My finances, my projects, my life
November 28, 2022

Enjoy retirement to the full

Get more out of life by preparing for retirement.

Pensions are much higher in Luxembourg than in neighbouring countries. Nonetheless, retiring entails a substantial drop in income for many individuals and households. This is especially so if the retiree has not adequately prepared for retirement during their working life. It then becomes difficult to make up for the inevitable decline in income of 20% or more – on average you can assume a fall of 22%. Proper preparation is needed to financially secure your standard of living in retirement.

A sound financial position is a good starting point

Generally speaking, a sound financial position, i.e. as little debt as possible, is a good starting point. Although most mortgage providers accept repayment periods that run into retirement, it will become increasingly difficult and, in some circumstances, expensive to reschedule your borrowings once your working life is over. By paying off a mortgage and reducing debts such as unsecured loans and credit card bills, you’ll have a higher income in retirement.

Owning your own home is naturally a huge advantage in retirement.

Owning your own home is naturally a huge advantage in retirement. Taking out a loan early protects against having to make high repayments at retirement age. Of course, property prices are high these days and it isn’t always easy to get a loan, especially when the bank asks for a down payment. On the other hand, interest rates are a help. Interest rates are currently extremely low and it is important to take advantage of them to invest in the future.

However, on the issue of pensions, it is an advantage if you can reduce your major outgoings before you retire. For many people, these will be mortgage or student loan repayments. In addition, it helps if your children have already left home, are independent and have an established career – and have perhaps even acquired a property of their own.

Do your research and define your goals

It’s important to be aware of your goals for retirement and to correctly assess how much money you’ll need. In all cases you should take account of major expenditure items such as travel and renovations. Furthermore, it’s also a good idea to have some rainy-day savings. Finally, it’s generally assumed that around two thirds of people will be dependent on costly long-term care. Although some of these costs are borne by the state, the actual contribution will be dependent on political decisions. So it is not advisable to rely solely on the state to cover all of your care needs as a pensioner.

In terms of your pension, it’s advisable to find out about what you are entitled to at an early stage. Did you work for different employers, work freelance or make private pension provision during your working life? These questions need to be answered in order to obtain a comprehensive picture.

In addition, other assets such as rental properties or investment portfolios can contribute to your future financial resources once retired. It’s important to determine the total value of your assets and to clarify how they should be used to generate the highest possible level of income.

In this connection, you also need to arrive at a realistic assessment of how long you are likely to live for as a pensioner. Though this may seem a bit bizarre, it does help you to plan ahead. Insurance statistics show that for couples who retire at 65, the likelihood of at least one partner reaching the age of 92 is 50%, whilst the probability of at least one partner reaching the age of 97 is 25%. It’s therefore worth thinking and acting with the future in mind.

In terms of your pension, it might also be worth considering whether to delay retirement by a couple of years. The later you start retirement, the better your financial situation will be, as your total assets will continue to grow and the number of years that you are dependent on your own financial reserves will fall.

The fact is that more and more people are continuing to work after the official retirement age.

The fact is that more and more people are continuing to work after the official retirement age. In the UK, for example, the number of working people aged 70 or over has doubled to around half a million over the past ten years. Many of these people are not dependent on the additional money, but they don’t want to stop working and devote themselves solely to a life of leisure.

It’s important to remember that retirement isn’t a one-way street and that many pension products offer greater flexibility these days. So you can continue to work as a consultant or freelancer, or on ad-hoc projects, even after you have retired. It’s even possible to consider a “second career” and start a business or do voluntary work.

Don’t focus solely on the state pension

Back to the subject of pensions or, rather, the existing opportunities that are available in addition to the public system. Alongside the state pension regime, the Luxembourg government has introduced measures to promote occupational pensions (the second pillar) and personal retirement savings (the third pillar).

If an employer offers a supplementary pension, employees can make additional personal contributions of up to EUR 1,200 annually into the scheme, which is tax-deductible. On retirement, the benefits are paid out in the form of a lump sum or an annuity and are fully exempt from income tax in Luxembourg. However, a flat-rate withholding tax of 20%, payable by the employer, does apply.

The tax reform that came into effect on 1 January 2017 provides for an annual tax allowance of EUR 3,200 for retirement savings irrespective of age. On retirement (at 60 at the earliest), the pension is paid out either in the form of an annuity, 50% of which is tax-free, or in the form of a lump sum, which is taxed at half the standard tax rate. Alternatively, a combination of the two is possible.