Supplementary pension schemes for the self-employed

Are you self-employed? Are you aware that you can make contributions to enhance your retirement income? Supplementary pension schemes have been open to freelancers and the self-employed since 2019 in Luxembourg.

 If you’re a freelancer or are self-employed, you may already be thinking about how to plan for your retirement and what income you’ll receive when the time comes. Like all employees, you are a member of the standard pension scheme and will receive the old-age pension or an early old-age pension if you meet the eligibility criteria.

However, very often, the old-age pension is not enough. This is why there are several ways to add to your state pension depending on your personal situation and means. The Supplementary pension scheme for self-employed workers (RCPI) that was established in 2019 is one option. It enables you to build up a pension pot to supplement your income in retirement.

The pension system is based on three pillars

As a reminder, Luxembourg’s pension system has three pillars:

• • The first pillar: the standard pension system (old-age, disability and survivor’s pension).
  • The second pillar: supplementary pension schemes that employers may offer their employees, or approved schemes that are open to the self-employed.
  • The third pillar: personal retirement savings plans, or private retirement savings held with a bank or insurance company.

Until 2019, only those with the status of “employee” and whose employer offered such a scheme were able to use the second pillar to enhance their income during retirement (Luxembourg Law of 8 June 1999). Since 1 January 2019, this option has also been available to freelancers and the self-employed.

Schemes that have been approved in advance by the Luxembourg General Inspectorate of Social Security (IGSS) are now available to freelancers and the self-employed.

 Second pillar pension schemes are open to freelancers and the self-employed

Since the expansion of the retirement savings schemes regulations (Law of 1 August 2018, which entered into force in January 2019), a promoter (insurance company, pension fund manager, etc.) can now offer you a supplementary pension scheme, provided it has been approved in advance by the Luxembourg General Inspectorate of Social Security (IGSS).

Just like the supplementary pension schemes offered by companies, these approved schemes provide extra cover for retirement, death, disability and survivors.

Adjusted tax treatment

A supplementary pension scheme is a good way for the self-employed to compensate for any shortfall in income upon retirement, and it also offers certain tax deduction benefits. Indeed, the law offers freelancers and the self-employed the same tax benefits as employees. Any pension contributions are deductible as special expenses – up to 20% of net taxable income per annum, with no cap on the total amount.

Useful info: contributions to a scheme for the self-employed will be taxed at a flat 20% and a compensatory tax of 0.9%.

A series of changes to the supplementary pension system

Beyond extending supplementary pension schemes to freelancers and the self-employed, the Law of 1 August 2018 also introduced a number of changes to pension schemes for employees, with the goal of addressing challenges that have arisen since the Law of 8 June 1999 came into force.

In particular, the Law strengthened the protection of the rights acquired in the event of early retirement, transfer (when changing companies), or changes to a supplementary pension scheme. It changed the vesting period for pension rights from 10 years to 3 years for certain groups, allowed for the repurchase of pension rights on certain conditions, and introduced new financial planning and minimum financing requirements.

Income tax law was also adapted. The law transposed several EU directives dealing with freedom of movement between member states, equal opportunities and the treatment of men and women, and the supervision of occupational pension funds.

Freelancers and the self-employed thus have an additional option available to help them to maintain their living standards upon retirement. To learn more about supplementary pension schemes, you can read the Law, which came into force in January 2019 or the dedicated page on bil.com. In the meantime, you can also read about the different ways to plan for retirement from the beginning of your career.

* Specific conditions apply to self-employed people who are non-resident in Luxembourg.