Pension or lump sum: how to choose for your 2nd pillar?

The pension: a guaranteed income for life

Choosing the pension means receiving a fixed monthly income for the rest of your life. The pension is calculated by multiplying your retirement capital by the conversion rate (minimum legal rate of 6.8% on the mandatory portion). Capital of CHF 500,000 thus generates a pension of about CHF 34,000 per year.

Advantages: full security, no market risk, protection against longevity risk (you cannot 'run out' of your pension). Disadvantages: the pension is taxed in full as income, it does not fully pass to your heirs, and the conversion rate tends to fall.

The lump sum: flexibility and control

Choosing the lump sum means receiving all of your savings at once. You can use it freely: invest it, repay a mortgage, or fund a project.

Advantages: total freedom, capital that passes to your heirs, and a single, reduced-rate tax (rather than every year). Disadvantages: you bear the market risk and the longevity risk (the capital can run out), and managing it requires discipline.

Taxation: a decisive factor

Taxation changes the result significantly. The pension is added to your other income and taxed every year at the ordinary rate. The lump sum is taxed only once, separately from other income, at a reduced rate — but that rate depends on your canton and the amount withdrawn.

The larger the lump sum, the higher the tax rate. That is why it is often worth staggering withdrawals over several years (for example by combining the 2nd and 3rd pillars) to reduce the overall tax bill.

How to choose: the factors that matter

Several elements shape the decision: your life expectancy and health (good health favours the pension); your other income (if the AVS and other pensions already cover your needs, the lump sum offers more flexibility); your risk tolerance; your family situation (the lump sum passes to heirs); and your need for flexibility.

In practice, many retirees choose a combination: a pension to cover essential fixed expenses, and a lump sum for flexibility and inheritance. The right balance depends on your personal situation.

Putting numbers on the decision

The only way to decide with full information is to compare both scenarios on your real situation: net income after tax, how long the capital lasts, and the impact on your heirs. RetirePlan calculates both options side by side, applies your canton's taxation and projects your income year after year.

You then see, in numbers, what the pension and the lump sum mean in your case — instead of deciding blind on an irreversible choice.

Frequently asked questions

Is it better to take the pension or the lump sum?

There is no single answer: the pension offers the security of lifelong income, the lump sum offers flexibility and inheritance. The right choice depends on your health, your other income, your risk tolerance and your family situation. Many opt for a combination of the two.

How is the 2nd-pillar lump sum taxed?

The lump sum is taxed only once, at withdrawal, separately from your other income and at a reduced rate. The rate depends on your canton and the amount; staggering withdrawals over several years often reduces the total tax.

Can you combine pension and lump sum?

Yes, most pension funds allow you to take part as a pension and part as a lump sum. It is a common strategy: a pension for fixed expenses, a lump sum for flexibility and inheritance.

What is the conversion rate?

The conversion rate turns your LPP capital into an annual pension. The legal minimum is 6.8% on the mandatory portion: capital of CHF 100,000 gives a pension of about CHF 6,800 per year. A lower rate means a smaller pension for the same capital.