Most people look forward to retirement. Finally, more time for hobbies, travel and family. If you want to enjoy retirement, you need to plan as early as possible and take a self-determined approach. The most important decision is how your retirement assets will be paid out by the pension fund. Would you prefer a monthly pension or a lump-sum payment?
Most people look forward to retirement. Finally, more time for hobbies, travel and family. If you want to enjoy retirement, you need to plan as early as possible and take a self-determined approach. The most important decision is how your retirement assets will be paid out by the pension fund. Would you prefer a monthly pension or a lump-sum payment?
1. Calculate your financial requirements
The first thing you should do is take a close look at your own financial situation and calculate your income following retirement. For example, will you receive income from a rental property or life insurance? How much will you receive from AHV? And how much money will you need every month to maintain your standard of living in retirement? Once these questions have been answered, you can determine how much pension money you will need each month.
2. Estimate security needs
The choice of a pension or lump sum also depends on your personality. Is the security of a monthly pension for the rest of your life important to you, or do you want to manage the money yourself and therefore prefer the flexibility of a lump-sum withdrawal? Both options have their advantages and disadvantages. With a pension, you have a high degree of security when you are retired, but you will not, for example, be able to profit from stock market gains or pay off larger expenses, such as a mortgage. While a lump-sum payment and subsequent investment may result in high returns, there is no guarantee. Falling stock markets will reduce your retirement savings.
3. Take account of your investment knowledge
Those who opt for a one-off payout of the capital will enjoy a high degree of flexibility and may, through their own skill, be able to achieve high returns on investments. However, this requires good knowledge of the capital markets. Otherwise you run the risk of making the wrong choices. Investing on the stock market also requires a certain investment horizon. Money that will be used in the short term should therefore not be invested. In addition, you need to think about who will manage your money if you become ill or are no longer capable of managing the investments independently.
4. Take note of the deadline for requesting a lump-sum payment
The amount of retirement assets that you can request as a lump-sum payment depends on your pension fund. By law, this amount is at least 25%, but many pension funds allow you to take half or all of the assets as a lump-sum payment. The deadline for requesting a lump-sum payout depends on the pension fund, but can be up to three years. If you miss the deadline for requesting a lump-sum payout, you cannot make a corresponding retroactive request. So it is important to start thinking about retirement early on and to approach the decision in a self-determined manner. Ideally, you will start planning between the ages of 50 and 55. Around five years before retirement, you should set the date when you will stop working and determine how you want your retirement savings paid out.
5. Consider paying off your mortgage
One advantage of a lump-sum payout is that you can use the money to pay off debts or pay down your mortgage to a level that is acceptable to the lender so the interest costs do not have a significant impact on your budget. After all, you must be able to afford your mortgage in retirement. After you retire, your income will likely be much lower than when you were working. But you will have to continue paying interest and your ongoing costs (including ancillary costs, maintenance, interest costs and amortisation) must not exceed one-third of your income.
6. Take account of taxes
And what effect will your decision have on your taxes? Pension payments are fully taxed as income. The situation is different with a lump-sum payout. The lump sum is treated separately from other income in the year it is paid out and taxed at a lower rate. After this, income and assets are taxed at normal rates. A lump-sum payout may be better for pensioners over the longer term – but this depends on the marginal tax rate and how long they live.
7. Don’t forget to plan for your family’s security
If you need to think about the financial needs of your children or other family members, it may be worth taking your capital as a lump sum. If you do so, your dependants will receive the retirement capital if you die. By contrast, a pension cannot be bequeathed. When a pensioner dies, the pension fund retains any assets that have not been paid out. This allows them to finance pensions for pensioners who are very old and draw more from the fund than they paid in when they were working. However, spouses and children do receive a survivor’s pension.
8. The best thing is to combine options
A sensible solution is to combine a pension with a lump-sum payout. The general rule is that basic needs should be met with a secure source of income for the rest of your life. Basic needs include fixed expenses – such as food, health insurance, housing and transport, as well as hobbies and holidays. A monthly pension is ideal for covering these basic needs. You can draw any assets in excess of this as a lump sum and invest them yourself.
The decision regarding whether to take a pension, a lump-sum or a combination of the two is up to you. It is important, however, is to approach the topic of retirement in a self-determined manner and to learn more about your options as soon as possible.
