Lots of Swiss people have amassed a small fortune in the form of an occupational pension. As retirement draws nearer, the question arises as to how this money should be paid out. It's an important decision that will affect your financial situation over the long term after you retire.
Funding your retirement is a complex topic, and there are a variety of factors you need to consider. Fundamental decisions you make before retiring can't be undone after the fact. That's why it's important to think about these questions as early as possible so you have plenty of time to work out the answers: How much will you need to live on when you're retired? How much money can you expect to get from your state pension, and how much from your occupational benefits? Will you have any other income, e.g. from a voluntary Pillar 3a or 3b account? Will you be responsible for supporting a partner or child? Is there something you really want to do, like take an extended trip abroad or make a gift to your children?
What's more important to you: a steady income or financial flexibility? You need to answer this question before you can determine the best way to draw your occupational benefits, i.e. as a lifelong annuity paid every month, a one-time lump sum, or a mix of the two. The best solution will depend on your personal circumstances. Our guide will help you to work out quickly and easily which option best suits your needs. We recommend seeking expert advice to analyze your situation in detail, including legal and tax aspects.
The key facts on pension funds
The Swiss pension system is made up of three pillars: state, occupational, and private pensions. Throughout your working life, part of your salary is automatically deducted and paid into a company pension, also known as occupational benefits insurance or Pillar 2. You can only access these pension assets before retirement if you buy a home, become self-employed or leave Switzerland. Ideally, though, all the money you pay into your Pillar 2 pension fund should stay there to complement your state pension (Pillar 1) so that you can maintain the standard of living you're used to after retiring. Most people have several hundred thousand francs in their pension fund by the time they retire. That money belongs to them. They have an important decision to make: should it be paid out monthly as a lifelong annuity or all at once as a lump sum? Both options have their advantages and disadvantages. A mix of annuity and lump sum is also possible.
Pros: The main argument in favor of a monthly annuity is financial security. You're guaranteed a regular, lifelong income. When you die, your spouse will receive a widow's or widower's pension. Children in full-time education will receive a child's pension. An annuity is also the simplest option because you don't need any financial or investment know-how – the pension fund takes care of your retirement savings for you.
Cons: One disadvantage of a lifelong annuity is that it depends on the pension fund's conversion rate. Falling conversion rates are leading to ever lower annuities in relation to the retirement assets saved up. Inflation also reduces the purchasing power of your pension over time. On top of this, your annuity will be taxed in full as income. Should you die early, the remainder of your retirement savings goes to the pension fund, not your heirs.
The conversion rate, together with the amount of your retirement savings, determines the size of your annuity. Here's an example: Mrs. F retires at the age of 64. Her pension fund's conversion rate for mandatory benefits is currently 6.8%. Mrs. F has CHF 300,000 in her pension. She receives 6.8% of this a year, i.e. CHF 20,400. Divided by 12, that gives a monthly amount of CHF 1,700.
Conversion rates for extra-mandatory benefits, which apply to salaries over CHF 86,040, are usually lower these days as low interest rates and rising life expectancy have forced pension funds to adjust them in recent years, and they are expected to continue falling in future.
Pros: If you have your retirement savings paid out as a lump sum, you enjoy total flexibility. For example, you could invest the money yourself, pay off your mortgage or make some long-held wishes come true. All of what's left after you die goes to your heirs. You'll also save on taxes over the long term: when they're paid out, your retirement savings are taxed separately from any other income at a lower rate (usually 5-15%). Depending on how you invest, you could compensate for inflation by generating higher returns.
Cons: The biggest disadvantage of a lump sum is that you bear all the risk yourself. If you invest the money, the stability and size of your income depend on the investment strategy you choose – and you don't know how many years your savings will have to last. You might get your calculations wrong and/or expect too much when it comes to returns. You'll need a little courage to take risks, time to plan, and an eye for a good investment – or a good advisor.
Smaller amounts of retirement assets are often drawn as a lump sum, medium-sized amounts as an annuity, and larger amounts as a mix of the two. 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 all of them as a lump sum. By mixing an annuity and a lump sum, you combine their respective opportunities and risks. The lump sum can perhaps allow you to afford something you've wanted for a long time, while the regular annuity payments give you a steady income. Most pension funds leave it up to you how you draw your pension. There are various strategies for deciding what's right for you.
Example 1: Mr. B wants to spend the winter in Southern Europe after he retires. That will increase his living costs. He generally needs CHF 2,000 a month – CHF 24,000 a year – from Pillar 2 to live on. A conversion rate of 5% would mean that he needs savings of CHF 480,000. However, Mr. B actually has more than CHF 600,000 in his pension, so he can afford to take CHF 100,000 as a lump sum.
Example 2: Mr. K has retirement assets of CHF 500,000, and Mrs. K has CHF 300,000. 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 Mrs. K, she'll continue to receive around 60% of her husband's pension as a widow's pension.
What you decide before your retirement will have a significant influence on the rest of your life after it. However, there are plenty of reasons to view retirement planning as a good thing 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 the third age.