Annuity or lump sum at retirement: how to choose.
At retirement, your 2nd pillar can be paid as a life annuity, lump sum, or a mix of both. Here are the arbitration factors: longevity, taxation, security, inheritance.
At retirement, you can receive your 2nd pillar in three forms: life annuity, lump sum, or a mix of the two. One of the most structural financial decisions of a career. And it is irreversible. Here is how to frame the choice.
Starting point: the conversion rate
The annuity is calculated by multiplying your old-age assets by a conversion rate. For the mandatory part, this rate is set by law: 6.8%. For the extra-mandatory part, it is free — generally between 4 and 6%.
| Period | Mandatory part | Source |
|---|---|---|
| Before 2005 | 7.2% | LPP art. 14 (original text) |
| 2005-2014 | Progressive decrease (women 7.1%, men 7.2%) | 2003 reform |
| 2015-2025 | 6.8% | Current text — women and men |
| LPP 21 reform (voted) | Progressive decrease toward 6.0% | Adopted in 2024 vote — gradual entry into force |
For mandatory LPP assets of CHF 500,000 at retirement, the 6.8% rate gives an annual pension of CHF 34,000 gross. About CHF 2,833 per month.
Total 2nd pillar assets: CHF 720,000 (CHF 480,000 mandatory + CHF 240,000 extra-mandatory). Fund allows 100% in capital. Estimated life expectancy: 86 (21 retirement years).
- Total assets
- CHF 720,000
- Mandatory conversion rate
- 6.8%
- Extra-mandatory conversion rate
- 5.0% (fund)
- Annual pension if all annuity
- CHF 44,640 32,640 + 12,000 = 44,640
- Total received if living until 86
- CHF 937,440 21 years × CHF 44,640
- Equivalent capital (annuity × 21)
- CHF 937,440 approximate break-even at 86
Arguments for the annuity
The life annuity is paid every month, for life. It has four structural advantages:
- Income security. If you live to 95, you will receive 30 years of annuity even if the initial capital would theoretically have been exhausted much earlier.
- No bad-investment risk. You cannot impoverish yourself through a failed investment.
- Survivor's pension for the spouse (generally 60% of the annuity, for life after your death).
- Simplicity of management. No investment to steer, no decisions to make every month.
Arguments for the lump sum
Capital withdrawal gives you all your assets at once. Four advantages:
- Freedom. The money is yours, you decide how to use it: investment, transmission, real-estate purchase.
- Tax optimization. Capital is taxed only once (separate pension rate). The annuity is taxed every year with income — depending on your bracket, the total can be heavier.
- Estate transmission. Capital not spent is part of your estate and passes to heirs under classic rules. The annuity stops at your death (or decreases via the survivor's pension).
- Inflation. With capital invested in securities, you can hope to track inflation. An annuity is generally weakly indexed.
The tax trade-off — a worked example
Tax optimization is often the decisive factor. Comparing annuity vs lump sum involves calculating tax over 20-25 years in both scenarios, taking other income into account.
LPP assets: CHF 600,000. Expected AVS pension: CHF 24,000/year. 3rd pillar 3a: CHF 80,000 to withdraw. Lausanne, single, estimated cantonal marginal rate 28%.
- LPP assets
- CHF 600,000
- Combined conversion rate
- 6.2%
- Annual LPP pension
- CHF 37,200
- Total income if annuity (AVS+LPP)
- CHF 61,200/year
- If annuity: yearly income tax (~22%)
- ~CHF 13,500 over 21 years: ~CHF 283,000
- If capital: one-off source tax (~7%)
- ~CHF 42,000 + income tax on AVS alone, lower
- Capital at 65 after tax
- CHF 558,000 freely usable / investable / transmissible
The annuity + capital mix: the middle way
Many experts recommend a mix. Idea: an annuity covers minimum current needs (rent/utilities/food), a lump sum covers projects and transmission. Typical example:
- 40 to 50% as annuity to secure a base income for life (with survivor's pension).
- 50 to 60% as capital for projects, flexibility, tax optimization, and transmission.
Timing constraints
Capital withdrawal is not requested the day before retirement. Four points to anticipate:
| Step | Deadline to respect |
|---|---|
| Announce your choice to the fund | Often 3 months to 3 years before retirement — check the rules |
| Change your decision | Possible until the deadline. After: irreversible |
| If recent LPP buy-back | No capital withdrawal for 3 years after a buy-back (LPP art. 79b) |
| Cantonal optimization | Transfer to a favorable foundation at least 12 months before withdrawal |
Three factors to integrate into the decision
- Your health and family. Realistic life expectancy, presence of a surviving spouse, heirs to protect. A doctor can give an honest reference.
- Your total wealth. If AVS + a partial LPP annuity cover your needs, the LPP capital becomes a long-term asset to transmit. Otherwise, the annuity's security prevails.
- Your risk attitude. Are you comfortable with managing capital over 25 years? With an advisor, manageable. Without any financial skill, the annuity is healthier.
- 01Three options: life annuity, capital, or a mix (recommended by default).
- 02Legal mandatory conversion rate: 6.8% in 2024-2025. Reform voted to decrease it progressively to 6.0%.
- 03Annuity = security, simplicity, survivor pension. Capital = freedom, tax optimization, transmission.
- 04Announcement deadline variable (3 months to 3 years depending on fund). No capital withdrawal within 3 years after an LPP buy-back.
To understand the comparative taxation of withdrawal by canton, see our comparison. For the 50+ action checklist that leads to this moment, our guide. And for buy-backs that change the equation, the dedicated article.