Conversion rate: what does this key parameter mean for your retirement?

The conversion rate: a key concept in pension planning

The conversion rate is a central element of the Swiss pension system.

It comes into play at retirement to convert the capital accumulated in your pension fund into an annual pension.

In other words, it determines the level of income you will receive each year, based on your pension capital.

How does the conversion rate work?

The principle is straightforward:

pension capital × conversion rate = annual pension

For example:

pension capital of CHF 100,000
with a conversion rate of 6%

→ results in an annual pension of CHF 6,000.

The higher the conversion rate, the higher the pension, and vice versa.

When does the conversion rate apply?

The conversion rate only applies when pension assets are withdrawn in the form of a lifetime pension.

It does not apply in the case of:

a lump‑sum withdrawal,
or for any portion withdrawn as capital in a mixed solution.

Who sets the conversion rate?

In Switzerland, different levels coexist:

the law sets a minimum conversion rate for the mandatory portion of the second pillar,
pension funds determine their own rates for the extra‑mandatory portion.

In practice, this means that conversion rates can vary from one institution to another.

Why is the conversion rate so important?

The conversion rate has a direct impact on your standard of living in retirement.

With the same capital:

a higher rate → higher pension
a lower rate → lower pension

It is therefore a key driver of future income.

What factors influence the conversion rate?

Several elements explain the level of the conversion rate:

life expectancy,
expected investment returns,
long‑term commitments of pension institutions.

For example, longer life expectancy means pensions must be paid over a longer period, which can lead to a lower conversion rate.

Why do conversion rates evolve over time?

Over time, conversion rates tend to be adjusted due to:

increasing life expectancy,
a lower interest rate environment,
financial constraints faced by pension funds.

These developments can have a significant impact on future pension levels.

The conversion rate in your retirement strategy

The conversion rate should not be considered in isolation. It needs to be assessed in relation to:

the amount of your pension capital,
your choice between pension and lump sum,
your personal and financial situation.

Understanding this parameter allows for more accurate forecasting of retirement income and helps guide planning decisions.

The conversion rate is a determining factor in the calculation of your retirement pension. By understanding how it works and the factors that influence it, you can better anticipate your future income and adjust your pension planning accordingly.

Want to know more? Contact a Piguet Galland advisor