Retirement may (or may not) be a long way off, but either way, make sure you’re ready! Aside from administrative questions regarding pension applications and the amount of money you will receive, one of the most important questions you should ask is: “How much tax will I pay?”. Your state pension allowance is indeed subject to tax, as well as certain social security contributions. If you want to know whether you really can afford to go on holiday all year and just how much you can spoil your grandchildren, then read on to find out how to calculate this amount.
Retirement pension eligibility conditions
Let’s start at the beginning: in order to receive a pension, you need to have worked. Pretty straightforward, right? On a more serious note: the legal retirement age in Luxembourg is 65, provided you can prove that you’ve paid in at least 10 years of pension contributions. You don’t need to have spent the whole of this 10-year period in Luxembourg; it can be anywhere in the European Union or in a country with which Luxembourg has signed a multilateral or bilateral social security agreement.
Note that if you do not meet this condition for receiving a pension at 65, you can request a reimbursement of the contributions paid into your account, or you can continue working. Early retirement is also an option:
- once you reach 57, if you have 480 months of mandatory contributions, which generally means you must have worked uninterrupted from the age of 17;
- once you reach 60, if you have 480 months of contributions, whether mandatory, continued, voluntary or through retroactive payments or the purchase of additional periods, and including at least 120 months of mandatory, continued or voluntary contributions or retroactive payments.
But this is all rather technical, and doesn’t help us answer the question of how much your pension will be taxed. So let’s dive in!
Social security charges
State pensions are subject to health insurance (2.8%) and long-term care insurance (1.4%) contributions.
Tax rates and classes
State pensions are paid out by the Caisse nationale d’assurance pension (CNAP). The CNAP deducts, at source, a withholding tax and social security contributions from your pension, just as your employer did in the past. It is therefore your dedicated point of contact for any questions on this topic.
To calculate the taxable amount of your pension, the CNAP needs to know your tax class, which is found on the tax card to be submitted to the CNAP. This document was mailed to you at the beginning of the year to be given to your most recent employer. This is what it looks like:
The example above only shows tax class 1A, but Luxembourg has three tax classes: 1, 1A and 2. It’s worth noting that taxpayers in class 1 automatically switch to class 1A once they reach 64. A pleasant surprise if you weren’t already aware!
- For an annual income under EUR23,450, classes 1A and 2 are tax-exempt, only class 1 is taxed.
- For an annual income above EUR23,500, all classes are taxed.
If you want to know where exactly you stand, check the annual tax rate for pensions (French).
If you file a tax declaration with the tax authorities, you must always state the pension awarded to you by the CNAP.
If you file a tax declaration with the tax authorities, you must always state the pension awarded to you by the CNAP. If your employer in Luxembourg allows you to have a supplementary pension scheme (in accordance with the Law of 8 June 1999 on supplementary pension schemes), this scheme is subject to a 20% withholding tax on contributions made by your employer. As a result, payments made to you under this regime will not be taxable if you are a Luxembourg tax resident. However, you must still declare them as tax-exempt pensions on your tax return.
In conclusion, to find out how much of your pension is taxable, check your tax card for your tax class and refer to the tax rate for pensions. It’s as simple as that!