Foresight
November 11, 2021

It’s more important than ever for young people to think about retirement planning

Why? Due to our increasing life expectancy many of us will have a much longer retirement period than previous generations.
Living until you’re 90 now means you’ll be living on your pension for 25 years. As you can imagine, preparing for this will take some planning. That’s why Luxembourg is encouraging its population to start building a supplementary retirement income.

Groupe de jeunes gens heureux prenant un selfie

Living until you’re 90: a lot to think about

A study by Imperial College London says that, by 2030, we can expect to see our life expectancy to be around the 90 mark for women and 85 for men.

The legal retirement age in Luxembourg is 65. That means we would get an average of 20 to 25 good years to enjoy the fruits of our labour. Holidays in the low season, treating yourself to a sports car, making up for lost time and doing all those things you put to one side for four decades of work.

However… do you have any idea how you’ll finance this time in your life? In addition, how will you maintain the standard of living you’ll have gotten so accustomed to? Due to your state pension, deducted from your salary, won’t cover everything. It’s down to each and every one of us to build our own pension plan.

What does a pension plan involve?

Ever heard of the Three-Pillar Pension system? It means that a retired person has three sources of income:

Pillar 1: State pension

This pension will depend on your salary, the number of years you worked and what your status was: employee, self-employed or civil servant. This one causes many people to worry.

Pillar 2: Supplementary company pension

The supplementary pension is paid into either by your employer, if you are employed (via group insurance, a pension fund or an industry-wide pension scheme), or as a self-employed person (via a supplementary pension scheme for the self-employed [RCPI]).

Pillar 3: Private pension plan

This is taken out on a voluntary basis by anyone wanting to secure a more financially balanced retirement for themselves. Previously, this type of pension scheme was used to supplement the state pension, but now it represents somewhat of a prerequisite for maintaining the lifestyle you want.

What makes Luxembourg’s fiscal framework so attractive

Luxembourg encourages people to build supplementary pensions with immediate tax benefits.

Compared to all other sources of savings (purchasing property, savings accounts, stocks and shares, cryptocurrencies, etc.), a pension plan qualifies for a tax deduction as a special expense.

The saving is far from small: since 2017, the premiums paid for a private pension have been deductible up to a maximum of €3,200 a year.

For a couple with a taxable income of €80,000/year, the annual tax impact is €2,135. Over a 30-year savings period, that represents a tax reduction of €64,050. There’s no situation where you don’t stand to benefit from that. Here are some examples:

Profile Single aged 25 Single aged 35 Couple aged 35
Period up to 65 years 40 years 30 years 20 years
Amount saved per year €3,200 €3,200 2x €3,200
Taxable income €40,000 €60,000 €100,000
Annual tax benefit €1,065 €1,335 €2,670
Total tax benefit €42,600 €48,600 €53,400

The different types of pension savings plans

The private pension plan lets you choose whether you want your savings in products with or without a guaranteed return.

At Foyer, we offer two choices:

  • A 50/50 plan, evenly distributed between unit-linked funds (financial assets) and guaranteed return.
  • A 100% unit-linked plan, which benefits from long-term positive trends in the financial markets.

All investments in unit-linked funds by Foyer are carried out and managed by CapitalatWork asset managers. There are four funds to choose from, and based on your age you can choose between more or less defensive or profitable investments.

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