Pension fund payout: pension or lump sum?

Pension withdrawal

Simplicity and security are the main advantages of drawing a pension. There is no need to worry about the allocation, administration and fluctuations of retirement assets. The pension is paid out until the end of life. In most cases, a widow's/widower's pension is paid out upon the death of the pension recipient. If there is a large age difference between the partners, it often makes sense to draw a pension. If the children are still of school age when they retire, the pension can also be advantageous due to the children's pension entitlement.

If you decide to draw a pension, it is imperative that you take the conversion rate into account. The higher the conversion rate, the higher the pension.
From a tax perspective, the pension is often less interesting than the lump-sum withdrawal, as the pension fund pension is 100% subject to income tax. If rental income flows in addition to the AHV pension or if an imputed rental value is taxable, the tax burden on the pension fund pension can be very high.

The pension income should not exceed the needs. In this case, it makes more sense to annuitize only as much capital as necessary and to withdraw the exceeding part in capital. Due to a privileged tax rate on the payment of pension capital, taxes can be saved in this way.

Capital withdrawal

The lump-sum withdrawal has three major advantages:
- The free division and organization of the capital paid out offers a great deal of flexibility.
- With a lump-sum withdrawal, surviving dependents are better off if a death should occur shortly after retirement. It is essential that the estate and provisions for any incapacity for judgement be arranged.
- The lump-sum withdrawal is taxed at a privileged rate for pension assets. Although this one-time tax is often high at the time of taxation (depending on the amount paid out), the lump-sum withdrawal is in many cases more interesting from a tax point of view. The reason for this is the subsequently lower annual income tax burden. If the lump-sum payment tax is also optimized by coordinating the withdrawals from the 2nd and 3rd pillars, or by taking several partial retirement steps, the tax advantage is usually even higher.

The lump-sum withdrawal offers some advantages, but also entails certain risks. Anyone who withdraws capital from the pension fund must bear in mind that this money should generate a return. To achieve this, investments must be made and risks must be taken. Without risk, there is no return. The risks of the investment must be appropriate and in line with requirements. There should be no speculation with pension money! If investments are out of the question or fluctuations on the financial markets cause stomach ache, the withdrawal of capital should be well questioned.

In addition to investment risks, there are other risks associated with lump-sum withdrawals. Due to a lower income, it is possible that a higher amortization of the mortgage is required. The consequence is that fewer or too few assets are left for consumption. Longevity is also a risk. Once the retirement capital is used up, there is only the AHV pension left.

Valentin Chiquet
Financial planning & pension consulting
BSc HES-SO in Business Economics
vch@core-partner.ch