The goal is to financially secure your standard of living in retirement.
Proper preparation is needed to financially secure your standard of living in retirement. In addition to the state pension and a supplementary occupational pension scheme from your employer, personal retirement savings plans are an attractive option.
The question is which personal pension plan is the right one. If the goal is to provide additional income that is as secure as possible, there are various ways of achieving it.
One particularly attractive option from a financial point of view is the retirement savings plan. Residents of Luxembourg (or cross-border commuters subject to a tax regime equivalent to that of a resident) have the option of saving for their pension. Such a plan is taken out with an insurance company or a credit institution and governs the contributions, which are made on a monthly, quarterly, annual or even arbitrary basis. There are substantial tax breaks throughout the term (at least ten years). Since the 2017 tax reform, there is an annual tax allowance of EUR 3,200 on the premiums (or contributions) paid. If a couple takes out a second plan, they benefit from another tax allowance of EUR 3,200 on top of that. Therefore, couples are eligible for a maximum tax allowance of EUR 6,400 per year.
By taking out a second plan, couples are eligible for a maximum tax allowance of EUR 6,400 per year.
When you retire (at the age of 60 at the earliest), the savings are paid out either a life annuity where 50% is tax-exempt, the full amount as a lump sum taxed at half the overall rate, or a combination of the two. Under this option, the insured person decides on the split between the lump-sum payment and the annuity. From the 2022 tax year, it is also possible to withdraw savings accumulated upon maturity of the policy as annual lump-sum payments up to the age of 75. This new option can be combined with the other options available prior to this date. The terms of such annual withdrawals may vary depending on where the policy was taken out.
Except in the event of serious illness or disability resulting in a loss of at least 50% of your professional activity, cashing in the saved amount early will result in application of a withdrawal penalty and the entire amount withdrawn being taxed at the normal rate.
One of the specific characteristics of retirement savings plans is that the investment products and policies are determined by specific conditions that vary depending on the chosen provider. You will be able to choose products that prioritise security or returns, in line with your investor profile. This is where the policyholder’s financial situation and risk tolerance play a crucial role. In general, older beneficiaries should opt for solutions with low risk. It is worth noting that the cap on exposure to equity markets was initially determined by legislation on the basis of age. However, this has been scrapped from spring 2022 and policyholders can now choose their preferred level of risk exposure.
A cautious approach…
If available, the safest option is a policy offering the capitalisation of the premiums paid with a guaranteed rate of return on one portion or the whole of the accumulated capital. With this option, the policyholder benefits from a guaranteed minimum interest rate on one portion or all of their savings and therefore from a secure outcome, irrespective of fluctuations on financial markets and other eventualities. Note that this guaranteed minimum rate applies for the duration of the policy, and it was 0% as at 1 January 2022. In times of low or even zero interest rates, the policyholder must therefore hope for high profit-sharing bonuses on the relevant product or the returns earned may not even cover the fees charged on the policy. That’s not great! The main advantage with this type of product is predictability – you know exactly what to expect when you reach retirement age and the minimum amount you will receive. So, the retiree can embark upon this new life stage completely at ease and with no surprises. If this is not enough for you and your aim is to generate higher returns, there are other more dynamic approaches available. These also entail a higher degree of risk.
… or more ambitious returns?
Retirement savings plans where the return is linked to investment funds do not guarantee a certain investment or savings outcome. These products are linked to the performance of the financial markets. This flexible and dynamic option holds the potential for strong returns. However, the financial risk is borne by the policyholder alone. The money paid in, i.e. the premiums, are invested in the insurance company’s own investment funds or in other funds. However, such investment products must meet certain criteria. The provider must suggest investment products (investment funds or undertakings for collective investment – UCIs) that feature a mix of equities and bonds. Naturally, the higher the proportion of equities, the higher the speculative risk. As mentioned earlier, the investment policies of these products are no longer subject to caps.
Which option is the correct one? In the end, it comes down to your personal risk profile, financial situation and expectations.
To ascertain which option best matches their retirement plans, savers should talk to their banker (as an approved sub-broker) or insurer. In the end, it comes down to your personal risk profile, financial situation and expectations, and when your policy matures. It’s worth bearing in mind that you alone bear the risk of your investment and you should therefore become increasingly cautious as the maturity date of your policy approaches. A dramatic fall in equity markets a few weeks before maturity could have disastrous consequences for a policy with high equity exposure.