Why are capital withdrawals in the 2nd pillar exploding?

There has been a great deal of discussion recently about the rapidly rising number of lump-sum withdrawals in the 2nd pillar. Three arguments dominate the search for explanations: declining conversion rates, tax advantages of lump-sum withdrawals and misguided incentives in advisory services. The following section examines these three arguments more closely.

A look at the chart of the week reveals that the proportion of people choosing a 100% lump-sum withdrawal is increasing rapidly, while the share of pure pension recipients is declining. Meanwhile, the number of insured persons opting for a mixed solution remains consistently low. This is surprising because there are several good arguments in favor of combining a pension with a lump-sum withdrawal. Are insured persons therefore making fully rational decisions?

The possible explanations in more detail:

• Declining conversion rates: A conversion rate of 5% implicitly corresponds to a lifelong return or interest guarantee of around 2.0%. Depending on family circumstances (eligible spouse or individual life expectancy), this guarantee may be higher or lower. At the same time, Flash 36 showed that achieving a 2.0% net return through personal investment requires significant equity exposure and strong cost discipline. The study “Annuity or Lump Sum?” by the Publica federal pension fund also shows that lump-sum withdrawals are increasing equally among both single and married individuals, even though the pension option implies a significantly higher interest guarantee when a spouse is entitled to benefits.
• Tax advantages of lump-sum withdrawals: At present, lump-sum withdrawals have a tax advantage compared with pension payments. However, indirect tax effects are often underestimated. In regions with strongly progressive lump-sum taxation – such as the canton of Zurich – withdrawing the entire retirement capital is already not necessarily the most tax-efficient option for large pension assets. If additional federal taxation of lump-sum withdrawals is introduced, the tax advantage of full capital withdrawal could diminish further.
• Misaligned incentives in advisory services: Banks and insurance advisors typically earn money only when capital is withdrawn and reinvested in financial products. The Publica study shows that individuals choosing full capital withdrawal were the most frequent users of external financial advice.

This raises an important question: are today's decisions between pension and lump sum always made in the best economic interest of the insured person?