Swiss Withdrawal Plans and Private Pensions Explained

Withdrawal plans and life annuities can be used to convert savings into a steady cash flow. This guide answers the most important questions about using withdrawal plans and private pensions.

What is a withdrawal plan?

A withdrawal plan is, quite simply, a setup in which you withdraw a fixed amount of money from your savings at regular intervals. There are a number of situations in which it can be beneficial to use a withdrawal plan. Examples include:

• You want to retire early, but prefer to fund your early retirement yourself rather than claiming early pensions from the OASI and your occupational pension fund.
• Your old-age pensions from the OASI and your occupational pension fund would not provide a suitable income. That could be the case if, for example, you have taken breaks from working, have been self-employed, have made early withdrawals from your pension fund benefits, or did not spend your entire working life in Switzerland.
• You want to have the same budget – or even a more generous one – after retirement as during your working life.

If you have pillar 3a retirement savings you will withdraw, or if you will withdraw all or part of your pillar 2 occupational pension benefits as a lump sum, then a withdrawal plan can be used to break that money down into a series of small withdrawals to supplement your other income.

What kind of withdrawal plans are there?

Withdrawal plans can be set up in several different ways. Which is more suitable for you depends largely on your risk capacity.

• Withdrawal plan using a savings account: You place your money in a savings account. When you reach the withdrawal phase, you set up a standing order to transfer a certain amount of the accumulated money from your savings account to your private account for your expenses at regular intervals (every month, for example). 

The money in the savings account continues earning interest until it is withdrawn. The value of your accumulated savings does not fluctuate, which makes it easier to plan, and savings accounts are considered to be secure. But in exchange, you accept low returns in the form of interest. The interactive Swiss savings account comparison makes it easy to find the banks with the current highest interest rates.

• Withdrawal plan using cash value life insurance: Many Swiss insurance providers offer withdrawal plans in combination with mixed life insurance, also called savings insurance or whole life insurance. You pay insurance premiums that build the cash value of a life insurance policy. Once the policy matures, you begin receiving regular benefits paid out from the policy’s cash value, until the cash value is depleted. As with other mixed life insurance products, withdrawal plans based on life insurance are often complicated and inflexible, and are generally best avoided.
• Withdrawal plan using investments: You invest your money in a fund (an ETF, for example) through a bank or stockbroker, or in an investment portfolio using an asset management service. During the withdrawal phase, you sell assets worth a certain amount at regular intervals (every month, for example), and transfer the resulting money to your private account for your expenses.

The money that stays in the fund or portfolio remains invested, and may continue to grow in value, depending on the type of asset and on market conditions. The disadvantage is that the value of your assets fluctuates, and there is always a risk of losing money. But in exchange, there is a chance of earning much higher returns over long periods of time, compared to savings accounts, as the historical Swiss savings interest and stock market return calculator shows.

How do return rates influence withdrawal plans?

The rate at which you earn returns on the unwithdrawn money plays a major role in determining the length of time over which you can withdraw from your accumulated capital.

Example of a savings withdrawal plan: You withdraw 200,000 francs of pillar 3a savings when you retire. You place it in a savings account that has no fees and yields 0.50 percent interest per year. You withdraw 1000 francs at the beginning of each month. The 200,000 francs, plus the interest earned, would last you for just short of 17 years and four months.

Example of an investment withdrawal plan: You withdraw 200,000 francs from the pillar 3a when you retire. You invest the money in a stock portfolio that happens to yield an average return of four percent, and you pay asset management and fund fees totaling 0.5 percent of your invested assets. You withdraw 1000 francs at the beginning of each month. The 200,000 francs, plus the returns earned, would last you for just short of 24 years and eight months.

You can use the moneyland.ch annuity calculator to simulate the effect of interest or other returns in relation to your withdrawals.

If the amount you withdraw, together with the fees you pay, is always the same or lower than the amount of interest or returns earned, then you can continue to withdraw from your capital permanently. This is known as a perpetual annuity.

Example of a perpetual annuity: You withdraw 200,000 francs from the pillar 3a when you retire. You invest the money in a stock portfolio that happens to yield an average return of four percent, and you pay asset management and fund fees totaling 0.5 percent of your invested assets. You could hypothetically withdraw around 570 francs per month from the returns alone, without ever using your 200,000 francs.

