The three-pillar mechanism of Luxembourg pensions

When I arrived in Luxembourg a few years ago, I quickly discovered through conversations that planning for retirement was not just a matter of saving money. It was primarily a tax issue. I took this idea lightly and put off taking action. Big mistake.

It is important to note that Luxembourg offers its residents and workers a retirement system structured around three complementary pillars. This system combines public benefits, professional advantages, and personal savings options to guarantee financial security for individuals working in Luxembourg once they retire.

Pillar 1: the statutory Social Security pension

A solid foundation for contributing to your retirement

The first pillar of the pension system in Luxembourg is a public pay-as-you-go pension scheme. Managed by Social Security, it is mandatory for all employees, self-employed persons, and civil servants in Luxembourg.

This system is based on intergenerational solidarity. Contributions from current workers finance the pensions of retirees. It is financed by social security contributions, deducted from the income of workers and employers, as well as by a contribution from the state.

• Eligibility requirements: To be eligible for a pension, you must have contributed for at least 10 years in Luxembourg or other European Union countries.
• Pension amount: This is calculated based on the length of contribution and income level throughout your career.
• Retirement age: The legal retirement age is set at 65, with the possibility of early retirement from 57 or 60, under certain specific conditions.

But the prospects for an adequate pension are insufficient

Although this pillar provides a solid foundation, it may not be enough to maintain a comfortable standard of living, especially for middle- and high-income workers. In addition, Luxembourg's public social security pension system is already showing signs of a deficit in the coming years. This is why the other two pillars are important for supplementing your future retirement income.

In addition, there is a real problem with the employability of seniors in Luxembourg.

Pillar 2: supplementary company pension

A retirement benefit offered by some Luxembourg companies

The second pillar is a supplementary pension scheme offered by certain companies in Luxembourg. This system remains optional and is intended to supplement the benefits of the first pillar, especially for employees wishing to improve their pension.

• Features: This plan can be defined contribution (contribution amount set in advance) or defined benefit (guaranteed pension amount).
• Participation: Contributions are often financed by the employer, sometimes with a contribution from the employee. This type of plan is particularly common for executives and high-income employees.
• Tax advantages: Contributions to these plans generally offer tax advantages for both employers and employees.

An asset for improving your standard of living in retirement

Companies that offer this type of plan often use this benefit to attract and retain talent. Learn more about the second pillar of old-age pension contributions

Pillar 3: Individual retirement savings products

Flexible and advantageous savings for retirement

The third pillar is based on individual retirement savings products, which are taken out voluntarily by people who want to plan ahead for their retirement. These products offer great flexibility in terms of contributions and investment.

• Examples of products: Life insurance policies, retirement savings plans, and other investments dedicated to retirement planning.
• Tax advantages: Contributions to these plans may be tax deductible, within certain limits.
• Flexibility: Subscribers can choose the amount and frequency of contributions, as well as the investment vehicles that best suit their objectives.

Strengthening your financial security in retirement

The third pillar is recommended for those seeking to maximize their retirement income and strengthen their financial security.

These PERIs are taken out voluntarily by people who want to better prepare for their financial future when they retire. Supplementary retirement savings products are individual contracts. They includelife insurance, retirement savings plans, or investments specifically dedicated to retirement planning.

One piece of advice: start planning for your retirement as early as possible

Like many foreign residents, you may have previously worked in another country. And you may be planning to move to a country other than Luxembourg in the near future. This could make managing your retirement a little complicated. So, if you are a resident of Luxembourg, it is essential to start planning now.

More information on retirement in Luxembourg.