Should one choose the pension or the lump sum from the LPP ?

Pension fund annuities have decreased by nearly 40% over the past 22 years, while AVS annuities have increased by 19% during the same period. This significant change in LPP annuities raises crucial questions for your retirement planning.

Indeed, the choice between LPP capital or an annuity is a major decision, especially when we know that in 2018, 48% of new retirees opted for an exclusive annuity, 33% for a capital withdrawal, and 19% for a mixed solution. This decision is all the more important given that the current life expectancy can represent up to one-third of your life in good health.

This practical guide helps you through this essential reflection, analyzing the different options available to you and their long-term financial implications. You will discover the determining factors for making the most appropriate choice for your personal situation.

Explaining the LPP annuity amount

The calculation of your LPP annuity is based on a precise mechanism that determines your retirement income. First, your accumulated capital is multiplied by the conversion rate, which is set at 6.8% for the mandatory part in 2025.

Components of the calculation

The amount of your annuity depends mainly on two factors: your retirement capital and the conversion rate. For example, with a capital of 200,000 CHF, your annual annuity will be 13,600 CHF, or 1,133 CHF per month. Additionally, your capital often consists of both a mandatory and a supplementary part, each with its own conversion rate.

Factors affecting the final amount

Several factors determine the amount of your final annuity. Indeed, the contribution rates vary according to your age:

• From 25 to 34 years: 7% of annual salary
• From 35 to 44 years: 10% of annual salary
• From 45 to 54 years: 15% of annual salary
• From 55 to 65 years: 18% of annual salary

The insured salary also plays a crucial role. In 2025, the maximum insurable salary is set at 90,720 CHF per year. Moreover, your employer must contribute at least as much as you to your pension fund.

The minimum interest rate, set at 1.25% in 2025, applies to your capital throughout the contribution period. Together, these elements form the calculation base that will determine your monthly lifelong annuity unless you opt for a partial or total withdrawal in capital.

Capital withdrawal strategies

Strategic planning of your LPP withdrawal can significantly influence your financial situation at retirement. In fact, several options are available to optimize this crucial moment.

Total vs partial withdrawal

The choice between a total or partial withdrawal depends on your personal situation. Additionally, you can withdraw up to a quarter of your benefits in the form of capital. Notably, this flexibility allows you to adapt your strategy based on your specific needs.

Withdrawal staggering

Staggering withdrawals represents a particularly advantageous approach. The law now allows the division of capital withdrawal into a maximum of three installments. This possibility applies to withdrawals from the second pillar and third-pillar accounts.

Tax optimization

The tax aspect is a crucial element in your withdrawal strategy. Capital withdrawals are taxed separately from other income, at a reduced rate. To optimize your tax situation, consider the following key points:

• Staggering your withdrawals over several tax years to reduce the progressivity of the tax
• Avoid withdrawing capital from the second pillar in the same year as the third pillar
• Analyze the tax differences between cantons, as practices vary significantly

For example, a 300,000 CHF withdrawal at once in Lausanne would result in 22,290 CHF in taxes, compared to 13,860 CHF if split into three withdrawals of 100,000 CHF. Moreover, you can divide your capital into three separate accounts: your current pension fund and two vested benefits accounts.

For married couples or registered partners, joint planning of withdrawals is wise, as they are taxed together in the same year. Furthermore, it is possible to withdraw third-pillar capital up to five years before the legal retirement age.

Mixed pension-capital solutions

The combination of pension and capital represents a balanced approach to retirement. Notably, this strategy allows you to combine the security of a regular income with the flexibility of available capital.

Optimal allocation

The division of your vested benefits is a powerful planning tool. Indeed, you can split your capital between two separate foundations, providing more flexibility in managing your retirement wealth. Furthermore, this approach allows you to adapt your withdrawals according to your specific needs while keeping part of your capital in a retirement account.

• To optimize this allocation, consider these essential factors:
• Maintaining a base annuity to cover fixed expenses
• Allocating capital for one-off projects
• Long-term tax planning

Advantages of diversification

Diversification between annuity and capital offers many benefits. As long as your assets remain in a vested benefits account, they are exempt from wealth tax, and the returns generated are not subject to income tax. Additionally, these assets are not included in AVS contributions for people without income.

This mixed strategy also allows for personalized investment approaches. For example, you could choose a more conservative strategy for the portion intended for short-term withdrawal, while the portion kept longer could benefit from a more dynamic approach to maximize growth potential.

The minimum LPP interest rate, set at 1.25%, applies to your entire retirement capital, thus ensuring a stable return base for the portion maintained in annuities.

Practical planning of your choice

To finalize your decision regarding the LPP pension, careful planning is essential. Implementing your choice requires rigorous organization and adherence to certain legal deadlines.

Schedule of procedures

First, you must inform your pension fund in writing at least three months before your retirement. Additionally, if you plan an early retirement, it is possible from the age of 60. Specifically, for an early withdrawal intended for purchasing a primary residence, the request must be made no later than three years before the normal retirement age.

Required ocuments

To validate your choice, several documents are required:

• A formal written request
• Written consent from your spouse or registered partner for a capital withdrawal
• Official documents according to your situation (purchase contract for real estate, proof of residence)

Consultation with experts

The complexity of rules and regulations surrounding occupational pension schemes makes professional guidance indispensable. Experts constantly monitor market and regulatory changes to provide personalized advice. A first consultation of just a few minutes can clarify the essential aspects of your situation.

This consultation notably covers the tax impact of your choices and the ability of your pension to maintain your current standard of living. Specific conditions vary according to pension funds, hence the importance of consulting your pension fund's regulations.

Conclusion

The choice between LPP annuity and capital is undoubtedly one of the most important financial decisions of your life. After examining the various options, you now understand that each approach has its specific advantages.

The ideal solution mainly depends on your personal situation. On the one hand, the annuity provides financial security throughout your retirement. On the other hand, capital gives you more flexibility and opportunities for tax optimization.

A mixed approach could prove particularly relevant, combining the stability of a base annuity with the flexibility of available capital. This strategy allows you to adapt your withdrawals according to your needs while maintaining a regular income.

Whatever your final decision, meticulous planning remains essential. Take the time to analyze your situation, consult the necessary experts, and respect legal deadlines. This thorough preparation will help you make the best decision for your financial future.