You don’t have to settle for a lower income in retirement

Plan for retirement early to get more out of life

According to official ministry figures, the average gross pension in the Grand Duchy of Luxembourg is EUR 3,862.75 per month, giving a net pension of EUR 3,743.67 on average. 75% of pensioners in Luxembourg draw a pension of EUR 4,766.43 gross or less. The remaining quarter receive more than that.

These figures show that pensions are much higher in Luxembourg than in neighbouring countries. Nonetheless, retiring entails a substantial drop in income for many. This is especially so if the retiree has not adequately prepared for retirement during their working life, which makes it difficult to make up for the inevitable decline in income.

There are understandable reasons for making insufficient preparation for retirement: partnership, career, children, limited resources – many young working people have other priorities and concerns. The whole pension business (and the financial consequences) gets side-lined. But given that the average drop in income is around 20% in retirement, it is absolutely essential to prepare and plan for the long term. Plus, based on current forecasts, Luxembourg will struggle to maintain today’s relatively high pension levels for 20, 30 or more years.

Based on current forecasts, Luxembourg will struggle to maintain today’s relatively high pension levels for 20, 30 or more years.

What do you need to do?

What steps can you take to plan for the future? The first step is to know your current pension status. It is a good idea to file all the relevant documents in one place so you can access them when you need them. A lot of documents are needed to claim pension rights. You must be able to produce records of periods of compulsory insurance (employment, unemployment, parental leave, maternity leave, etc.) and periods treated as such (study and vocational training between the ages of 18 and 27, time taken off work to take care of children under the age of 6, etc.) However, gathering all the documents together also helps with planning, and this is something that shouldn’t be left to chance.

The pension you can expect depends to a large extent on what you do or have done about it yourself. It is worthwhile starting to save at a young age, even if you don’t have much to put aside initially. Even small amounts over several decades accumulate a tidy sum on retirement, which will make a difference. Of course, savers have to be mindful of the liquidity of their savings, so they have the flexibility they need for short-term projects and purchases. Saving for the future should not mean excessive scrimping. As with so many things, it comes down to finding the right balance.

Owning your own home is naturally a huge advantage in retirement. Taking out a loan early protects against having to make high repayments at retirement age. Of course, property prices are high these days and it isn’t always easy to get a loan, especially when the bank asks for a down payment. On the other hand, interest rates are a help. Interest rates are currently extremely low and it is important to take advantage of them to invest in the future. Don’t hesitate to contact your bank to find out what your borrowing capacity is.

Supplementary pension options

Back to the subject of pensions or, rather, the options available outside the public system. Alongside the state pension regime, the Luxembourg government has introduced measures to promote occupational pensions (the second pillar) and personal retirement savings (the third pillar).

If an employer offers a supplementary pension, employees can make additional personal contributions of up to EUR 1,200 annually into the scheme, which is tax deductible.

If an employer offers a supplementary pension, employees can make additional personal contributions of up to EUR 1,200 annually into the scheme, which is tax deductible. On retirement, the benefits are paid out in the form of a lump sum or an annuity and are fully exempt from income tax in Luxembourg. However, a flat-rate withholding tax of 20%, payable by the employer, does apply.

The tax reform that came into effect on 1 January 2017 provides for an annual tax allowance of EUR 3,200 for retirement savings irrespective of age. On retirement (at 60 at the earliest), the pension is paid out either in the form of an annuity, 50% of which is tax-free, or in the form of a lump sum, which is taxed at half the standard tax rate. Alternatively, a combination of the two is possible. 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 also be combined with a capital withdrawal and/or a monthly annuity.

Investing for retirement

Another option to prepare yourself financially for retirement are investments. Whether investment funds, insurance or structured products, there are many investment options to generate capital in the longer term and secure your standard of living in retirement. Nor do you necessarily have to have huge amounts of money to invest either. If you are considering investing, it is worthwhile finding out your personal investor profile. The aim is to define what risks and opportunities are associated with your preferred investments and what your objectives are.