Capital or Annuity: How to Make the Right Decision
One of the most important questions at retirement is choosing the payout form from the pension fund.
The Agony of Choice at the End of Working Life
With the decision for annuity or capital, you set the financial track for the rest of your life. While the annuity offers the security of a lifelong monthly payment, capital enables maximum freedom and the possibility to bequeath assets to descendants. A wrong decision cannot be corrected afterwards – the choice must therefore be made on a sound basis.
Legal Note: The Registration Deadline. Many pension funds require that the decision for a capital withdrawal (full or partial) be communicated in writing at least six months or even up to three years before retirement. If you miss this deadline, often only automatic payout as an annuity remains.
The Facts Compared
- The Annuity: Offers protection against longevity risk. You receive the money as long as you live, regardless of stock market developments.
- The Capital: Enables mortgage repayment or investments. However, it is subject to self-responsibility in investment and is taxed once.
- The Middle Way: Often a combination makes sense – draw enough annuity to cover fixed costs and the remaining balance as capital for flexibility and inheritance.
Conclusion
There is no universal "right" – the decision depends on your health, marital status, and financial goals.
Frequently Asked Questions
3 answers about this topic
The spouse usually receives a reduced survivor's pension (often 60% p.a.). With capital withdrawal, the remaining amount goes directly into the estate.
The capital payout is taxed separately from other income at a reduced rate. This can be more tax-attractive than lifelong taxation of an annuity as income.
No. Once the first pension payment has been made or the capital has been paid out, the decision is final.
Author
Adis Kavazovic
Head of Insurance & Financial Planning
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