Annuity or lump sum: Which is better?

Many people in Switzerland have accumulated considerable assets through their occupational benefits insurance . As retirement draws nearer, you need to think about how these assets should be withdrawn from the pension fund – as an annuity, as a lump sum, or as a combination of the two. It’s an important decision that will affect your financial situation over the long term after you retire. 

Financing your retirement requires careful planning. Once a decision has been made, it usually can’t be changed later. This makes it all the more important to take the time early on to calmly consider your own needs and options: How much will you need to live on when you’re retired? What benefits do I receive from OASI and occupational benefits insurance? What additional assets are available to me, for example from Pillar 3a or 3b? Do I have any financial obligations to your partner or children? And what personal wishes would I like to fulfill, such as travel or an early transfer of assets to my descendants?

How do I want to withdraw my pension fund assets?

Whether an annuity, a lump sum, or a combination of both is the best solution depends on your financial needs, your personal situation, and the options offered by your pension fund. Entitlement to pension benefits, i.e. when an annuity or a lump sum withdrawal from the pension fund is possible, generally begins at the reference age of 65. However, depending on the pension fund regulations, early or deferred withdrawal may also be possible. If you are planning a lump sum withdrawal, you should find out more as early as possible: While an annuity is generally paid without prior notification, a lump sum withdrawal must be requested several months to three years in advance, depending on the pension fund.

The best solution will depend on your personal circumstances. At the same time, the range of solutions offered by pension funds is constantly evolving, so that in some cases more flexible withdrawal options are already available, offering additional flexibility. For a more detailed analysis of your situation – including legal and tax aspects – it is advisable to seek advice from an expert. You can also use our decision-making tool for an initial assessment.

What are the advantages and disadvantages of an annuity?

Advantages of an annuity

• Financial security: You will receive a guaranteed, regular income for the rest of your life.
• Survivors’ benefits: After your death, your surviving spouse or partner receives a partner’s pension. Children who are still in school receive a child’s pension.
• No investment risk: The pension fund assumes full responsibility for managing and investing your pension assets.
• Uncomplicated choice: You don’t need any financial or investment knowledge.

Disadvantages of an annuity

• Dependencies: The amount of the lifelong annuity depends on the pension fund’s conversion rate and how much pension assets you have saved.
• No cost-of-living adjustment: There is no mandatory inflation adjustment of the retirement pension.
• Duty to pay taxes: Pension payments are taxed in full as income.
• Remaining capital: If there are no eligible beneficiaries, there is a risk that the residual capital will remain with the pension fund under the traditional pension model.

What are the pros and cons of a lump sum?

Advantages of a lump sum withdrawal

• Flexibility: You yourself decide how your pension assets are to be used – whether for investments, mortgage repayment, or personal goals.
• Inheritability: Unused capital goes to your heirs after your death.
• Tax advantage: The lump sum withdrawal is taxed once, separately from other income, at a reduced special rate. After that, the usual tax rules for assets apply.
• Earnings opportunities: The capital can be invested in accordance with your personal risk tolerance. Depending on the investment strategy, there are opportunities for higher returns.

Disadvantages of a lump sum withdrawal

• Investment risk: The security of the capital and the achievable income depend on the investment strategy chosen and the performance of the financial markets.
• Timing: Negative investment returns can shorten the financing period of the assets, especially when you start retirement.
• Longevity risk: You don’t know how long the capital will have to last. As a result, there is a risk that the assets will be consumed faster than planned and will already be used up during your lifetime.
• Financial planning required: A lump sum withdrawal requires careful financial planning and investment knowledge – or professional investment advice.
• Protection of survivors: The financial protection of spouses or life partners is not automatically guaranteed when a lump sum is withdrawn. It depends on how much lump sum is still available in the event of death.

Annuity or lump sum: What are my options? 

The decision between an annuity and a lump sum is complex and requires careful planning. The following five steps will help you make an informed decision.

Step 1: Clarify options and benefits

Get an overview of your financial situation. Consider not only your pension assets and the benefits of your pension fund, but also your OASI, Pillar 3a and 3b assets, other assets, any income, and the financial situation of your spouse or life partner.

You should also find out about the options your pension fund has and whether there are any other options besides traditional annuities and lump sums.

Step 2: Assess personal situation

Take account of your health and expected life expectancy, your family and inheritance situation as well as your personal risk tolerance and investment know-how. You should also consider the tax implications: Whereas pension payments are taxed as income, a one-time lump sum withdrawal tax is payable. Thereafter, the ordinary tax rules apply to wealth and investment income.

Step 3: Determine your financial needs in old age

Determine your minimum financial needs in old age and take into account your ongoing costs of living as well as major expenses or financial reserves for unforeseen events.

Step 4: Compare options with your financial needs

Compare different scenarios – such as a full annuity, a full lump sum, or a combination of both. Check which option will cover your financial needs over the long term. When making a lump sum withdrawal, keep in mind that your spending must be sustainable over many years and depends on the performance of your investments.

Step 5: Review and implement decision

Discuss your preferred solution with an independent expert and have the calculations reviewed. Plan the implementation in good time and pay particular attention to your pension fund’s deadlines for a lump sum withdrawal.

When does it makes sense to mix an annuity and a lump sum?

Often small pension assets are drawn as a lump sum, medium-sized assets as an annuity and large balances are sometimes withdrawn as a lump sum and sometimes as an annuity. Every pension fund is required by law to allow its members to draw at least 25% of their mandatory benefits as a lump sum, but many are prepared to pay out as much as half or even the full balance in that form. By mixing an annuity and a lump sum, you combine their respective opportunities and risks. The lump sum can go toward realizing your dreams, while the regular annuity provides you with a fixed income. Most pension funds leave you up to you how you divide your pension. There are various strategies for deciding what’s right for you. 

Example 1: Mr. B. would like to spend each winter in southern Europe after he retires. To cover his regular living expenses in Switzerland, he needs a lifelong annuity of CHF 2,000 a month (CHF 24,000 a year) from Pillar 2. With a conversion rate of 5%, this corresponds to pension capital of CHF 480,000. Since Mr. B has total pension assets of CHF 600,000, he can use the excess amount of around CHF 120,000 as a lump sum withdrawal on retirement. This additional capital can be used, for example, to cover the additional costs of his winter stays abroad.

Scenario 2: Mr. K and Mrs. K have pension assets of CHF 500,000 and CHF 300,000 respectively. They would like to use some of this money to pay off their mortgage. Mr. K’s pension fund has the better conversion rate, so he draws his CHF 500,000 as an annuity, while Mrs. K draws her CHF 300,000 as a lump sum. If Mr. K dies before his wife, she will continue to receive around 60% of her husband’s pension as a widow’s pension.

Why should I start planning for retirement so early?

What you decide before you retire will have a major impact on your later life. Precisely for this reason, there are plenty of reasons to regard pension planning as something nice rather than a chore. Dare to dream, make plans, imagine the freedom you’ll enjoy. As soon as you have an idea of what’s important to you in financial terms, you can work out specific future plans based on your priorities. Our guide will help you to get started by providing an overview of your situation. If you start thinking about your pension between the ages of 50 and 55, you’ll have enough time to prepare and look forward to your retirement.

Frequently asked questions about annuity or lump sum withdrawals