Maximize your retirement income with the PCE

To significantly improve the retirementincome of future retirees, employers have the option of setting up a supplemental pension plan for their employees. Are you the owner of a small business or self-employed? The Supplemental Corporate Pension (PCE), also known as the second pillar of retirement in Luxembourg, is available to you as well.

The PCE is also often used as a tool to attract new talent or reduce employee turnover, although the transfer of accrued benefits has somewhat mitigated this latter effect.

Two Different Plans for the Second Pillar

Unlike the first pillar, which is managed by the government, the second pillar is based on private, voluntary pension plans funded by the employer and sometimes partially by the employee. There are two ways to set up this second pillar.

The defined-contribution plan, riskier for the employee but more flexible

In this type of plan, the focus is on the contributions made over time, with no guarantee of the amount that will be paid out at retirement.

• Fixed contributions: The employer, and sometimes the employee, regularly makes contributions to an individual retirement account.
• Investment performance: The final amount available to the employee depends on the returns generated by the investments made with the contributions. Thus, the risk is borne by the employee.
• Uncertainty regarding benefits: At retirement, the amount paid out depends on the accumulated funds and the returns earned, with no guarantee regarding the amount of benefits.
• Flexibility: This plan is often more flexible for the employee, who can adjust their contributions or decide how to invest their funds.

Defined-benefit plan, more rigid for the employee but less risky

In this type of plan, the employee knows in advance the amount they will receive upon retirement, based on a predetermined calculation formula.

• Guaranteed benefits: The pension amount is determined based on criteria such as average salary at the end of the career, years of service, etc.
• Variable contributions: The contributions needed to guarantee benefits are adjusted according to changing financial needs. The employer assumes the investment risk.
• Less flexibility for the employee: The employee has no control over how the money is invested but benefits from greater certainty regarding the amount of their pension.
• Example: This is typically the case with public pension plans or pension plans offered by large companies.

Learn more about the three pillars of the Luxembourg pension system.

3 cumulative benefits of the second pillar retirement pension

In addition to the supplemental retirement income — which is the first and primary benefit of this scheme for Luxembourg employees—there are two other reasons to enroll in a Supplementary Company Pension or second pillar.

Tax advantages of the second pillar

In the Supplementary Company Pension, contributions paid by the employer are not subject to tax. Furthermore, the employee’s contributions may be deductible from income tax within certain limits.

Currently, the maximum deductible amount for contributions made by an employee to a supplementary pension plan is €1,200 per year.

For example, if you contribute €80 per month, you can deduct €960 per year from your taxable income.

Changing employers? No problem if...

If you change employers, you may, under certain conditions, transfer the benefits accrued through your participation in a Corporate Supplementary Pension Plan to a new pension plan.

If you leave your employer, it is important to verify your accrued benefits and determine whether they can be transferred to another plan.

For example: John has worked at a company for 10 years and has accumulated €30,000 in a defined-contribution plan. When changing employers, he can transfer his accrued benefits to the new plan offered by his new employer if that employer has established this type of financial benefit.

John transfers this €30,000 in capital without penalty and continues to save for retirement.

Upon retirement, the accumulated savings can be paid out as a lump sum (a single payment) or as an annuity (regular payments for life), depending on the terms of the pension contract.

You increase your income upon retirement

The second pillar of retirement in Luxembourg is a valuable option for employees seeking to secure additional income in retirement.

By taking advantage of voluntary savings and tax deductions, the PCE allows you to improve your standard of living once you reach retirement age. However, since this solution often depends on the employer’s policy, it is essential for every employee to fully understand the specifics of their plan and maximize its benefits.

Other Supplementary Savings Products

Beyond the second pillar, there are other supplemental retirement savings products worth considering to further strengthen your financial security in retirement. Among these options are:

• The third pillar: This is an individual retirement savings plan, often in the form of a life insurance policy, which also offers tax benefits under certain conditions. Products such as investment life insurance or private pension funds are good options for supplementing retirement income. Learn more about the 3 pillars
• Home Savings Plans (PEL): In addition to their primary purpose (saving for home ownership), they can be used over the long term to build wealth for retirement.
• Long-term financial investments: Investing in financial products such as stocks, bonds, or diversified investment funds can be a good strategy for growing your savings over the long term.

It is therefore wise to consider a combined approach, taking into account your profile, needs, and retirement goals. This diversification allows you to optimize your future income while adapting to the ups and downs of life and the economy.

How can you qualify for a retirement pension in Luxembourg?