�۶��Ƶ

Pension fund

Pension or lump sum from pillar 2: which is better?

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.

by �۶��Ƶ Insights 23 Aug 2024 15 min read

Content:

There are various options for withdrawing your pension.
Which form of withdrawal is best depends on your personal situation.
There are differences regarding taxation.
To the conclusion.

Decide how you wish to receive your pension benefits.

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.

Pension fund annuity

Under normal circumstances your pension fund will pay you an annuity when you reach retirement age. Your entitlement is lifelong and guaranteed by law. The pension fund is allowed only to reduce supplements for inflation that it has granted voluntarily. In the case of pension funds that pay extra-mandatory (supplementary) benefits, it is possible that some of the assets can only be paid out as capital.

Once you have chosen one withdrawal option, it cannot be changed later. When calculating your pension, pension funds distinguish between mandatory and supplementary pension assets. The latter arise when the pension fund pays more than the mandatory benefits, for example because it insures higher salaries or allows increased savings contributions. The statutory minimum conversion rate applies for mandatory benefits (2024: 6.8 percent); a lower rate generally applies for supplementary benefits. Many pension funds with extra-mandatory benefits apply a combined conversion rate to the entire balance.

Lump-sum withdrawal

If you wish to withdraw your balance in full upon retirement, you should notify your pension fund in good time. With most funds, you must give advance notice that you wish to withdraw the capital. Since these notice periods vary from one pension fund to another, it is advisable to inquire about the different options at an early stage. You must withdraw the capital as a lump sum when you retire. Partial withdrawal in up to three stages is only possible if you retire gradually.

Combination of pension and capital withdrawal

A combination of both withdrawal types is also possible. In addition to your annuity, you can withdraw at least 25 percent of your mandatory retirement savings as capital. This percentage is a legal requirement. Pension funds are also permitted to make higher payouts, and most pension funds nowadays allow a full lump-sum withdrawal.

Couples who live together have another option to combine a lump-sum withdrawal with annuities. Working couples save assets in two pension funds. Look into the possibility of drawing a pension from one fund and a lump sum from the other. Many couples make use of this option. Since women generally live longer than men, they often choose an annuity. Other couples base their decision on which of the two pension funds has the higher conversion rate.

Pension or lump sum – or 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.

A comparison between a pension and a lump-sum withdrawal

Category	Category	Pension	Pension	Lump-sum withdrawal	Lump-sum withdrawal
Category	Income	Pension	Until you die Regular, guaranteed and secure	Lump-sum withdrawal	Variable Dependent on investment performance Regularity not guaranteed
Category	Flexibility	Pension	None	Lump-sum withdrawal	Capital can be used as desired
Category	Financial market knowledge	Pension	None necessary	Lump-sum withdrawal	Recommended (possibility to consult an investment advisor)
Category	Protection for surviving dependents (statutory benefits)	Pension	60 percent widow/widower’s pension 20 percent orphan’s pension No mandatory benefits for cohabiting partners Unused capital reverts to the pension fund	Lump-sum withdrawal	Unused capital goes to the heirs Beneficiaries can be named in a will
Category	Taxes	Pension	Taxation of the full amount as income	Lump-sum withdrawal	Taxation at a reduced rate if received separately from other income Subsequently subject to income and wealth tax

What are the arguments in favor of an annuity?

The major advantage of an annuity over a lump-sum payment is a secure and guaranteed income for the rest of your life with no investment risks. However, an annuity is not protected against inflation and there is no statutory adjustment for inflation.

When you die, your surviving spouse will receive a survivor’s pension. However, this is usually only 60 percent of the original amount. If both spouses have passed away and there are no eligible offspring, the unused retirement capital reverts to the pension fund. Only a few pension funds provide a refund for survivors, which is paid with reduced retirement benefits.

An annuity is more suitable for individuals for whom the following applies: I …

am married
have a significantly younger spouse
require a constant amount for living expenses
have limited experience with securities and view market trends with some skepticism
have limited financial means
value security and predictability

What are the arguments in favor of a lump-sum withdrawal?

A lump-sum withdrawal has the advantage of allowing you to plan liquidity individually and invest your capital according to your personal investor profile. However, you also bear the investment risk and must expect the value of your assets and returns to fluctuate.

Nevertheless, compared to an annuity, there are advantages both regarding taxation and in the event of death. When you plan your estate, you can decide in your will who should benefit from the remaining assets. One disadvantage compared to an annuity is due to uncertainty about how long you might live and the fact that your capital is finite. You cannot determine in advance how much money you might need in old age.

A capital withdrawal may be the more suitable option for individuals for whom the following applies: I …

am single or cohabiting with someone
have heirs for the unused retirement assets
do not expect to live to a very advanced age due to poor health|
want to access my pension capital flexibly
plan to make large investments

When does a lump sum make sense and when is a pension the better option?

Pros and cons	Pros and cons	Lump-sum payment You withdraw all your savings when you retire.	Lump-sum payment You withdraw all your savings when you retire.	Pension You receive a monthly pension until the end of your life.	Pension You receive a monthly pension until the end of your life.
Pros and cons	Advantages	Lump-sum payment You withdraw all your savings when you retire.	More flexible financial planning because you can invest the capital as you wish. If you die, all of the remaining capital will pass to your heirs. Capital withdrawals are taxed at a reduced rate.	Pension You receive a monthly pension until the end of your life.	A secure, monthly income for the rest of your life. If you die, your spouse will receive a survivor’s pension, which is generally 60% of the original pension. You are secure thanks to independence from fluctuations on the financial markets.
Pros and cons	Disadvantages	Lump-sum payment You withdraw all your savings when you retire.	The amount is fixed and so you will not receive any further payment, however long you live. Invested capital is subject to investment risk and returns can fluctuate over time.	Pension You receive a monthly pension until the end of your life.	Not adjusted for inflation, so your pension may lose value over time. Your pension must be taxed as income.

What role does inflation play?

You can receive benefits from pillar 2 as a pension or a lump sum. Does the prospect of higher inflation favor the former or the latter? Our study provides insights.

Download now

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.

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.

Review your personal situation

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.

How is your retirement provision?

The free �۶��Ƶ Pension Check gives you a reliable overview of your current financial situation. Based on the results, you can optimize or increase your private retirement savings.

Book a pension check

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.

Would you like to plan your retirement?

Arrange consultation now

Questions about retirement planning ?

Give us a call at 0800 002 983, Mon-Fri, 9 a.m. to 5 p.m.

Help section

Answers to frequently asked questions

Forms and applications

Disclaimer

This publication is for personal information purposes only within Switzerland and is not to be understood as a recommendation, offer or solicitation of an offer for investment or other specific products and services. It is not intended to form investment, legal or tax advice and should not be used as the basis for financial decisions. Before making a decision, you should obtain professional advice.
All the information and opinions contained in this publication come from reliable and trustworthy sources. Nonetheless, �۶��Ƶ does not accept any contractual or implied liability for any incorrect or incomplete information. The views of non-�۶��Ƶ authors are their own opinions and do not necessarily reflect the views of �۶��Ƶ AG and its affiliates. Complete or partial reproduction without the express consent of �۶��Ƶ is not permitted.

Save today, benefit tomorrow