In practice, the returns earned on stock market investments and the interest rates of savings accounts can fluctuate, so there could be periods in which the return rate is much lower or much higher than four percent. For this reason, it is beneficial to use a withdrawal rate that is substantially lower than your anticipated rate of return. 

You can use the perpetual annuity calculator on moneyland.ch to find out how much money you could withdraw as a perpetual annuity, based on the amount of savings you have and the average return you earn. The guide to the four-percent rule also provides useful information.

What is a life annuity?

A life annuity is a kind of insurance that you can be used to insure against the “risk” of outliving your savings. Life annuities are often described as private pensions. A life annuity differs from a withdrawal plan in that you do not accumulate savings and then withdraw from them. Instead, an insurance company promises to pay you a lifelong pension from a certain date until the day you die.

Two kinds of life annuities are offered in Switzerland:

• Life annuities with residual value: This kind of life annuity mixes insurance with a savings or investment element, much like cash value life insurance. Part of your insurance premiums is used to cover the actual cost of insurance, while part of it is used to build cash value in the policy, and to cover administrative fees. The cash value counts towards your wealth, and is paid out to your heirs if you die before you begin receiving the annuity. Like mixed life insurance, life annuities with residual value are complicated and inflexible, and are generally best avoided.
• Life annuities with no residual value: This is a pure risk insurance product. You pay insurance premiums and in exchange, the insurance company promises to pay you a specific pension after you reach a certain age. The premiums are generally much lower than those of life annuities with cash value. Life annuities without residual value is a pure insurance product that can be used to insure against the “risk” of living to a very old age because you receive a guaranteed, lifelong pension.

How does a life annuity work?

Like the Swiss OASI old-age pension scheme and occupational pension funds, the insurance term of a life annuity is divided into two parts:

• The accumulation phase: During this period, you pay regular insurance premiums. Many insurance providers give you the alternative of paying just a single, lump-sum insurance premium. In that case, there is no accumulation period because the premium is paid in full up front.
• The annuitization phase: After you reach the pre-agreed maturity date, the insurance company stops charging you insurance premiums, and begins to pay out the insurance benefits in the form of a monthly or yearly pension. You continue to receive this pension until you die.

Typically, the pension you receive during the annuitization phase is based on a percentage of the total premiums you paid during the accumulation phase, plus possible insurance dividends. This percentage is known as the annual conversion rate.

How are life annuities taxed in Switzerland?

Life annuity insurance falls under the pillar 3b category of personal providence. The insurance premiums you pay can be included in the tax deduction for health insurance, pillar 3b life insurance and disability insurance, and interest earned on savings. However, this tax deduction is limited, and in most cases it is fully used up by your mandatory health insurance premiums.

The pension you receive during the annuitization phase must be declared as income, but a lower tax rate applies to this pension.

Because the income used to pay the insurance premiums often cannot be deducted due to the tax deduction being used up by your mandatory health insurance premiums, the tax on pensions from life annuities can result in double taxation.

Note that the same tax deduction that applies to pillar 3b insurance premiums also applies to interest earned on savings. What that means is: If the tax deduction is not fully used up by your mandatory health insurance premiums, the remaining deduction can be used to deduct the interest earned from money in a savings account.

Does using a life annuity make financial sense?

There are very few situations in which paying for a life annuity makes financial sense compared to using a withdrawal plan. A simple withdrawal plan based on a savings account gives you much more flexibility because you can choose when and how you save up, and when and how you withdraw your money. Additionally, a savings account is simple and transparent, and any remaining savings go to your heirs or chosen beneficiaries when you die.

There are cases in which a life annuity without cash value can be beneficial, compared to using a savings account, because of the guaranteed lifelong pension, as the example below shows.

If you will be saving or withdrawing from your assets over very long terms, it is worth considering investing part of your savings in a diversified portfolio (a global stock ETF, for example). Diversified stock portfolios have historically delivered higher returns over long periods of time (10 years or more, for example). But you should know that there is always a risk that your investments could lose value.

More on this topic:
Swiss pension funds: Lifelong pension vs. lump-sum withdrawal
Swiss occupational pensions explained