Pension or lump sum from your pension fund?

When you retire, your balance in the pension fund falls due. You have two ways, and you can combine them.

1. Pension. The fund converts your balance into a lifelong pension using the conversion rate. With CHF 500,000 and 5.3 percent that is CHF 26,500 a year, for as long as you live.
2. Lump sum. You receive the balance in one go and decide yourself how to invest and spend it.

OASI always pays a pension. Pillar 3a always pays capital. So the choice only concerns the pension fund.

• Conversion rate. It determines how high your pension is. For the compulsory part at least 6.8 percent applies. Because many funds also insure supra-mandatory balances, they calculate lower overall, on average at 5 to 5.5 percent. The lower the rate, the more attractive the lump sum becomes.
• How long you live. The pension is insurance against a long life. At 65, men live on average another 20.7 years and women 23.2 years. Many get clearly older. If the capital is used up earlier, you bear the risk yourself.
• Taxes. The pension counts in full as income every year. The lump sum is taxed once and at a lower rate. The Federal Tax Administration shows in a case example a tax advantage of the pure capital withdrawal of around CHF 68,000.
• Return and risk. If you invest the capital, it can keep growing. It can also fall, and a slump shortly after retirement hits you hard.
• Inflation. Pension fund pensions usually do not rise with prices. With 1 percent inflation, CHF 20,000 is only worth around CHF 16,400 after 20 years.
• Partner and heirs. With the pension, your spouse receives at least 60 percent after your death. With the lump sum, the rest goes to your heirs.
• Security or freedom. The pension arrives every month without you having to do anything. The lump sum demands discipline, but gives you room for big expenses or the mortgage.

Assume you have a balance of CHF 500,000 at 65 and a conversion rate of 5.3 percent. You pay 20 percent tax on the pension and 8 percent on the lump sum.

If you take the same amount from the capital every year as the pension brings, it lasts without any return until just under 87. With a 2 percent return it lasts until about 93. With a conversion rate of 6.8 percent the pension would be higher, and the capital would only last until about 85.

The rule of thumb from this. If you live longer than this age, you are better off with the pension. In the calculator above you can see how the age shifts with your numbers.

• “The lump sum is always better because it costs less tax.” Not always. If you live long or the money earns little, the pension catches up the advantage.
• “I can decide spontaneously when I retire.” Many funds require registration months or years in advance. Anyone who misses the deadline gets the pension.
• “The pension rises with inflation.” With OASI mostly, with the pension fund only rarely.
• “Either everything or nothing.” A partial withdrawal is often possible. That way the pension secures your fixed costs and the lump sum keeps you flexible.