For many people, pension fund assets from the 2nd pillar are the most important component of their retirement income. That is why it makes a big difference whether you receive your benefits as an annuity, as a lump sum or as a combination of the two. Your decision applies for the entire duration of your retirement; you cannot change it later.
At the same time, there are constant changes: The conversion rates for new annuities are falling at many pension funds, which means that the expected future annuity payments may also be lower. The tax treatment of a capital withdrawal should also be taken into account in the decision: It depends, among other things, on where you live, the amount of your benefit and the timing of any additional lump-sum payments. It also depends on the pension fund regulations to determine what options you actually have. So it's not that easy to make the right decision.
Annuity, lump-sum payments and hybrid options: What are the differences?
Throughout your working life, you build up retirement provision through occupational pension plans (2nd pillar). Over decades, this often adds up to a large sum of several hundred thousand francs. You are entitled to this amount upon retirement.
In the past, retirement savings were usually paid out as a lifetime annuity from a pension fund.
The pension under the 2nd pillar is calculated by multiplying the account balance by a conversion rate. This rate is set by law and currently stands at 6.8% for mandatory pension fund assets. This means you receive 6.8% of your accumulated capital under the mandatory BVG scheme each year, providing you with a predictable income.
Many pension funds not only accumulate the mandatory capital but also additional voluntary contributions, known as "extra-mandatory" balances. Different conversion rates apply to this, which are determined on a case-by-case basis.
In the case of "split" pension funds, two annuities are calculated using different conversion rates and then added together. In the case of "envelope" pension funds, the total pension is calculated based on a combination of mandatory and non-mandatory capital. This pension may never be less than the statutory minimum of 6.8% of the mandatory capital.
Alternatively, you can also have your pension fund balance paid out as a lump sum. Possible examples include:
Many retirees opt for a hybrid approach: They receive part of their balance as an annuity and part as a lump sum. Exactly how these combinations are structured depends on the rules of the respective pension fund.
The law stipulates that you may withdraw at least 25% of your mandatory savings balance as a lump sum. In many cases, it is also possible to withdraw larger amounts of capital – in some cases, even the entire amount. This information can be found in your pension fund's regulations. It also specifies when you must make your decision.
Tip: Find out early on what the general terms and conditions of your pension fund are and what options it offers. This is an important factor to consider when making your decision. Discuss your retirement provision options with the experts at Zurich. Here's how to make sure your decision aligns with your personal situation and the structure of your pension plan.
A lump-sum payment from a pension fund has clear advantages: You have the greatest possible freedom to decide how you want to use your money. You can use it, for example, to pay off a mortgage or invest in a home or other projects. If you invest the money yourself, you have the chance to earn higher returns than you would with a fixed annuity. When you die, any remaining money can be passed on to your heirs.
However, there is also a significant risk: You have to manage your money on your own. As a result, there is a high risk that your capital will be depleted before the end of your life – because you have high expenses, your investments aren't performing as expected or because you live longer than you anticipated. You alone bear the risk of investment losses and of making the wrong decisions.
Who should choose a lump-sum?
A lump-sum withdrawal is particularly recommended for the following individuals:
Do not decide to opt for a lump-sum payment on your own; instead, seek advice – ideally as part of a retirement provision consultation with our experts at Zurich.
A pension fund annuity provides you with a guaranteed, predictable income for life. Your pension fund bears the longevity risk – that is, the question of whether your money will last until the end of your life. You don't have to worry about investments, you don't bear any investment risk yourself and you can plan your budget for retirement relatively easily.
However, there are some drawbacks: Your retirement savings are generally not inheritable. If you die, your widow or widower will typically receive 60% of the pension fund annuity you were receiving. However, certain requirements must be met for this, as specified in your pension fund regulations. Whether a cohabiting partner is also eligible for a pension – and under what circumstances – also depends on your pension fund. Minor children are also usually eligible for an orphan's pension.
Another risk is inflation: Many pension funds do not offer inflation adjustments. This means that your pension will lose purchasing power over the years. With annual inflation at just 1% and a payout period of 20 years, that already amounts to a 20% loss in purchasing power.
Who should choose an annuity?
Annuities are often chosen by people who value security, have little experience with or interest in investing and want a stable, predictable income. Find out how well the annuity option meets your personal needs, especially with regard to protection for your surviving dependents and inflation. The best way to do this is as part of a retirement planning process with our experts at Zurich.
Some retirees do not opt exclusively for an annuity or a lump-sum payment, but instead choose a hybrid option. For example, it is possible to:
With this option, a pension provides stable basic financial security. At the same time, the capital portion can be used flexibly – for example, to purchase a home, pay off a mortgage or cover major expenses. From a tax perspective, partial retirement spread out over several years can be an attractive option. This way, the additional income is also spread out over several years.
Find out which combination options your pension fund actually allows and how they affect your overall financial planning. The best way to do this is as part of a retirement provision process with our experts at Zurich.
When deciding between an annuity and a lump-sum payment, tax plays a crucial role:
The amount of tax you'll owe depends heavily on where you live: Do you live in a canton with a high or low tax burden? Are you planning to move in the years leading up to retirement or are you even thinking about emigrating? All of these factors must be taken into account when making a decision, so that you can find the best solution for yourself. The tax burden can often be reduced through staggered lump-sum withdrawals or partial retirement. This is because the money isn't paid out all at once in a single year, but is spread out over several years.
