What does the BVG provide for retirement?
By default, the LPP provides for the payment of retirement savings in the form of a lifetime annuity. However, it is possible to withdraw at least 1/4 of the mandatory portion as a lump sum, provided the request is made in advance and with the spouse’s consent. Some pension funds go further and allow a full lump-sum withdrawal or a mixed solution. The choice is irrevocable and must be carefully considered.
Option 1: LPP pension
Choosing the annuity means receiving a guaranteed lifetime income, paid monthly starting at retirement.
Key benefits of annuities
Choosing the LPP annuity means receiving a guaranteed monthly income for life. This payment, provided by the pension fund, is independent of financial markets and your actual life expectancy. It is therefore a particularly reassuring solution for those who live a long life, as the amount remains stable and consistent regardless of age. In addition, the current conversion rate (6.8%) makes the annuity more attractive than a lump-sum withdrawal in many cases.
The annuity also provides continued protection for loved ones. In the event of death, a survivor’s pension is generally paid to the spouse or registered partner, amounting to 60% of the initial annuity. Children under the age of 18, or up to 25 if still in education, are entitled to an orphan’s pension or a retiree’s child pension equivalent to 20% of the annuity.
Finally, this option requires no financial management on your part. Everything is handled by the pension institution, making it an ideal solution for those who wish to avoid the uncertainties associated with investments or managing a lump sum.
Disadvantages of annuities
While the LPP annuity offers a certain level of security, it also comes with several limitations that must be clearly understood before making a decision. The main drawback is that in the event of death, the remaining capital is generally not passed on to heirs. Only survivor benefits (spouse’s or orphans’ pensions) are paid, and only if the legal conditions are met. In other words, if you pass away without a spouse or underage children, your retirement savings remain with the pension fund.
From a tax perspective, the annuity is 100% taxable as income, which can result in a significant tax burden depending on the canton and your overall income level.
Finally, the annuity offers you no flexibility. You cannot adjust the amounts according to your needs, nor make early withdrawals. You are tied to a fixed payment, the amount of which is determined once and for all at retirement, based on your conversion rate and accumulated assets.
This lack of leeway can be a disadvantage if you have other projects to finance, if you want to help your loved ones during your lifetime, or if you have a shorter-than-average life expectancy.
The BVG pension at a glance
- Monthly income guaranteed for life
- Orphan's pension / pensioner's child (20 % per child up to age 18/25)
- No need to manage capital or investments
- Stable, simple and predictable
- High conversion rate equivalent to a guaranteed return higher than most safe investments
- Unused capital remains in the pension fund in the event of death
- Little or no possibility of passing on to your heirs
- Taxed at 100 % as income
- No early access or partial withdrawal possible
- Less attractive solution for shorter life expectancy
- Gradually declining conversion rate
What are the advantages of such a reform?
Key benefits of capital
The main advantage of withdrawing a lump sum is the complete flexibility it offers. You are free to use the funds as you wish: carry out a project, repay a mortgage, support loved ones, or invest according to your risk profile. Unlike the annuity, the lump sum allows you to plan your expenses at your own pace, without being tied to fixed monthly payments.
From a tax perspective, the lump sum is taxed separately from the rest of your income, at a preferential flat rate equivalent to one-fifth of the regular tax. Afterwards, only the future returns are subject to income and wealth tax.
Another important advantage: the remaining capital is transmissible. In the event of death, what has not been used reverts to the heirs, which is generally not the case with annuities. It is therefore a solution to be favored if you wish to organize an inheritance.
Finally, withdrawing a lump sum is often considered more advantageous for individuals with a limited life expectancy, additional sources of income, or strong financial management skills. It also allows for free reinvestment, or even the creation of a private lifetime annuity based on personal preferences.
Disadvantages of capital
Withdrawing your capital at retirement also means taking full responsibility for managing it. Unlike the annuity, there is no longer a guaranteed lifetime income: you must ensure that the funds last until the end of your life, which requires accurately estimating future needs and resisting the temptation of excessive spending.
Capital must generally be invested in order to generate a return, which exposes market risks. In times of economic instability or low interest rates, it can be difficult to achieve sufficient returns without taking significant risks. Poor investment decisions can jeopardize long-term financial security.
From a tax standpoint, even though the initial withdrawal is taxed at a preferential rate, the income generated by the capital (interest, dividends, gains) will be taxed annually, and the capital itself will be subject to wealth tax. This can represent a significant long-term burden, especially for individuals with medium to high net worth.
Finally, if life expectancy is underestimated or care needs increase at an advanced age, the capital can run out too soon. Unlike the annuity, there is no safety net once the funds are depleted. This is where the greatest risk of a lump-sum withdrawal lies.
BVG capital retirement at a glance
- Total freedom in the use of capital
- Transfer of remaining capital to heirs in the event of death
- Advantageous tax treatment on withdrawal (single tax at reduced rate)
- Potentially higher income from well-managed investments
- Suitable for people with short life expectancy
- Interesting option for those with other sources of income or good financial knowledge
- Personal responsibility for long-term management
- Market risks associated with investments (volatility, potential losses)
- No lifetime income guarantee: risk of depleting funds too soon
- Difficulty in superforming the conversion rate with safe investments
- Annual tax on income and wealth
- Capital depletion risk
The problem of capital withdrawal
One of the major challenges of lump-sum withdrawals is to generate an income equivalent to that of a BVG pension over the long term, without running excessive risks. Today, the usual conversion rate is 6.8 % on the mandatory portion, equivalent to a very attractive guaranteed annual return, which is difficult to reproduce without exposure to the vagaries of the markets.
Let's take a simplified example: a 64-year-old with BVG capital of CHF 600,000. Let's compare possible net incomes under two strategies: annuity or capital, based on realistic scenarios.
Example of capital withdrawal
- Net annual yield
- Gross LPP/BVG capital
- Single tax (IPC)
- Net available capital
- Annual income
- 1 %
- CHF 600,000
- 45,945 CHF
- 554,055 CHF
- CHF 26,100
- 2 %
- CHF 600,000
- 45,945 CHF
- 554,055 CHF
- CHF 28,100
- 3 %
- CHF 600,000
- 45,945 CHF
- 554,055 CHF
- CHF 30,200
Receipt of annuity
- Net annual yield
- Gross annual pension
- Estimated annual tax
- Annual net annuity
- 1 %
- CHF 33,000
- CHF 6,600
- CHF 26,400
- 2 %
- CHF 37,200
- CHF 7,400
- CHF 29,800
- 3 %
- CHF 40,800
- CHF 8,200
- CHF 32,600
Conclusion
Lump-sum withdrawals may seem attractive, with their low tax rates, freedom of use and possibility of passing on to heirs. But an objective analysis of the figures shows that, in most cases, a BVG pension is more advantageous in the long term.
With a conversion rate of 6.8%, the annuity provides a steady income that is hard to match through conservative investments. Even with a net return of 2% to 3% on the markets—which already involves a certain level of risk—a lump-sum withdrawal does not generate a higher net income, except possibly in the medium term.
It is also important to consider life expectancy after retirement, which is often estimated at around 25 years for someone retiring at age 65. The longer the lifespan, the more advantageous the annuity becomes, as it continues to be paid without time limit, regardless of the initial capital accumulated.
Ultimately, the choice between annuity, lump-sum or a combination of the two depends closely on your personal situation, objectives and risk tolerance. The best way to make an informed choice is to carry out an individual analysis with a pension advisor.
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