Should you take a pension or a lump sum from your second pillar in Switzerland?
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When nearing retirement age, an important decision needs to be made: withdrawing the second pillar as a pension or a lump sum. Indeed, the Swiss retirement system allows both options and they both have some pros and cons, so how can we choose?
In this article, we delve into both options in detail to help you decide whether you should withdraw the second pillar as a pension or a lump sum.
A pension or a lump sum
In most cases (more on the details later), you will have to decide between a pension or a lump sum once you reach retirement. If you have a pension fund at retirement (which is the case for most people), this is an essential decision.
A pension is money that you will receive every month until your death. The pension amount is derived from the money in your pension fund and a conversion rate. The conversion rate is used to multiply the assets in your pension fund and give you the annual pension. The monthly pension is simply a twelfth of that. The pension amount is counted towards taxable income.
A lump sum is a simple concept. You will get your entire assets paid to you at once. From then on, you will be able to manage your assets yourself. Once you receive the lump sum, you will have to pay a withdrawal tax.
With most pension funds, you can also choose a mix of both. You could take half of your assets as a pension and the other half as a lump sum. So, this can complicate the choice further because this creates many variations.
This choice between a pension or a lump sum can make a huge difference to your retirement, so it is important to think about it thoroughly.
Differences between pension funds
When deciding between a pension or a lump sum, you need to look closely at the details of your pension fund.
The first difference between pension funds is the conversion rate. As mentioned before, the conversion rate is what will define your pension from your assets. Currently, the conversion rate of the mandatory assets is set by law at 6.8% (as of 2025). This only governs the pension coming from the mandatory assets. If you have extra-mandatory assets, each pension fund will have different conditions. So, you should look for your average conversion rate. This unfortunately means that some people can get a much better pension than others, depending on their employer’s pension fund.
The second difference is how much you can withdraw as a lump sum. The law only sets a minimum of 25% of the pension assets that can be withdrawn as a lump sum. Some pension funds are more flexible and allow up to 100% lump sum. But you will have to read the conditions of your pension fund to be certain.
Since these two points are essential, it is crucial to take them into account for your retirement choices.
How to choose between a pension or a lump sum?
So, now that we have covered the basis of the choice, we need to go into the criteria we can use to decide.
What is your financial situation?
Before deciding between a pension or a lump sum, you will need to have an accurate view of your financial situation. It is essential that you can tell what you need for retirement and how stretched your finances are.
If you require some stable income in retirement, you will have to take a pension. On the other hand, if you are already planning to retire based on your assets, a lump sum may make sense.
In general, the more security you already have with your assets, the more interesting a lump sum becomes. On the other hand, if you need more security, a pension may fill that gap.
And you should not forget about your risk capacity. If you have a good financial situation, but you are very risk-averse, you may prefer a pension for its guarantees.
How will you handle the lump sum?
If you opt for a lump sum, there are two essential questions related to what you will do with the money.
I am assuming that you actually require the money, like most people. If you do not need it at all, a lump sum is great, and you could even splurge it if you wish.
The first question is whether you will invest the lump sum or keep it in cash. If you do not invest it, the lump sum will lose value due to inflation and withdrawals. On the other hand, if you take a lump sum and invest it, you may generate higher returns than the pension itself. With a good withdrawal rate, you can generate sustainable returns over the long term.
Another important question is whether you are capable of not spending it quickly. Many people take a lump sum because they think it is smarter, but they end up spending it too quickly. As a result, they are now in a much worse situation than if they had taken the pension. The advantage of the pension is that you cannot spend it too quickly.
If you choose a lump sum, you will need to be good at handling money. It may sound easy, but many people spend the money they have without thinking about it. And many people think they can do many small expenses out of a large lump sum, but they end up underestimating their withdrawals.
Life expectancy
One of the most essential criteria for deciding between a pension or a lump sum is also one of the hardest: you need to estimate your life expectancy. In Switzerland, on average, in 2025, men have a life expectancy at birth of 82 years, and women live 86 years. So, from your age at retirement age, you can estimate how long you will live. However, be careful that this is the life expectancy at birth, not the life expectancy for everybody.
Additionally, you should also consider how healthy you are and the health of your ancestors. This should give you an idea of whether you are aiming for a longer or shorter life than the average.
If you are going to live a very long life, a pension may make more sense since it is guaranteed for life. On the other hand, for a short lifespan, a lump sum is more beneficial. Or, put another way, a lump sum has a longevity risk while a pension has a short-term risk.
Conversion rate
The conversion rate is also crucial because it will define how much pension you will get from your assets.
If you are getting a lump sum, you should invest it. And you should compare how much returns you will get from your portfolio and the conversion rate. If you can get a better average return than the conversion rate, you have an advantage. But if you are not, your lump sum may decay rapidly.
