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Old 03.01.2017, 11:46
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Lump sum offer to retirees

I did a search but couldn't find this subject being raised before. If I've missed it, apologies, and could you refer me? Thanks.

In my Summary report of my Pension Council it had the following:

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Lump sum offer to retirees in exchange for monthly pension
As an additional means to reduce Foundation and company liabilities, as well as to offer more choice to the retiree, the Council decided to make a once-off lump sum offer to all retirees who might be interested to receive a lump sum in exchange for their monthly pensions. If this offer is taken up by a retiree, the Foundation will have no further responsibility towards that retiree.
The retirees will be contacted in the New Year regarding this offer.
Company is an International Organisation with offices in Geneva, but subject to Swiss pension laws.

To the best of my knowledge the plan is still solvent (Funds in excess of 225m made a +5.5% return for 2016). Plan is dual DB and DC with employees hired after 1 Jan 2005 in DC, others including me in DB. But:

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DB Plan Changes. As a result of the deficits over the past few years in the DB plan component of the foundation, as well as the large deficit incured by Company in its IFRS accounts, the Company Board has asked the foundation to take measures to reduce liabilities. (Early retirement options change and 100% capital lump sum option to be offered on retirement)
Swiss resident, paying tax on pension income and wife's salary.

While I'm waiting to be contacted my brain is moving a light speed wondering what the implications are here. Surely taking a large lump sum is going to put my taxes through the roof for the year I take it - and my fortune for subsequent years. But there are got to be things I haven't thought of yet.

Would appreciate any comments and/or thoughts someone more experienced in these matters may have.

Last edited by bowlie; 03.01.2017 at 12:03.
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Old 03.01.2017, 12:00
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Re: Lump sum offer to retirees

It's probably going to be a bad deal. It's tough to generate statutory 6.8% guaranteed yield in CHF in this economy so they want to shed some load.

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Surely taking a large lump sum is going to put my taxes through the roof for the year I take it
It would be taxed at a special rate, separately from your ordinary income
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Old 03.01.2017, 12:18
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Re: Lump sum offer to retirees

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It's tough to generate statutory 6.8% guaranteed yield.
They don't have to generate 6.8% yield, just pay you 6.8% of your own money each year until you die. So even if they make 0% gain on it it's still enough for almost 15 years. Their problem begins if you live past 80.
Taking the lump sum (minus the one-off tax of around 4-5%) is probably a good deal as you can invest it on your own and over the long term still earn 6.8% PLUS keep all of your principal.
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Old 03.01.2017, 12:33
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Re: Lump sum offer to retirees

Good point about not losing principal, yes. But life expectancy today sets new records, and the OP also has a younger wife who'd be entitled to survivor's pension long after he's gone, so the pension fund is still on the hook big time if he doesn't take up their generous offer.

And not everyone would be looking forward to having to manage their investments after retirement.
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Old 03.01.2017, 13:20
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Re: Lump sum offer to retirees

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as you can invest it on your own and over the long term still earn 6.8% PLUS keep all of your principal.
If you let me know where I can make 6.8% at the moment I'll be all ears. Best I got at the moment is 4.25% but that's in Australian Dollars. How much I will lose on exchange we shall see as at the moment I keep the interest in a Australian Dollar account.
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Old 03.01.2017, 13:42
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Re: Lump sum offer to retirees

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If you let me know where I can make 6.8% at the moment I'll be all ears
Stocks or property. Both can easily provide you such yields, at correspondingly high levels of risk. Whether you'd want to take on such risk after retirement is a different matter. Conventional wisdom is that it's ok to risk for higher returns when you're far from retirement, but close and after you'd want a stable and guaranteed source of income.
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Old 03.01.2017, 14:37
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Re: Lump sum offer to retirees

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Stocks or property. Both can easily provide you such yields, at correspondingly high levels of risk. Whether you'd want to take on such risk after retirement is a different matter. Conventional wisdom is that it's ok to risk for higher returns when you're far from retirement, but close and after you'd want a stable and guaranteed source of income.
Exactly.
Taking high risk with my pension money is not something I would do (in fact I don't take any high risks anymore since I lost my share of what I now call "gambling money" apart from keeping the stocks I've had for years - which according to my bank is too big a part of it all, they make me sign knowing that every year ... which is kind of funny because their value keep going up = very safe).
A friend of mine had it payed out, he claims if you "die early" the whole money is lost. On the other hand if you have a pension you can kind of relax a little plus you don't have to think about money all the time. I personally am not that interested in money-juggling, so having to invest time into it every 3-5 years when investments return is more than enough for me.

Guess the decision lump sum or pension is a very personal one and whether OP is single or has family will play a part too.
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Old 03.01.2017, 14:48
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Re: Lump sum offer to retirees

The pension of the widow(er) is usually smaller (often: much smaller) than the original pension.
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Old 03.01.2017, 15:52
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Re: Lump sum offer to retirees

Thanks for all the comments. I doubt if I could generate 6.8% year in, year out even with a large lump sum.

Paying 5% one off tax on the total plus tax on annual earnings on the capital doesn't seem to be terribly attractive either.

I suppose I will wait and see their offer.

Edited to ask another question. What would be the downside of turning down their offer. I understand, maybe incorrectly, that my pension is safe - regardless of the status of the company. Or is that only a best case scenario?
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Old 03.01.2017, 16:04
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Re: Lump sum offer to retirees

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Thanks for all the comments. I doubt if I could generate 6.8% year in, year out even with a large lump sum.

Paying 5% one off tax on the total plus tax on annual earnings on the capital doesn't seem to be terribly attractive either.

I suppose I will wait and see their offer.

