Planning for retirement can raise a number of unanswered questions. One of the main aspects to consider – and also the most consequential – is what is the best way to draw funds from a pension pot. Most pension funds give their policy holders the option of drawing the funds that they have saved in their pension pot over many years either as a recurring annuity for life or as a full or partial lump sum.
This is a particularly important decision that can only be taken once and will determine the course of your financial future.
Those who opt for an annuity have the major advantage of not having to make any arrangements. They simply receive monthly or quarterly payments for life once they have retired, which makes budgeting easier. For retired persons who are married or in a partnership, a widow’s or partner’s pension is paid after their death. If opting for lump sums, it is important to bear in mind that regular annuity payments will be lower or not paid out at all. This means that you will have to be prudent in managing your funds and – to some extent at least – make decisions on rationing your money.
However, various other points also have to be considered. First of all, the entire pension pot will be subject to income tax. This is in addition to taxes on old age and survivor’s pension annuities, imputed rental values or other rental income and investment income. However, many of the usual deductions such as work-related expenses, dual earner deductions and pillar 2 & 3a deductions under the Swiss pension system will no longer apply. As a result, the tax burden may not be materially lower than it is when you are employed, while your income will be substantially reduced.
Partial or full lump sums are subject to what is known as a lump sum tax. This is a separate, one-off tax charge that is significantly lower than the rate of income tax. There are vast differences in the rates of tax applied by different Swiss cantons. The lump sum amounts are also taxed progressively, but the tax rates range from around 5% to almost 30%, with the highest rates of tax payable in the canton of Zurich.
It is therefore imperative to consider the tax situation as a whole, especially aspects such as how pension planning can be optimised before retirement and what the long-term implications may be. Obviously, the canton in which you are a resident makes a big difference. Moving home may also be an option on retirement if the tax burden is an issue.
However, a number of other criteria play an important role in addition to tax aspects, especially the individual’s current situation. For example, is there a significant age gap between spouses/partners? Is emigration an option? Are there any health conditions to consider? Is the individual experienced in accumulating large amounts of wealth? What arrangements has the individual already made with regard to estate planning/are there any heirs?
As we can see, there is no one-size-fits-all solution. Everyone should seek individual and, above all, independent advice well in advance of retiring.
Written by:
Konstantin Wyser | Partner
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