When you retire, you have the option of either withdrawing your pension fund benefits as a lump sum or receiving a lifelong pension based on your pension savings. Depending on the pension fund you are subscribed to, you may only be able to withdraw part of your benefits as a lump sum.
The larger a portion of your pension savings you withdraw as a lump sum, the lower your lifelong pension will be. Whether you should withdraw your pension savings as a lump-sum and if so, how much you should withdraw, depends on a number of factors. Here, moneyland.ch lists the 11 most important factors to consider.
Many of these factors can be accounted for when you use the pension fund lump sum vs. pension calculator on moneyland.ch. The calculator is the most comprehensive of its kind, and lets you simulate the effects of lump-sum withdrawals.
1. Life expectancy
The longer you live, the more likely you are to receive more money from a lifelong pension than a lump-sum withdrawal. The reason for this is simple: The more of your pension savings you withdraw, the lower the pension you receive from your pension fund will be. Pension funds are required to pay out your pension at a predetermined rate from the time you retire until you die.
Benefits which you withdraw as a lump sum, on the other hand, are limited and are usually depleted as the years pass. The so-called “break-even age” denotes the age at which receiving a pension becomes more profitable than withdrawing your pension savings as a lump sum. You can calculate your break-even age using the pension fund calculator.
2. Conversion rates
The applicable conversion rate determines how high your annual pension will be in relation to your pension fund savings. By law, pension funds are obligated to pay out an annual pension equal to a minimum of 6.8 percent of your compulsory pension fund savings. There is no legal minimum conversion rate for voluntary pension fund savings, and pension fund typically apply a lower conversion rate to these than the minimum legal rate for compulsory benefits.
Early or late retirement also affects conversion rates. When you retire early, a lower conversion rate is used to determine your pension. When you retire late, pension funds may pay out your pension at a higher conversion rate.
Example: If you had pension fund savings of 500,000 Swiss francs and received a pension based on an average conversion rate of 5 percent, you would receive 25,000 francs per year until the end of your life.
3. Living expenses
Before you decide whether or not to withdraw any portion of your pension fund savings, take time to carefully consider your living expenses. Estimate what your monthly or annual expenses are likely to be after you retire. The estimated costs should be covered by the regular income you expect to receive after retirement. Your retirement income will include the pension you receive from your pension fund, your social security pension and possible annuities, returns on investments and income from part-time employment.
4. Flexibility and Security
When you make a lump-sum withdrawal, you have full access to your pension savings. You can decide how to invest them or spend them. That is not the case when you receive a pension because the pension fund continues to manage your savings and you simply receive a predefined annual pension.
Disadvantage of receiving a pension: Many pension funds do not adjust pensions to match inflation and you do not benefit from flexibility in accessing your pension savings.
The advantage of receiving a pension: In the best case, you have the security of knowing that you will receive a fixed pension for the rest of your life. You also do not need to manage your savings yourself.
5. Spending capital
Withdrawing your pension savings to pay for the construction of a home or the amortization of a mortgage may seem to be a logical move. However, you should only withdraw and spend your pension fund savings in full if you have enough income to live on without those assets.
Note that you have the option of withdrawing just part of your pension fund savings. Doing this lets you benefit from a regular pension while still accessing part of your pension benefits when you retire. The moneyland.ch lump sum vs. pension calculator lets you calculate the effects of full and partial lump-sum withdrawals.
If you choose to withdraw your benefits as a lump sum, your heirs or beneficiaries will inherit any pension savings which were not spend before your death. This is not the case when you opt for a full pension. Depending on the pension fund you use, your savings may simply be absorbed into the pension fund. Aside from possibly receiving an orphan, widow or widower pension, your heirs may not inherit any of your pension savings. Survivors pensions are dependent on various terms and conditions and the size of pensions can vary depending on the situation.
7. Returns on investments
The return or interest you could earn by withdrawing and investing your pension fund savings is a key factor in determining whether or not to withdraw your benefits. Withdrawing your pension savings can make sense if you are absolutely sure that you can achieve high returns on investments. When you receive a pension based on your benefit, you have no way of influencing the size of your fixed pension. However, you should understand that investments – and lucrative investments in particular – generally come with some amount of risk. The pension vs. lump sum calculator accounts for your projected returns on investments.
8. The financial health of your pension fund
There are numerous pension funds in Switzerland, and there are many notable differences between these pension funds. Differences include coverage ratios, which vary between pension funds. While your benefits are guaranteed in part against pension fund bankruptcy by a guarantee fund, the coverage provided by this guarantee is limited. If you have doubts as to the financial liquidity of your pension fund, then withdrawing your capital as a lump-sum may give you more peace of mind.
9. Capital withdrawal tax
In Switzerland, a special tax applies to withdrawals of retirement savings from 3a, vested benefits and pension fund solutions. This tax is levied on federal, cantonal and municipal levels on a one-time basis when you withdraw your assets. This “retirement tax” is lower than income tax, but it also follows a progressive tax schedule.
Because of this, staggering withdrawals of possible 3a retirement assets over several years rather than in a single year – as is the case when you withdraw a lump sum from your pension fund. The way in which the capital withdrawal tax is calculated varies based on your place of residence. The lower the taxes on capital benefits in your municipality, the less you will pay in taxes when you withdraw your retirement savings. Additionally, the less money you withdraw from your pension fund savings as a lump sum, the lower your capital withdrawal taxes will be.
10. Income taxes
You are still required to pay income tax after retirement. The pensions you receive from the social security office and your pension funds are counted as taxable income. The higher your pension is, the more income tax your will pay. You pay one-time capital withdrawal taxes when you withdraw your pension fund savings, but because withdrawing a lump sum results in your receiving a lower pension – or none at all – your annual income taxes will be lower. The moneyland.ch lump sum vs. pension calculator lets you simulate various tax scenarios.
11. Wealth taxes
Money which you withdraw from your pension fund is subject to annual wealth taxes. Benefits which remain in your pension fund are not taxable. However, when compared to the income taxes levied on pensions and capital withdrawal taxes levied on retirement saving withdrawals, the wealth taxes levied on withdrawn pension fund savings are relatively insignificant – except in the case of very large amounts of wealth.
Pension fund lump sum vs. pension calculator