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Preparing for my retirement – where should I begin?
When the time comes to retire, you’ll probably have a myriad of questions: should I opt for an annuity or take a lump sum? Would it make sense to pay off my mortgage? What impact would moving to another canton or country have on my finances? Can I afford to retire in the near future, or do I need to keep working to cover my needs?
Whatever your situation and concerns, it is essential that you evaluate your finances so you can plan your retirement without stress. This status check is part and parcel of how a wealth manager at a private bank guides you through this transition. To give you some insight, here are a few points we often discuss with our clients.
Annuity or lump sum: which solution is right for me?
Before you even consider these two options, you should first find out the rules of your pension fund. These rules set out the terms and conditions for taking out a lump sum or an annuity, the deadline for requesting your preferred option, and whether this decision is irrevocable. Your banker and wealth planner can then draw up a financial plan modelling the different withdrawal options under consideration. This will illustrate how your income, spending – including tax – and wealth will change over time.
As a reminder, the annuity option provides you with a guaranteed income for life, at least in principle. It does not have to be inflation-indexed; this depends in part on what the foundation or board decides, and can lead to a significant difference in real purchasing power after 10 or 15 years. And if the insured person chooses an annuity but dies just a few years into retirement, the remaining capital will be used to fund the survivor’s pension on behalf of the surviving spouse. If the surviving spouse dies soon afterwards, in principle the remaining capital stays in the pension fund.
Conversely, if the capital is withdrawn and managed well, it can generate returns and thus retain or even increase its purchasing power over time. Another important aspect is how you transfer your wealth to future generations. By withdrawing all your capital and investing it wisely, you can organise your estate and optimise the capital transferred through an inheritance or philanthropy.
From a tax perspective, an annuity must be declared in full each year, just like income. On the other hand, capital withdrawn is taxed in one go in the year of withdrawal, separately from other income and at a lower rate. It is important not to overlook the fact that pillar 2 and 3 funds withdrawn in the same calendar year are added together when calculating tax. The same applies to benefits drawn in the same tax year by a married couple or registered partners. So to limit the total tax expense, it’s essential that you plan ahead and stagger withdrawals of capital from the various pension savings accounts over several years.
Where should I spend my retirement? In another canton or abroad?
Many people plan to move when they retire, and tax issues need to be taken into account. The tax treatment of occupational pension benefits and related pillar 3 savings differs according to the type of benefit (annuity or lump sum) but also the beneficiary’s place of residence. The cantons set the cantonal rates, and some have created a more favourable tax regime for pension benefits.
The following is an example of some of the disparities between cantons in the taxation of occupational pension assets for a married couple domiciled in one of the following cantons1 at the time the capital benefits fall due :
To avoid questions from the tax authorities when you leave your canton, it is essential that you plan a change of residence carefully and, if necessary, move your centre of economic interest and commit to living there permanently. And if you are going to move abroad, meet with your banker well in advance to plan your relocation. This way, you will be aware of the tax treatment of pension benefits in your new country of residence and can anticipate the legal and tax impact of your plans.
What investment strategy should I use to cover my needs when I’m retired?
To answer this question, your banker will check the status of your assets and use this overview to build a personalised strategy. This involves taking stock of all your movable assets and property, as well as existing debts, and comparing them against your future expenditure and aspirations. The next step is to adjust the structure of your wealth or its management, based on your anticipated needs.
The importance of this analysis can be illustrated by an example of a liability: our newly retired clients sometimes ask whether they should pay off their mortgage. We need to look beyond the tax implications to answer this. The analysis should take into account your investor profile, how your cash is invested, interest rates, the marginal tax rate and your future plans.
In simple terms, your cash investments need to generate more than the cost of your loans after tax. If the return from your investments is greater than your net cost of borrowing, you will be better off keeping your loan. This calculation is particularly important when you retire, as it tends to be harder to borrow more at this stage of life.
Will I eat into my capital? How do I limit this risk?
The question of how best to manage cash flow inevitably arises when you retire, so you need to work out your short, medium and long-term cash requirements. Any investment strategy should reflect your needs, personal life goals and risk profile. We recommend using separate portfolios with clearly defined goals to structure your financial assets. These should reflect your consumption needs in different phases – the short, medium and long term – while maintaining an overview of all your bank assets.
This process involves three main phases and associated strategies. In phase 1, you need a permanent liquidity portfolio to cover your short-term needs and any contingencies. In phase 2, you need a capital preservation portfolio to cover your medium-term needs and take advantage of favourable market developments. And in phase 3, you need a growth portfolio – to cover your long-term needs in your golden years, and to transfer your estate.
In conclusion, to prepare for life after retirement without stress, it is essential that you take the time to evaluate all the options on offer when you retire. This may involve questioning certain preconceived ideas. You may be retired for 20 to 30 years of your life, so it is crucial that you choose a banking partner who can support you and help preserve and grow your estate.
To find out more about our expertise, visit our dedicated page on our Swiss offering or contact us using the form below.
1Source: Taxware. As at 1 January 2021
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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