A low conversion rate means a lump sum may be more interesting. On the other hand, a high conversion rate will make a pension interesting.
Taxes
Then, taxes should also be considered when picking between a pension or a lump sum.
A pension is added to your taxable income. So, any pension will be taxed at your marginal tax rate.
A lump sum is taxed once as a withdrawal tax, separately from your regular taxes. Additionally, the lump sum may also significantly increase wealth tax. The withdrawal tax on lump sum is a progressive tax. It can be very cheap for low sums, but can become expensive for large amounts. You can optimize it by staggering your withdrawals. It also varies heavily from canton to canton.
If your marginal tax rate is high, choosing a lump sum can be advantageous. Indeed, the lump sum will be taxed separately (not added to your regular income). Furthermore, over the long term (if you live longer), the taxes paid on the pension are likely higher since the pension is taxed every year.
What happens if you die?
Nobody really likes to think about that, but what will happen finance-wise if you die?
This is an essential question because lump sums and pensions are very different in that matter.
If you got a lump sum, it becomes part of your estate and is treated as the rest of your income at death. So, your spouse or children will get your estate. If you have a will, you can also give it to somebody different if you have neither spouse nor children.
On the other hand, if you die with a pension, the rules will depend on your pension fund. By default (set by law), the spouse will get 60% of the pension (based on mandatory assets). The children can get 20% of the pension on mandatory assets. In general, other people will not get anything.
Therefore, depending on your situation, a lump sum may have significant advantages if you die in retirement with dependents. But you will have to check out the conditions of your pension funds because some are much more generous than others.
Additionally, if you want to leave a legacy to your heirs, a lump sum will add to that legacy.
Hybrid options
You generally do not have to choose only a pension or a lump sum, you can choose a combination of both. Indeed, most pension funds will allow you to withdraw part of your retirement assets as a lump sum and the other part as a pension.
If you are on the fence between both options, it may be a good idea to combine both. This could be great if you have some short-term plan for which a lump sum could help, but still want a long-term pension.
But again, you will have to carefully weigh all the pros and cons. With a hybrid option, you will have both the advantages and disadvantages of both options. Furthermore, if you take a large lump sum, you can expect a significantly reduced pension.
What about vested benefits?
Until now, we have discussed money in a pension fund, meaning the person considering this is still employed. But what if your retirement money is a vested benefits account?
In this case, the solution is simple: you do not have a choice between a pension or a lump sum. Vested benefits must be withdrawn as a lump sum.
What about the third pillar?
The third pillar is an easier point. You can only withdraw your third pillar at once, as a lump sum. To know more, you can read our article about the third pillar in Switzerland.
Our strategy
For completeness and transparency, we can also share our strategy between a pension or a lump sum. At this time, we are looking at more than 25 years before we can withdraw any money from our retirement accounts.
Since I plan to retire early, I will likely have no pension fund at retirement, only a vested benefits account. Therefore, I will not have a choice, since vested benefits can only be withdrawn as a lump sum. If I am still employed (through the blog, for instance), I will still take out a lump sum. We are planning to retire based mostly on our portfolio. As a result, it makes sense to keep it entirely invested.
As for my wife, if she is still working when nearing retirement age, we will likely take out a lump sum as well if possible. Our reasoning is the same: to keep one portfolio for our retirement. We do not plan on any annuity (if we get social security, it will be a small bonus).
Since we are very far from retirement, we can still adapt our strategy later. But this is our current plan.
Summary
We can summarize our findings for the question of a pension or a lump sum in this simple table:
| Criteria | Pension | Lump Sum |
|---|---|---|
| Investment Control | None | Full |
| Flexibility | None | Full |
| Taxes | As income | One-time withdrawal tax |
| Inheritance | Limited and only for spouse and children | Part of your estate |
| Security | Guaranteed income | Investment risks |
| Longevity | Great if you live long | Great if you live short |
Frequently asked questions
Is it better to take a pension or a lump sum in Switzerland?
It depends on many things: your personal financial situation, your risk capacity, your investment knowledge and more. You also need to consider inheritance, longevity, and taxes.
Can I take 100% as a lump sum in Switzerland?
It depends on your pension fund. The law sets a minimum of 25% that can be withdrawn as a lump sum. Many pension funds allow up to 100%, but you will have to look at the details of yours.
Can I take both a pension and a lump sum in Switzerland?
Yes. Pension funds allow for a combination of a lump sum and a pension.
Calculator
To help you make a decision, we have written a lump sum or pension calculator that can help you decide. This is only one side of the picture because we do not have all the context about you, but this can bring some good basis to your choice.
