefit when planning for retirement by turning to a professional. A professional helps you avoid the risk of overlooking crucial aspects of retirement planning and makes sure you get them right.
By courtesy of Neue Zürcher Zeitung. Translated by UBS Switzerland Marketing Translation Services.