Private pensions can also be a sensible option. They can supplement your retirement provision and, depending on how they are structured, offer tax advantages.
The tax implications vary greatly from person to person and can only be accurately calculated by taking a comprehensive view. That is why it is highly recommended that you have your situation evaluated by a professional. Ideally, you should do this as part of your retirement planning with our Zurich experts.
Do you own a home? Your decision to choose an annuity, a lump-sum payment or a hybrid option will have a direct impact on your ability to afford your home in retirement. For example, you can use your pension fund lump sum to pay off a mortgage. Conversely, the stability of annuity payments will make it easier for you to cover the ongoing costs of owning a home.
However, homeownership is just one component of your overall financial plan. The key factor is how your choice between an annuity and a lump-sum payment will affect your overall financial situation. Other assets and your partner's financial security are also relevant in this context.
Ideally, you should start gradually building your retirement plan around age 50: Organize your assets, include your home, hedge against risks and find out what options your pension fund offers you.
An increasing number of retirees are opting for lump-sum payments: Currently, 45% choose this option, 19% choose a hybrid option and only 41% choose an annuity (as of 2026). The trend toward lump-sum payments reflects not only individual decisions but also has an impact on society.
This dilemma is also a subject of public debate – for example, in reports by SRF or statements by the Federal Council. The question is, which should be given greater weight: personal responsibility or collective security?
Regardless of that, the following applies on an individual level: Retirement planning is important and valuable because it helps you find the best balance between freedom and security, between personal responsibility and financial protection and between opportunities and risks.
Annuity, lump sum or a combination: Which option is best for you depends on a number of factors. We recommend that you take some time to answer the following questions for yourself. This will help you to be well-prepared when it comes to retirement provision:
Common mistakes you should avoid
Our clear recommendation: Always make your decision as part of comprehensive financial and retirement planning. Here's how you can take all the important aspects into account: Your personal situation, your goals and needs, tax issues, your living situation and providing for your loved ones. Our experts will work with you to develop a comprehensive plan. This will help you make an informed decision and find a solution that is sustainable for you in the long run.
To help you make the best decision regarding "annuity, lump sum or a combination of the two," it is important to take a holistic view. That is why we provide you with comprehensive and detailed advice as part of our financial and retirement planning service. Together, we’ll review your 1st, 2nd and 3rd pillars, homeownership, taxes, inheritance issues and your personal life situation.
Joint financial planning is important for couples so that both partners are financially secure in their later years and can fully enjoy their retirement.
There is no one-size-fits-all answer to this question. After all, every option has its pros and cons.
An annuity provides a lifelong, predictable income, but it offers little flexibility. A lump-sum payment offers greater flexibility and the money can be invested with focus on returns. But this carries the risk of either losing money or spending it too soon. This hybrid option combines the security of an annuity with the flexibility of a lump sum, which is why it is gaining popularity.
When making this decision, tax issues, personal circumstances and providing for dependents must also be taken into account. That is why seeking expert advice is highly recommended.
Your pension fund assets consist of a mandatory portion in accordance with the BVG and may also include a non-mandatory portion. The law requires that you be able to receive at least 25% of the mandatory BVG portion as a lump sum, provided that your pension fund’s regulations do not impose any restrictions. Whether you can receive additional benefits, when you must file for them and how the non-mandatory portion works are determined on a case-by-case basis. Check with your pension fund.
Your annuity from the pension fund will be taxed as income every year, just like your current salary. If you choose the lump-sum option, it will be taxed as a one-time lump-sum payment at a special rate. This rate is lower than the income tax rate, but it rises with the size of your lump sum. Tax rates vary by canton – be sure to seek expert advice.
If you withdraw your funds from the pension fund as a lump sum and you spend it, you will no longer receive any benefits from the pension fund. So you will have to live on other sources of income. These include, for example:
There is a real risk that you will spend your lump sum too quickly. Be sure to seek advice and take advantage of retirement planning services to minimize your risk.
If you own a home, you should take this into account when deciding whether to opt for a lump sum or an annuity from your pension fund. On the one hand, owning a home can lower your fixed costs because you don't have to pay rent. On the other hand, you'll have to pay for maintenance and the mortgage and you may face costly repairs if, for example, your heating system breaks down. Homeownership often results in higher debt due to the mortgage.
Especially as we get older, affordability can become an issue. In addition, homeownership can serve as an asset. However, it isn't very liquid, so you can't just use it for everyday expenses. In short: Homeownership makes the decision between "lump sum or annuity" more complex – which is all the more reason to engage in comprehensive retirement planning.
When implementing your personalized retirement planning strategy, we can offer you all relevant solutions from a single source. There are two options if you decide to opt for a full or partial lump--sum payment:
With professional support from
Head Financial and Pension Planning D-CH.
As Head of Financial and Pension Planning at Zurich, he contributes his expertise.
With professional support from
As a technical expert at Zurich, he contributes his expertise in retirement provision and investments.