Conclusion
Choosing between a pension or a lump sum is not an easy decision and must be taken carefully. You will need to compare multiple criteria, and there is no single one-size-fits-all solution.
In many situations, a lump sum will be better. But in some situations, a pension will be better. To pick between a pension or a lump sum, you will need to consider taxes, investing, your personal situation, and more to make an educated decision. If you are very far from retirement, you do not need to think about this too much. However, once you are getting closer, you will have to plan accordingly.
In our case, we will likely only take lump sums in retirement. This fits perfectly with our early retirement plan and our idea of living from our portfolio.
But what about you? Are you planning to take a pension or a lump sum?
More reading
Second Pillar: All you need to know to retire in Switzerland
Maximize your Second Pillar (LPP). Discover how occupational pensions work in Switzerland and how to optimize your contributions for a better retirement.
Can you retire early with Swiss Stocks and Bonds?
Can we retire early with only Swiss stocks and bonds? We find out with Trinity Study simulations with historical Swiss stocks and bonds data.
The Three Pillars of Retirement in Switzerland
Master the Swiss pension system. Learn how the Three Pillars work together and what you need to do to secure a comfortable retirement in Switzerland.
Learn easy ways to optimize your finances and save thousands in Switzerland with our exclusive e-book. Learn about the most cost-effective financial services tailored for savvy residents and expats!
Get Your FREE Swiss Money-Saving Guide
I was told by my current employer that when you change jobs you don’t have to move your second pillar to the fund that the new employer is working with. And this way you can create more flexibility in terms of how you want to take out your second pillar. Do you know anything about this Baptiste?
They are both right and wrong.
By law, you are supposed to transfer your pension assets to your new employer.
In practice, this is not enforced, so many people are not doing it.
But I would still recommend following the law.
Hi Baptiste,
Very good article, thank you.
I think it is also worth mentioning that with the pension option, the pension fund will add a premium on top of the conversion rate as long as your children are still in education and up to 25 years old. About 20% per child depending on your fund conditions.
Best regards
Paul
I think you’re confusing the first (AHV) and second (BVG) pillars? In the second pillar, what you are referring to should not exist. At least, this is the first time I have heard of it, and I could not find anything on the internet.
Hi Paul
Excellent point, I did not even know about this before. This will only apply to the mandatory part of the assets, but it can make a significant difference. I will mention it.
Hi Baptiste,
Great and increasingly interesting topic. Wonder why you didnt put the cherry on top of the cake I.e. I was looking forward to some simulations for different scenarios. Something along the lines to the very many you’ve done based on the famous Trinity study. Perhaps in the making for a 2.0 version? Or even better, an online calculator so that each one can reflect their personal situation best. Congrats for the blog!
Hi,
The reason I did not do it is because there are many factors and it would be difficult to put them all in graphs.
But I agree that an online calculator would be very nice! I will put that on my list and try to do that in the next weeks, great idea!
You can get inspiration from this one (With True Wealth’s permission): https://www.truewealth.ch/pension-or-lump-sum-payout
Cheers!
Thanks for the example!
Hi
I wrote a first version of such a comparator: https://thepoorswiss.com/pension-or-lump-sum-calculator/
Please let me know what you think either here on the forum: https://forum.thepoorswiss.com/threads/feedback-pension-vs-lump-sum-calculator.453/
I consider myself to be a pension expert because I receive payments from six pensions and four countries each month. Only one is fixed payment. The rest are adjusted for inflation, more or mostly less.
Both my parents lived to 102( I’m not joking!). So I opted for lifetime payments. By the time I reach 100 the paying countries will be bankrupt. My additional income comes from renting properties. Much better because it’s something I control. Investing in Smerican shares at the moment ( including ETF ) is like bragging about your first class cabin on the titanic. Bezos has been selling his Amazon shares like crazy. The party will end, in the next 12 months. Time to hold Swiss Francs.
Hi Graham
Very nice longevity! It makes sense to plan for lifetime payments if you plan to live for 100 years, and you have some flexibility if you have more rental income.
Not sure the statement “On average, in 2025, men have a life expectancy of 82 years and women live 86 years” is correct. It depends on when you were born. I believe there is a PDF/table with the different life expectancies depending on year of birth.
Hi binfch
This is the latest data I could find for average people living in Switzerland. Did you find another sources for life expectancy at birth?
But obviously this is only an average, and it depends on other factors, but this is only for Switzerland. I will amend the article.
An additional consideration is that the pension is normally not automatically adjusted for inflation, as far as I know it is up to the Pensionskasse to make sporadic adjustments, if any.
Hi Marco
That’s a fair point. They have to do some inflation adjustments but only if the fund can afford it and only on the mandatory portion.
On the other hand, the lump sum is also not adjusted at all to inflation ;)