Edited to ask another question. What would be the downside of turning down their offer. I understand, maybe incorrectly, that my pension is safe - regardless of the status of the company. Or is that only a best case scenario?
Capital gains is tax free, you don't want income as its taxable.

Inflation is the risk of taking a fixed pension.

Retirement should be looked at as a 30 year plus investment horizon, over which time equities will provide higher than 6.8%. on average compound if the last 100 years is anything to go by. The CHF is overvalued & eventually will revert to the mean.
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Old 03.01.2017, 16:07
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Re: Lump sum offer to retirees

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Edited to ask another question. What would be the downside of turning down their offer. I understand, maybe incorrectly, that my pension is safe - regardless of the status of the company. Or is that only a best case scenario?
One obvious downside is that you'll have less inheritance to leave if you die early.
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Old 03.01.2017, 16:23
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Re: Lump sum offer to retirees

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Retirement should be looked at as a 30 year plus investment horizon, over which time equities will provide higher than 6.8%. on average compound if the last 100 years is anything to go by. The CHF is overvalued & eventually will revert to the mean.
There will come some point in life when you wouldn't want to or even be able to manage your investments by yourself anymore. For example, Alzheimer or a sudden stroke. Good if you have a plan B and someone else (e.g. kids, wife; hopefully not KESB!) can manage your wealth for you and provide for your needs, then it would make sense to take a lump sum. Otherwise a guaranteed for life pension, even if it's not the most profitable use of capital, is not such a bad deal. And many people don't even know how to properly invest and would be better off with pension fund managed capital.
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Old 03.01.2017, 16:51
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Re: Lump sum offer to retirees

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There will come some point in life when you wouldn't want to or even be able to manage your investments by yourself anymore. For example, Alzheimer or a sudden stroke. Good if you have a plan B and someone else (e.g. kids, wife; hopefully not KESB!) can manage your wealth for you and provide for your needs, then it would make sense to take a lump sum. Otherwise a guaranteed for life pension, even if it's not the most profitable use of capital, is not such a bad deal. And many people don't even know how to properly invest and would be better off with pension fund managed capital.
Buy the S&P 500 index or invest in Fundsmith, nothing to do except set up an auto redemption every 3 months or however often you want a pay out.
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Old 13.03.2017, 15:24
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Re: Lump sum offer to retirees

I have their proposal now. In exchange for all liabilities (my pension and my surviving spouse's pension) they will give me 19.7 times my annual pension. They expect Swiss residents would pay no more than 10% tax.

I seriously doubt investing the capital is going to give me a return equal to my pension. Which means that reducing the capital regularly is going to impact on the poseible return.

On the other hand if I don't live another 20 years ...

I hadn't expected the offer to be this large.

Thoughts, comments? I'll be talking to some professional tax people for their advice.
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Old 13.03.2017, 15:48
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Re: Lump sum offer to retirees

The main question here is if you want to leave any inheritance out of this capital.

If you have no heirs, i think the annuity would be a no brainer. 5% guaranteed yield in CHF for life is pretty good.

If you invest it in stocks, you'll get maybe 2-3% dividend yield, so your pension will be halved (unless you'll eat into principal), but your heirs will inherit all of it, along with capital gains. You can get more yield with real estate, but that's not as hassle free as stocks or index funds, which you can buy and forget, collecting dividends forever

For taxes, most cantons have calculators online where you can check how much you'll owe on withdrawal
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Old 13.03.2017, 16:11
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Re: Lump sum offer to retirees

Thanks for your reply, you raise interesting points.

But where could you get 5% guaranteed for life?

I expect my wife to outlive me, but no kids. The average life expectency in CH is 81.3 for men, 83.4 for women. I'm almost 62 which, on average, gives me another 20 years.
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Old 13.03.2017, 16:13
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Re: Lump sum offer to retirees

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But where could you get 5% guaranteed for life?
That's your current offer from the pension fund if you leave the capital in it. 1/19.7 = 5.07%

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I expect my wife to outlive me, but no kids.
So, then she's the only heir? I'd ask them how much pension would she be getting from them as a widow to decide
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Old 13.03.2017, 16:20
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Re: Lump sum offer to retirees

Your question can't be answered as it depends on many other things, including your health and thus actual (as opposed to statistical) life expectancy, need and want for safety and predictability, and many other things.

Are there additional perks beside the annuity you get if you stay in?

At age 65 your remaining life expectancy of the average Swiss resident was 19.2 years in 2015 so your statistical life expectancy should be around 22 years as you're 62.

Since they make this offer they see an advantage in doing so, so if you're inclined to take it you probably want to haggle (especially if you're in good health as in that case they and you need to assume that you'll be drawing longer, perhaps much longer.). The offer is either taking you for a fool or assuming you're earning some money on it, which is of course realistic - the implication would be about 1% return p.a.

I think your question shouldn't only be "can I earn 5%" but also, perhaps rather, "can I get enough return to pay for my livelihood for the next 30 years" in which case the principal won't be touched.
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Old 13.03.2017, 17:12
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Re: Lump sum offer to retirees

Widow's pension is 65% of mine.

My former company swears up and down that it has no intention of closing their pension plan, but what if they do? Is my monthly pension guaranteed? Or would the best be something less than they are offering today? I worked there for 25 years and I don't trust them. Telling the truth has never been their strongest point.
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Old 13.03.2017, 17:55
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Re: Lump sum offer to retirees

so you would stop working at 62? You are talking about the pillar 2 pension you saved. You will get AVS when you reach 65 (I think it still is 65) even if you get the lump sum paid out.

also consider that you can do a lot more when you are 62 than when you are 85 years old. Yes, you may grow very old but if for example you want to see the world you better travel when you are young(er)
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