“So tell me, your second pillar, will you be withdrawing it as pensions or as capital?”. This question is crucial and unique for every person reaching the age of retirement. We can almost always choose between taking all our assets at once, or if we would rather have our pension fund pay us predetermined life annuities. But in order to make an informed decision, there are a few factors to consider:
- Our state of health
- Our knowledge of financial management
- The financial implications of our decision
- Our successors
- Our current and future needs
No need to panic, we will have a look at all this in more detail!
Withdraw ones second pillar as annuities
Opting for infinite pensions is necessarily more reassuring. We know what we will get from the first pillar and we know the amount of the second pillar pensions. We can thus easily find out what our income will be an determine our buget accordingly.
In addition to knowing our situation in detail, we can be certain that until the last day of our lives, we will benefit from the same financial situation.
Be careful: By same financial situation, we mean the same income and not the same purchasing power! Second pillar pensions do not adapt to inflation. Over time, one’s purchasing power can considerably grow weaker.
Despite all these advantages, you are wondering what the hiccup is? Yes, there has to be one…or two in this case.
Withdrawing the second pillar as a capital
Hmmm here’s a good idea!
This possibility is attractive, it allows to benefit from vast resources after so many years of working. You will finally be able to treat yourself to this stunning country estate or go on a world tour with just a one-way ticket in hand. This idea is mouth-watering, but riskier! Indeed, having significant capital on one’s bank account compels to a certain assiduity and discipline when it comes to expenses. Once the capital is exhausted, all you will have left will be your OASI pensions to cry on. Therefore, it is essential to be able to manage that kind of money, how to invest it, how much you should buget yearly… That’s right! You will have to create what is called a disinvestment plan.
What should you pick?
It is always hard to find a clear and definitive answer applicable to everyone. However, it is possible to reliably determine the observable financial impacts (taxes and income) depending on our choice.
Let’s take my case as an example, I worked all my life as an advisor, I managed to put 500,000 CHF in my pension fund. Not bad! When I turn 65 years old, I will have to make this key decision between pensions or capital…
Thanks to my pension fund, I can decide between a pension of about 34,000 CHF per year, or a full withdrawal of 500,000 CHF paid to my account. But from what age will my pension exceed my huge capital?
This table shows from what point one option is more beneficial than the other.
It can therefore be concluded after 14.7 years in retirement, which will make me almost 80 years old, I will have made as much money as if I had left with all my money since day one. Unfortunately, it is not that easy. Taxes also have to be taken into account, of course… you cannot forget about those…
In the previous chapters, we have seen that the capital will be imposed only once at a reduced income tax rate but, depending on how this money is placed, it will keep being imposed as fortune whereas a pension will be imposed in a consistent manner throughout our lives as an income.
You can see that income taxes are very high and that after nine years, they will have exceeded the amount paid out in capital.
Be careful: the graphic only factors in income taxes (cantonal and communal taxes, ICC and direct federal taxation, IFD) and does not take into account wealth taxes, which will be a lot lower anyway!
So, think twice about what is the best option for you before withdrawing your second pillar and of course, if you are struggling to make a decision, do not hesitate to get in touch with us!