Pension or capital – an important decision

You can take the pension fund savings as a pension or as capital. Keep an eye on your planning. Many pension funds require three years notice for a withdrawal of capital. This notice period also has to be adhered to in the event of early retirement. Therefore, you should tackle the issue in good time and make a considered decision.

Pension: Greater security

A pension is favourable in the following situations:

• long life expectancy
• a younger spouse
• children still at school 

Once granted, the conversion rate remains guaranteed until the end. For example, someone retiring at the age of 65 with a conversion rate of six percent will receive more as of the age of 82 than he or she has originally saved. Average life expectancy is over 84. However, the pension has to be taxed as income.

Capital: Greater freedom

How much of the retirement savings can be taken depends on the pension fund in question. Legally it has to be possible to take at least 25 percent. Those who have made purchase contributions cannot withdraw them in the following three years for tax reasons.

Compared to the pension, capital withdrawal creates more financial flexibility. In this version, surviving dependents can be considered as heirs. However, the assets have to be managed by the beneficiary, which may become a burden depending on the stock market situation or with increasing age. 

Taxation of the capital withdrawal

In the case of capital withdrawal, a separate capital tax becomes due first. Then the savings are taxed as assets and interest on the investments made is taxed as income. However, the pure depletion of assets is tax free. Capital withdrawals from the pension fund are taxed as payments from pillar 3a. For that reason they should not both be taken in the same year. This avoids progression to a higher tax bracket.

Paying off a mortgage by withdrawing capital

The option of withdrawing capital is also popular to pay off a mortgage, however, in this case it is important to note that subsequent top-ups, for example for conversion work or renovation, will only be possible to a limited extent with increasing age. Such amortisation also restricts the freely available savings. Therefore, an additional repayment is only to be considered when mortgage interest rates are going up. If, however, the mortgage interest rate drops below the taxable net rental value, the difference has to be taxed as income.

Individual decision

The middle way, with a partial withdrawal, may well represent the correct option. The question of pension or capital cannot be answered unequivocally and it depends on individual needs and options. However, planning should be started early and with the help of a competent advisor.