Should you opt for an annuity or a lump-sum payment of your retirement assets? What are the advantages and disadvantages of each of these options?
Pension fund payment options
When you retire, in addition to AVS (1st pillar), you are generally entitled to benefits from your 2nd pillar. Several options exist: a lifelong pension, a one-off lump-sum payment or a combination. Information on these options is available in your pension fund regulations.
Lump-sum or annuity payment?
There is no universal answer to whether retirement assets should be paid out as an annuity or a lump sum. The decision depends on your financial needs when you reach retirement age, but above all, on your ability to manage a lump sum with peace of mind instead of an annuity. The advantage of a retirement pension is that it is paid throughout your life. The disadvantage is that this amount is added to the AVS pension, and the total will then be subject to income tax.
Combining an annuity with a lump-sum payment can be an advantageous way of enjoying the benefits of both forms of payment.
A lump-sum payment allows you to use the money freely and put a strategy to structure your investments and consumption in place. The advantage of choosing a lump sum is that it is taxed at a reduced rate at the time of withdrawal and is then subject to wealth tax.
A crucial point to remember when choosing between these options is the possible consequences of your death. In the case of an annuity, and you are already retired, only the surviving spouse would continue to receive 60% of the retirement pension. In the case of a lump-sum benefit, the assets become part of the estate. Certain factors, such as family situation or health, may influence your decision.
Pension savings and tax progression
Tax on pension capital is progressive. It may be worthwhile staggering your withdrawals from different forms of pension funds.
Financial planning as a key tool
Choosing between an annuity and 2nd pillar capital is a crucial financial decision in every individual's life, and every situation is unique. Drawing up a financial plan will set out the advantages and disadvantages of the various possible scenarios and the tax and asset impacts. So, you must consult an expert who can guide you towards the best option.