Pension or capital from the pension fund? You should ask yourself these questions

 

There are many decisions to make when you retire. One of the most important is what should happen to the assets saved in the pension fund. Should this be converted into a lifelong pension, or is it more advantageous to have the capital paid out? Or does a mix of both make the most sense? The decision needs to be carefully considered because it is irrevocable.

“Capital is not better than pension, and pension is not better than capital,” says Daniel Hausherr, financial planner at the consulting firm Consult in Finance. “Ultimately, the insured person has to be comfortable with the decision.”

Security through a lifelong pension

But you can do a lot of things wrong, so you should ask yourself a number of questions before making a decision. They are the following:

1. How important is security? A lifelong pension offers greater security than a lump sum withdrawal. “When drawing a pension, retirees avoid the investment and longevity risk that they face with a lump-sum withdrawal,” says Ueli Mettler, partner at the pension fund consulting company C-Alm.

The “longevity risk” means that a person could live longer than average and, in this fortunate case, could run out of money at some point if they withdraw capital. A pension from the pension fund, on the other hand, is paid out for life.

“Investment risk” refers to the fact that investments – especially stocks – fluctuate in value over time. If the capital is withdrawn at an unfavorable time, you also have to be able to deal with losses. You don’t have to worry about that when you retire.

2. Do you want and can you manage the money yourself? When withdrawing capital, the question arises as to whether you can actually manage your assets yourself. This requires a certain level of specialist knowledge or appropriate advice – which is often not free from conflicts of interest. Even if you are able to manage your capital immediately after retirement, that does not mean that you will still be able to do so at the age of 90.

“Many retirees want peace and quiet and don’t want to manage assets,” says Hausherr. The pension is recommended to them, even if they may then pay a little more taxes than if they were withdrawing a lump sum. However, he particularly advises against withdrawing capital from the pension fund and converting it into an annuity with an insurance company. The conversion rates here are generally significantly lower than for the pension fund, and this is not advantageous for tax purposes either.

Health and relatives as factors

3. How good is the health? An important factor when deciding between pension and capital is your own health. The pension is an advantage for people who can expect a long life expectancy. If you fear that you will not reach old age for health reasons, lump-sum withdrawals are more attractive.

4. Do you want to protect your relatives? Even if a shorter life expectancy is to be expected after retirement, the protection of a pension for surviving dependents should not be overlooked. Typically, the surviving partner receives 60 percent of the original retirement pension, according to a paper by C-Alm.

5. Do you want to pass on something? “When you withdraw your pension, any remaining balance in the pension fund expires,” says Daniel Hausherr. The capital, on the other hand, falls into the inheritance and can be left to your heirs.

Individually different financial situations

6. What is the financial situation like in addition to the occupational pension scheme? For many insured people, the pension fund is the largest asset. On average in Switzerland, the pension fund balance at retirement should be 550,000 to 570,000 francs, says Hausherr.

For example, if someone owns three properties and earns high rental income, they already have a constant income in retirement and are less dependent on the security of a pension. “If the AHV and pension fund are the most important source of income in old age, this speaks in favor of the pension,” says Mettler.

An argument for withdrawing capital can also be, for example, that you want to repay or reduce a mortgage when you retire. “Depending on the situation, this can definitely make sense, for example if the portability is not otherwise met,” says Hausherr. Many of his customers opted for a mix of pension and capital and used the money they received to pay off part of their mortgage.

7. What needs to be taken into account for tax purposes? You pay income tax every year on monthly pensions, but capital withdrawal tax is due once when you withdraw capital. However, one should not forget the higher property taxes both in the year of purchase and in the following years, says C-Alm. Ultimately, assets increase through the withdrawal of capital. If the money is invested, income taxes are also due on the capital gains.

First, make a retirement budget

It should also be noted that you should contact the pension fund early if you are planning a lump sum withdrawal. Finally, depending on the fund, the registration periods can be up to three years. For married partners, the spouse’s signature is also required. Anyone who decides to retire doesn’t have to do anything.

Daniel Hausherr also recommends that his customers urgently create a retirement budget. It is often said that after retirement you will need around 80 percent of the income you previously received. The financial planner warns against giving a percentage here, because people’s ideas about retirement are very different. Some retirees wanted to travel a lot, others wanted to reduce the mortgage on their property or make larger purchases. Others, on the other hand, strive for a modest life and therefore have significantly lower expenses.

“The budget in retirement is the be-all and end-all,” says Hausherr. Only then should you consider the question “pension or capital?” dedicate.