Your pension fund before 65: annuity, lump sum or leave it

For most Swiss employees the pension fund, the second pillar, is the largest asset after the home. It is also the least flexible. If you want to stop working before 65, you need to know your options and what each one costs.

What is in the pot

Your balance is your own contributions and your employer’s, plus interest. At retirement it is converted into a lifelong annuity using a conversion rate, or taken as a lump sum, in whole or in part. The legal minimum conversion rate for the mandatory part is 6.8%, and many plans use lower rates overall.

Three paths if you stop early

1. Early retirement from the fund. Many plans allow it from about 58. The annuity is lower, because it starts earlier and is paid for longer.
2. Leave the employer. The capital moves to a vested benefits account at a bank or insurer. You can withdraw from five years before the ordinary retirement age, so from about 60.
3. Leave Switzerland. A lump sum of the non-mandatory part is generally possible. The mandatory part depends on where you go: it stays blocked when you move to an EU or EFTA country, and can be paid out in most other cases.

Annuity or lump sum

Example You have CHF 220,000. At an overall conversion rate of 5%, an annuity pays CHF 11,000 a year for life. As a lump sum drawn at a 3.5% rule, it pays CHF 7,700 a year, but you keep control and what is left goes to your heirs. The right answer depends on health, family and risk. This is an illustration, not a forecast.

An annuity is a good hedge against living a long time. A lump sum is flexible and can be spent down or left to others. Many early retirees take the annuity for the base and the lump sum for the rest, if their plan allows.

Practical rules

• Plans often require advance notice for a lump sum, sometimes years. Ask your fund in writing.
• If you made a buy-in, capital withdrawals may be blocked for three years.
• Capital withdrawals are taxed separately, at a reduced rate that varies by canton. Combining them in one year with a Pillar 3a withdrawal raises the rate.

For the full picture, read the three pillars, Pillar 3a for early retirees and AHV gaps. For the tax effect of each choice, see taxes in early retirement.

Next step

Open the calculator, enter your balance and compare lump sum and annuity in the pensions step.