Offsetting a potential fall in income upon retirement

In recent years, Luxembourg has successfully addressed its gender pay gap, which is now among the lowest in Europe. However, inequalities persist, and are particularly marked at retirement age. What can you do to combat this and maintain your quality of life during retirement?

Low gender pay gap but high pension gap

For some years, now Luxembourg has taken action to reduce any unjustified pay differences between men and women. As well as a dedicated Ministry of Equality between Women and Men and a 2016 law that makes wage inequality a breach of the Labour Code, the country has introduced a number of measures to improve gender equality in the workplace: the “Actions Positives” programme of the Ministry of Equality between Women and Men, the promotion of diversity in all types of work; flexible parental leave, investment in pre-school childcare, measures to promote work-life balance, etc.

The gender pay gap in the Grand Duchy of Luxembourg was the second lowest in Europe in 2018 (…), while the gender pension gap was the highest.

The gender pay gap in the Grand Duchy of Luxembourg was the second lowest in Europe in 2018. The average income for men is 7.2% higher than for women, but the difference is just 1.6% based on the average hourly wage (Statec 2021).

Despite this progress, it is also the country with the highest gender pension gap. In 2019, Eurostat recorded a gap of 44% in the pensions of men and women over 65 years old in Luxembourg. This is well above the European average (29%), which is partly, but not solely, attributable to inequalities in the past.

How can we explain this gap?

Your pension mainly depends on two factors in Luxembourg: your income during your career and the number of months of insurance contributions. Your pension is then adjusted on the basis of the cost of living and the applicable uplift. These two factors of income and periods of insurance contributions are precisely where there are differences between men and women.

Women often have shorter periods of insurance cover. There are more women in part-time employment (78% of these positions are held by women) and, despite notable progress, women are more likely to take a career break, for example to raise children or take care of a dependent person.

Furthermore, although it is shrinking, the gender pay gap still exists. Women are overrepresented in low-paid professions. And although 26% of women now occupy management roles, they earn less than their male counterparts. And we mustn’t forget that pensions paid today are based on past earnings, when levels of inequality were significantly higher than today.

What are we trying to say here? While the gender pay gap is shrinking in our country, we will need to wait a few more years before this translates into a similar reduction in the gender pension gap. This is not optimal, but it is inevitable unless further measures are taken to address this situation. The question is therefore: what can women do to offset the fall in income upon retirement?

Women can supplement their future pension with savings or investments made during their working lives (…).

Enhance your retirement income

There are several solutions available to compensate for a fall in income upon retirement. Women can enhance their future pension with savings or investments made during their working lives, or by continuing to work after retirement.

Open a savings account

You can build a lump sum for use upon retirement by regular savings over several decades. An automatic monthly transfer into a savings account is a good way of setting aside money without thinking about it. And the earlier you start, the less effort is needed! However, given the level of interest rates currently, the returns offered are very low.

Join an occupational pension scheme (second pillar)

Some employers will finance an occupational pension scheme for their employees to top up the state pension. Employees can make personal contributions, with up to EUR 1,200 a year deductible for tax purposes. Upon retirement, the benefits are paid out in the form of a lump sum or a tax-exempt monthly annuity.

→ Occupational pension schemes are also available to the self-employed since January 2019.

Take out a retirement savings plan (third pillar)

A retirement savings plan is an individual savings contract agreed with a bank or insurance company. When you take out this type of plan, you choose whether your capital is protected or invested in riskier assets. The contract must run for at least 10 years and end when you are aged between 60 and 75 years old. Throughout the life of the contract, up to EUR 3,200 per year is tax-deductible, depending on the level of premiums paid. On maturity, beneficiaries can choose between full payment of the capital taxed at half of their overall income tax rate, an annuity that is 50% tax-exempt, or an intermediate solution combining capital repayment and annuity. You are free to decide on the percentages granted to the capital or annuity formula. Since the 2022 tax year, the savings accumulated at the end of the contract can also be subject to annual withdrawals until the age of 75. These annual withdrawals can be combined with a capital withdrawal and/or a monthly annuity.

Invest in financial or insurance products

Investment funds, structured products, life assurance, etc. There are many options available that enable you to build up a lump sum for your retirement. Novices should contact their banking advisers who will explain the risks and opportunities associated with the different types of investment based on their objectives and risk profile.

Purchase one or more properties

If you buy your own home, you won’t have to pay rent or a mortgage once you retire. You can generate additional revenue from selling or renting properties.

→ For example, women who are self-employed or own their own business can invest in their office premises.

Retired women can enhance their income by continuing to work while drawing from their pension.

Continue to work when retired

When you retire, you can top up your income by continuing to work while drawing from your pension. However, you must check that you comply with the relevant criteria to avoid any impact on your pension, particularly if you have an early old-age pension.

Useful info: there are some options that enable you to top up your insurance contributions: the “baby year” period, optional, continued or top-up insurance, etc.

Ultimately, all of the choices you make during your working life have an impact on your future pension. That’s why you should contact your banking adviser who will help you look at the various means available for maintaining your quality of life once you retire.