The PF pension contains an interest guarantee that is equivalent to the return on a safe investment. With a conversion rate of 5%, this interest guarantee corresponds to around 2%.
Why does the PF pension come with an interest guarantee? This can be explained by the fact that the sum of the monthly pensions you receive until the end of your life is, for an average lifespan, higher than your retirement assets at the time of retirement.
Anyone who draws the lump sum instead of a pension and invests it themselves should achieve at least a comparable annual return with their own private investment in the long term in order to reach the return level of the PF pension.
The interest guarantee contained in the PF pension is a guaranteed minimum benefit. It can be calculated from the level of the entitlements to retirement and survivors’ benefits as well as the expected payout period. In addition, pension funds can top up the pensions with inflation allowances, pension bonuses or a 13th pension.
If you opt for a lump-sum withdrawal, the question therefore arises: can you achieve a higher return in the long term with your private investment than the interest guarantee contained in the PF pension, including any additional benefits?
If you do not want to take any investment risks, you can compare the level of this interest guarantee with the interest on a savings account. If you are willing and able to take risks, the return on your investment depends on the development of the financial markets.
When comparing, you should also take into account the costs and taxes that arise in private asset management.
The higher the conversion rate, the greater the interest guarantee contained in the lifelong PF pension. But which other factors influence the level of the interest guarantee?
- Life expectancy: the longer you live, the higher the interest guarantee from the lifelong PF pension.
- Marital status / entitlements: if you are married or live in a registered partnership, your spouse or partner is as a rule entitled to a widow’s or widower’s pension in the event of death. In pension provision, this claim to benefits is called an entitlement. Such entitlements increase the value of your lifelong PF pension and therefore also the interest guarantee it contains. If you still have children under 25 at your retirement, claims to orphan’s pensions may arise in addition in the event of death. These also increase the interest guarantee of the lifelong PF pension.
- Level of the entitlements: the higher the entitlements set out in the regulations of your pension fund, the higher the interest guarantee. The widow’s or widower’s pension often amounts to 60% and the orphan’s pension (up to the age of 25) to 20% of the PF pension.