You need the pin or wire to be able to fit thru the hole, but otherwise tighter is better.
First, you look at the specs from your board house. They will give you the tolerance of final finished hole diameters from what you specify. In some cases, they will round to the nearest drill size, with then a resulting diameter range for each such drill. In other words, it is best to stick to a set of discrete hole sizes. Check with your board house, but .020, .025, .029, .035, .040, .046, .052, .061, .067, .079, .093, .110, .125 inches is otherwise a good list to stick to. If your board house guarantees finished hole diamter is ±3 mil, for example, from one of these standard drill sizes, then the first would be .017-.023, the second .022-.028, etc. Note that these ranges overlap a little for common tolerance values.
Now look at the datasheet for your part and see what the maximum lead diameter can be. If it's a round lead, it will tell you this directly. If it is a rectangular lead, you have to do the math to find the maximum possible diagonal. Either way, you end up with the minimum diameter hole the lead will fit into.
Now look thru your list of hole sizes and compare the minimum guaranteed size for each of them to the maximum diameter of the lead. Specify the smallest drill size where the minimum diameter hole is larger than the maximum diamter lead. If both come out to the same value, use the next higher drill size.
I don't think you should depend on the holes to locate the part when tolerances are important. I agree with your 10-15 mils as I said earlier here (in metric 0.25 to 0.4mm).
Instead, make up a jig to hold the parts in the proper location while they are being soldered. It can be fancy for wave soldering or something simple that holds the parts while being hand soldered (perhaps fashioned from the mating part such as the punched chassis).
Round pins are a particular hassle if you call it too close- at least with square or rectangular pins you can skive off some plating inside the holes at the corners of the pin and still force the pin in. If you insist on the using the holes... um, maybe make the peg round and the hole square.. (call out slot-drilled square holes in the PCB).
Best Answer
Of course the annular ring should be at least as large as the minimum annular ring specified by the PCB house, but generally you'll want to make it much larger, especially on heavy parts or parts (like your switch) that are exposed to force.
At least 10 mils (0.25mm) annular ring is better for manufacturability regardless of any strength considerations, and a bit bigger than that is even better.
If the board has plated-through holes, exceeding a 1mm annular ring is probably not of much benefit for pins up to 1.5mm or so.
If the board is single-sided, the adhesive under the pad has to provide a lot of strength, so you probably want to go as high as 2mm annular ring or more (bigger is better for strength) on a part requiring strength such as a switch, terminal block, coil, etc. If there is not enough room to get appropriate clearances you can use a non-round (oblong or rectangular) pad and still get some of the benefit.
I don't know of a specific formula or rule of thumb.