Supplementary insurance: a profitable option

Freelancers can also take advantage of this retirement solution

Luxembourg’s system of supplementary pension provision was reserved for employees for many years, but is now open to the self-employed too. Regulated by law, this extension to the pension system came into force on 1 January 2019. The new rules apply to the self-employed and freelancers, and allow promoters (insurance companies, pension fund managers, etc.) to market supplementary solutions specifically aimed at these categories of workers. This type of retirement solution can take the form of a pension fund or occupational pension. Simply put, it must be a scheme that enables capital to be accumulated for retirement. The General Inspectorate of Social Security (IGSS) is responsible for approving products. The law allows insurance protection to be extended to cover death and disability, and protection for surviving dependents.

Luxembourg’s system of supplementary pension provision was reserved for employees for many years.

Tax benefits

Employees, self-employed people and freelancers enjoy the same tax benefits. The contributions they pay in are classed as “special outgoings” and can be fully offset up to an amount equivalent to 20% of taxable net annual income. Furthermore, the contributions paid by self-employed individuals are subject to 0.9% on the paid premiums and a flat-rate tax of 20% as income withholding tax.

In addition to extending the system of supplementary retirement provision to include self-employed people and freelancers, several changes were made to the scheme for employees as well on 1 January 2019. Increased protection was provided for accrued pension rights, particularly in the event of exit prior to normal retirement age. The rules governing the transfer of pension rights were likewise improved. The vesting period for pension rights is now three years, subject to specific conditions. Provided the relevant conditions are met, subsequent purchases of insurance periods are allowed.

A unified framework

The Luxembourg pension system is based on three pillars:

• • First pillar: the basic pension insurance system (old age, disability and survivors insurance);
  • Second pillar: supplementary pension provision which an employer may voluntarily offer its employees.
  • Third pillar: private pensions, i.e. private pension savings schemes from banks and insurance companies.

Under the first pillar, the self-employed, just like all employees, are automatically enrolled in Luxembourg’s state pension system. The statutory retirement age is 65 so long as compulsory contributions were paid for at least ten years; that is, 120 months in total.

A self-employed person drawing the old-age pension is entitled to continue working.

Note that a self-employed person drawing the old-age pension is entitled to carry on working after reaching the statutory retirement age with no effect on the pension amount. If the self-employed person draws the old-age pension early, however, the amount of income earned through work does indeed have an effect on the award, continuation and calculation of the pension, depending on whether this work is carried out in the context of paid employment or not. If it is a self-employed activity, the early old-age pension is withdrawn if the income, spread over a calendar year, is more than one third of the statutory, monthly minimum wage; that is, currently more than EUR 856,98.

Two components are considered when calculating the state pension amount: the flat-rate mark-up (which comes from the number of years the beneficiary contributed, up to a maximum of 40 years) and the proportional mark-up (which comes from the contributory income). The gross pension for a year is then calculated taking the cost-of-living index into account and adjusted based on the applicable revaluation factor. The old-age pension cannot be less than 90% of a certain reference amount for beneficiaries who have a 40 year-record of contributions. In 2023, the minimum state pension amount was EUR 2,244.82 per month.

Saving as a retirement solution

With life expectancy increasing, there is a question mark over whether the government will always be in a position to hold state pensions at their current level. Consequently, young professionals as well as freelancers are increasingly aware that their pension will depend to a significant extent on the action they themselves take. It is worthwhile starting to save and/or invest at a young age, whether in property, insurance products, investment funds or structured products. There are numerous ways of investing to accumulate capital and assets, thus securing a proportion of your current standard of living in retirement. It’s important to know your investor profile – and that’s where your bank comes in. It can help you determine what’s most suitable, and what risks and opportunities are associated with your preferred investments.

Becoming the owner of your home is an important step in preparing for retirement. If you start to borrow early enough, you won’t have any mortgage or rent costs to pay in retirement.

Of course, property prices are high and it isn’t always easy to borrow what you want, especially when the bank asks for a down payment, which is normally the case. The good news, however, is that interest rates (including fixed interest rates) remain relatively low at the moment, although they have risen significantly in 2022. It makes sense to find out how much you can borrow by talking to your bank.

Finally, a tip on the subject of pensions: You must be aware of your periods of compulsory insurance (employment, unemployment, parental leave, maternity leave, etc.) and periods treated as such (study and vocational training between the ages of 18 and 27, time taken off work to take care of children under the age of 6, etc.) It’s best to start early by creating a special folder containing all the records you’ll need. It would be disastrous if you weren’t able to find key documents 30 years down the line.