Is Withdrawing Capital from Pension Funds a Better Option?
Withdrawing capital from occupational pension funds instead of relying solely on retirement benefits is becoming increasingly popular. Consequently, this trend results in lower retirement benefits from pension funds.
Impact of Reductions in Pension Fund Conversion Rates
Many Swiss pension funds have reduced their retirement benefits in recent years. The reductions in conversion rates fuel concerns among individuals that their savings may not be sufficient in old age. This concern likely played a significant role in the approval of the Swiss Trade Union Federation’s initiative to introduce a 13th AVH retirement fund in March.
Calculation of Retirement Benefits
The conversion rate determines how much the accumulated capital in the pension fund is multiplied to determine the annual retirement sum. For example, if the capital is 500,000 Swiss francs, and the conversion rate is 6 percent, the insured individual would receive an annual pension of 30,000 Swiss francs from the pension fund. However, if the fund reduces the rate to 5 percent, the annual pension would decrease to 25,000 Swiss francs.
Exclusion of Capital Payments
According to the November 2022 new pension statistics from the Federal Statistical Office (BFS), the median newly paid retirement benefits from occupational pensions in 2022 were 1217 Swiss francs for women and 2077 Swiss francs for men per month. However, these figures do not consider that many individuals choose to withdraw some or all of their capital from the pension fund at retirement, which does not contribute to their retirement benefits. In 2022, the median amounts paid by pension funds and vested benefits institutions to men were approximately 153,600 Swiss francs and to women were 65,600 Swiss francs.
Scrutinizing Pension Fund Retirement Benefits
When discussing reduced pension fund benefits, it is essential to examine the details. A new analysis by the think tank Avenir Suisse highlights that the average total benefits from occupational pensions between 2015 and 2022 have only slightly decreased, contrary to common belief.
One reason for this is the increased significance of capital withdrawals, resulting in lower pensions as the money is taken from the savings pot and not factored into the pension calculations. According to Jérôme Cosandey of Avenir Suisse, the proportion of new retirees who fully or partially withdraw their pension fund capital increased by 7 percentage points to 56 percent between 2015 and 2022. The median amounts of withdrawn savings increased from 85,000 to 114,000 Swiss francs.
To gain a more accurate picture of the development of total benefits from occupational pensions, Avenir Suisse calculated the hypothetical pension amounts if no capital withdrawals had been made. With an average conversion rate, the reduction in pensions would have been only 5 percent instead of 9 percent for the period 2015 to 2022. Considering that pensions are paid out for an average of six months longer due to increasing life expectancy, the perceived significant reduction in benefits is even lower.
Increased Benefits for Women
According to the think tank, benefits for women, accounting for higher life expectancies, increased between 2015 and 2022 by 2 to 6 percent depending on the conversion rate, whereas benefits for men decreased by 4 to 9 percent. The higher benefits for women are attributed to their increased participation in the workforce, says Cosandey.
The Pensionskassen study presented by pension provider Swisscanto at the end of May also highlighted the growing importance of capital withdrawals in occupational pensions. In 2022, 37 percent of male insured individuals exclusively withdrew their pension fund assets as capital at retirement, compared to 29 percent in 2015. For women, the figures were 37 percent in 2022 and 32 percent in 2015.
Conflicts of Interest in Consultations
The increased reliance on capital withdrawals from pension funds poses challenges. It is likely that many retirees opt for this route due to lower pension fund conversion rates. However, there are concerns in financial circles that individuals may not fully grasp the need to make their money last a lifetime. Additionally, managing finances becomes more challenging as cognitive abilities decline with age.
Therefore, it is advisable to calculate anticipated living costs in retirement and cover them with regular income, primarily from pensions but also potentially from rental income. Only once living costs are secured should individuals consider withdrawing capital from their pension funds.
There is also a risk that some insured individuals may overlook financial market risks or receive incorrect advice. Some financial advisors may have a vested interest in individuals withdrawing capital from pension funds and then entrusting them with wealth management.