Annuity or lump sum? Consider taxes and inflation

Pension or lump sum? When deciding how the pension should be paid out, aspects and arguments must be weighed against each other. There is neither right nor wrong, only the optimal personal solution counts.

With most pension funds, you can choose between a lifelong pension or a lump-sum withdrawal. But if you have a choice, you are spoiled for choice! Both variants have clear advantages and disadvantages. Simple and convenient, speak for the lifelong pension. With the withdrawal of capital you can reduce your mortgage and thus reduce housing costs. In addition, one has direct influence to invest the money profitably and can fulfill a long-cherished desire with a partial amount. If you can't decide, opt for a mix, a living pension and the rest in lump sum form. In contrast to the AHV pension, the lifelong pension is not adjusted to inflation. With most pension funds, the cost-of-living adjustment on retirement pensions is only a voluntary benefit. In the last ten years, inflation has disappeared worldwide as a result of the expansive monetary policy of the central banks. But this is only a temporary phenomenon. Inflation is a consequence of a growing economy, so it comes back again.

Taxes: the better way to go
Over the last 25 years, inflation in Switzerland has been almost 20 percent. Inflation is and will remain a major long-term enemy for retirees. Purchasing power is dwindling slowly but steadily. Central banks around the world are aiming for "healthy" inflation of 2 percent. Healthy for the economy, but not for the pensioner. Purchasing power will decrease by 40 percent over 20 years. One franc will then be worth only 60 centimes. The pension fund pension is safe and comfortable, but the purchasing power is not guaranteed. With a lump-sum withdrawal, you have better cards in your hand. You can invest your pension fund money yourself and benefit from rising interest and capital gains in the event of inflation, although these are taxable as income. In the case of a lump-sum withdrawal, a one-time tax is paid for the withdrawal of the pension assets and in the following years, the accruing investment income must be taxed as income and the retirement capital as assets. The pension withdrawal is taxable as income like an earned income or the AHV pension. And where do you fare better in the long term?? In our example, one pays annual taxes of 6900 francs on the lifelong pension of 40 390 francs. A one-time tax of 63,000 Swiss francs is due on the capital withdrawal. With capital consumption over 20 years and an investment return of 4 percent, the result is an annual capital income of around 46,900 Swiss francs. The taxes on the capital gains amount to an average of about 1400 francs per year over 20 years. In total, you pay taxes of 4550 Swiss francs per year on the withdrawal of capital, saving 2350 Swiss francs per year in taxes.

Pension comes without capital depletion
One should not make the decision, annuity or capital, only from a tax point of view. With a lump-sum withdrawal, the lump-sum income is 6000 Swiss francs higher than with a pension. However, there is a consumption of capital, in our example in 20 years to zero. Those who are concerned about security should therefore rather decide in favor of the annuity. One should really deal with one's own retirement in good time and get competent advice from a neutral party.

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