Capital benefit vs. pension withdrawal

It is one of the most important decisions before retirement: pension or lump-sum withdrawal? You should think carefully about which option you choose, as you will not be able to switch afterwards. Because of its lasting effects, you should make this decision well informed, in good time and with competent support, so that you can embark on your new phase of life with peace of mind.

In brief - important information on lump-sum withdrawals

• Investing according to your own ideas

• Amortization of the mortgage

• Enabling the inheritance of pension fund assets (free beneficiaries)

• Potential for tax savings

• Blocking period for single premiums 3 years before retirement 

• Possible application period of up to 3 years

In brief - Important information on drawing a pension

• Guarantees an eternally high income: Regularity

• Protection against old-age risk: Lifelong payout

• Hedging against investment risk: independent of stock market volatility

• Protection of the life partner in the event of death: spouse's pension

• Elimination of asset management expenses for investments

Less tax & more flexibility thanks to lump-sum benefits

Saving taxes is also possible after retirement. The logic behind this is simple: achieve as low an income as possible. The higher the taxable income, the higher the tax rate and the associated tax liability. So if taxable income is reduced by the pension fund pension, less tax is due each year. The lump-sum withdrawal is also taxed, but at a pension rate that is lower than the ordinary tax rate: one fifth of the ordinary rate for direct federal tax and a maximum of 4.5% of the rate-determining assets (lump-sum withdrawal per person in a calendar year) for cantonal tax in the canton of Basel-Landschaft. The effect of the lump-sum payment is illustrated in the following calculation example.

Tax comparison between lump-sum withdrawal and pension

Marco and Regula Sprenger are married and live together in a detached house in Muttenz. They are both looking forward to retiring in a few years and starting a new chapter in their lives. The only thing that unsettles them is whether they should withdraw their 2nd pillar savings capital as a lump sum or a pension. They therefore turn to their trustee for advice on lump-sum payments and pension withdrawals. The following key data is given:

• Both Marco and Regula are healthy. We therefore assume that they will reach the statistical life expectancy (she 87, he 85 years).

• The property has a tax value of CHF 350,000

• The apartment is encumbered with a mortgage of CHF 600,000

Note: For reasons of simplification, various factors are not included in this example (e.g. asset and administration costs as well as investment income or capital consumption when withdrawing capital).

Marco and Regula's example calculation illustrates the tax savings from the capital payment. The couple saves a total of CHF 99,000 over 20 years, or CHF 4,950 per year.

Amortization by means of capital payment

In addition to the tax-saving opportunities, a lump-sum withdrawal also offers greater flexibility to use the assets as you wish. For example, the capital withdrawal can be used to amortize part of the mortgage. This reduces the interest burden and ensures affordability.

Protection against old age and death by drawing a pension

We all know that people are getting older and older. The average age of today's 65-year-olds is currently 87 or 85. This means that the retirement capital they have saved will have to last longer. If, on the other hand, you draw a PF pension, this guarantees a lifelong income. The following is a mathematical illustration of old-age provision.

Note: The tax effect and other factors (interest, asset management costs, etc.) are not taken into account for this sample calculation.

Mixed form of lump-sum benefit and pension withdrawal

The mixed form is a popular way of drawing retirement capital. The combination of lump-sum and pension withdrawals is often used to cover the cost of living by supplementing the AHV pension with a partial PF pension. The remainder of the retirement capital is withdrawn in the form of a lump sum. Another conceivable option for a married couple would be for spouse X to receive a lump sum and spouse Y to draw a pension.

The regulations of the respective pension fund provide information on the specific options. In any case, a pension fund must by law pay out at least 25% of the retirement capital as a lump sum at the request of the beneficiary.

Staggered capital withdrawal

From the age of 58, partial retirement can be taken, which in turn enables a staggered lump-sum withdrawal. In this way, the workload can be gradually reduced and the corresponding lump sum withdrawn.

However, in addition to the additional leisure time and the associated higher standard of living, there are also losses to be accepted as a result of benefit reductions. Less retirement capital is saved for the remaining term to the extent of the reduction in the workload; there is also no compound interest on the capital already withdrawn.

Tax on lump-sum withdrawals is also reduced by the staggered withdrawal of various vested benefits accounts and assets from the 3rd pillar, which are added together with the withdrawal from the 2nd pillar for taxation purposes.

Don't forget the big picture

The pension fund is an essential and important pillar of pension provision. As explained above, the decision on the form of benefit is therefore of great importance. Nevertheless, this decision should not be made solely on the basis of tax considerations. The harmonization of budget, pension capital, other assets and debts, in the context of the family and health situation, is ultimately decisive for an optimal and holistic solution.