The quality of your retirement will largely depend on how well you have prepared for it. In addition to the state pension and any occupational pension scheme you may be part of, individual retirement savings plans can really help ensure you continue to enjoy a good quality of life in retirement. But which should you choose? With each plan having its own merits, it is not always easy to identify the one that best suits your needs. Fortunately, myLIFE is on hand to help you see things more clearly.
Retirement savings plans in Luxembourg
Who doesn’t dream of a golden retirement in the sun? Sadly, it is highly unlikely that the state pension will allow you to fulfil these dreams. If you want to lead a comfortable retirement, you will first have to work hard and build up some decent capital. And that means today if you haven’t already made a start! Among all the different solutions out there to help you prepare for your retirement, there is one which is particularly attractive and can start earning you money right now: the retirement savings plan (see Article 111bis of the Luxembourg Law on Income Tax, or LIR).
If you are a resident taxpayer or an assimilated non-resident taxpayer, by taking out such a policy with an insurance company or bank you can start to build up a pension pot. You make monthly, quarterly, annual or customised payments until the plan matures. Throughout the policy (which has a minimum term of 10 years), you make significant tax savings by deducting your premiums (up to the annual cap per individual taxpayer) from your taxable income under the exemption for special expenses. If you are married, your spouse can obtain the same benefits by taking out a second plan.
The tax reform that entered into force on 1 January 2017 provides for an annual tax deduction of EUR3,200 for retirement savings plans, regardless of your age.
The tax reform that entered into force on 1 January 2017 provides for an annual tax deduction of EUR3,200 for retirement savings plans (Article 111bis of the LIR), regardless of your age. When you retire (between the ages of 60 and 75) and if you are resident in Luxembourg for tax purposes, you will receive 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. You can choose what portion you wish to receive as a lump sum and as an annuity. From the 2022 tax year, savings accumulated upon maturity of the policy can also be withdrawn in annual lump-sum payments up to the age of 75. The amounts and terms of such withdrawals may vary depending on where the policy was taken out. Annual lump-sum amounts can also be combined with a lump sum and/or annuity.
Unless you are seriously ill or infirm, early redemption incurs fees and taxation of the total amount redeemed at the full rate. A request for early redemption must include substantiating documents to prove that you have had to give up at least 50% of your professional activity due to serious illness or disability.
One of the specific characteristics of retirement savings plans is that the investment products and policies must fulfil certain conditions that vary depending on the chosen provider. This means that you can choose the product that best matches your risk profile as an investor. You can choose whether to prioritise security or returns.
Let’s be clear: there’s no right or wrong answer. It all depends on your situation and your aversion to risk. As a general rule, the older the policyholder, the more they are advised to choose solutions that minimise risk. 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 you can now choose the level of risk that you are willing to accept.
Certain retirement savings plans involve the capitalisation of the premiums paid by offering a guaranteed rate on one portion or the whole of the capital gradually accumulated. This is a solution that gives you a guaranteed minimum interest rate on one portion or on all of your payments (independent of financial market fluctuations), as well as any share of profits, depending on the insurance company’s results. This guaranteed minimum rate applies for the duration of the policy (0.00% as at 1 January 2022).
In concrete terms, this means that on maturity, the accumulated savings comprise all net payments plus profit-sharing income and less fees. As such, you know the minimum amount of money that you will be paid when you reach retirement age. Start your new life with peace of mind and no surprises.
Although this first option is reassuringly certain and offers an attractive maximum annual tax deduction of EUR 3,200, it is not particularly appealing when it comes to returns, particularly if interest rates are low. In fact, even with interest rates starting to rise again, your guaranteed return would still be capped at 0% until maturity for a policy that was taken out in 2022. So you just have to cross your fingers and hope for a generous share of profits. And that’s something you can never count on. What’s more, the fees charged on these policies may be higher and have a major impact on your returns. So, what’s the alternative? A more dynamic, albeit risky, approach.
If you wish to prioritise performance, you should look for the type of retirement savings plan that offers returns dictated by unit-linked investment funds. Instead of a known amount in euros on a portion or all of your payments, your insurer gives you a number of units of account whose value fluctuates based on the performance of the financial markets. These are non-guaranteed capital policies that give you the chance to get more from your savings based on developments in financial markets. This flexible and dynamic solution allows you to procure potentially strong returns and try to build up a substantial sum for retirement. However, you and you alone bear the financial risk of the investment.
One unit corresponds to a fraction of the fund in question. The value of your plan is therefore established by multiplying the number of plan units by their fund exit value.
Your premiums are converted into units and invested in funds within or outside the insurance company. One unit corresponds to a fraction of the fund in question. The value of your plan is therefore established by multiplying the number of plan units by their fund exit value. This means that the value of the plan can change right up to maturity.
Your service provider also offers you several products which invest in investment funds or UCIs (undertakings for collective investment) that tend to have a mixed portfolio of equities and bonds. The higher the equity percentage, the greater the risk. As mentioned earlier, the investment policies of these products are no longer subject to certain absolute caps on equity investments based on the subscriber’s age.
What should I choose?
Unfortunately we can’t answer that! It depends on you, your plans, your investor profile and so on.
If your banker also has the qualities of a good broker, he/she should be able to help you make an informed decision. Suffice to say that you alone bear the risk of your investments. The younger you are, it is more likely that you will be able to achieve sustainable returns and less likely that your savings will be significantly affected by temporary volatility. On the other hand, a sharp fall in markets a few weeks before your policy matures could have disastrous effects.
Over the long term, history clearly shows that a more dynamic approach generates considerably higher returns than a more conservative approach. Remember the old adage, though: “past performance is not indicative of future performance”. You can find more information about retirement savings plans (Article 111bis of the LIR) in Circular from the Director of Personal Income Taxes of 27 April 2022. Lastly, you should always bear in mind that any information provided should always be viewed in light of your personal situation and is likely to change in line with legislation.