Capital or pension: The tax aspect

In Economico Flash 4, we provided an overview of the “capital versus pension” decision. In this Flash 8, we look at the tax aspect.

The tax advantage is often cited as the main reason for the increase in lump-sum withdrawals in Switzerland. This does indeed exist: the lump-sum withdrawal is subject to the (lower) lump-sum withdrawal tax, while the pension is subject to the (higher) income tax as part of your income after retirement. The actual difference depends on your tax domicile, the applicable tax rate there and your assets and income situation.

The financial industry likes to publicize this tax advantage. This is not entirely altruistic. If your advisor succeeds in convincing you to withdraw your capital and you then invest this capital in his investment or insurance products, you will make him very happy.

The simple “back-of-the-envelope” tax comparison between a lump sum and a pension is also somewhat more complex than clients are often led to believe. In the case of lump-sum withdrawals, the following indirect tax effects are added to the one-off taxation of the capital: the withdrawn capital leads to a higher annual wealth tax burden and the capital income generated on the withdrawn capital is subject to income tax.

In the chart of the week, we calculated the tax consequences for various tax domiciles of an available retirement savings capital of CHF 1 million that is either withdrawn as a lump sum (“C”) or as an annual income tax-relevant pension (“P”) of CHF 50,000 with a conversion rate of 5%. For all tax domiciles, the presumed tax advantage of the lump-sum withdrawal is shown. The tax comparison was carried out using the average remaining life expectancy (22 years) at retirement.

With Economico’s “capital or pension” function, you can compare the direct income and capital benefit tax effects of the “capital versus pension” decision for your individual situation and tax domicile. The consideration of indirect tax effects (wealth tax and capital income subject to income tax) will soon be integrated into the calculator.

Finally, this: nothing lasts forever, not even tax rates. The tax incentive in favor of capital withdrawals is a thorn in the side of many and a group of experts has recently proposed to the Federal Council in its report that this preferential tax treatment of capital withdrawals be abolished. To be continued.