Since 1 January 2019, the supplementary pension system (Pillar 2) – up until now reserved for employees – has been opened up to freelance workers and independent professionals. This will enable them to build up capital for their retirement and enjoy a beneficial tax structure.
The 3 pillars of the pension system
In Luxembourg, the pension system is based on three pillars:
- Pillar 1: the statutory pension system
- Pillar 2: the supplementary pension system
- Pillar 3: personal pension savings plans
Pension system under pressure
Financing statutory pensions will soon become problematic. According to forecasts by the Inspection Générale de la Sécurité Sociale (IGSS), the body in charge of monitoring the social security system in Luxembourg, outgoing pension benefit payments will exceed incoming contributions from 2035 and the payment reserve will be depleted by 2043. It is therefore becoming increasingly important for individuals to build up their own retirement capital.
Who is concerned?
- Self-employed professionals (such as doctors, dentists, veterinary surgeons, lawyers, architects, engineers, journalists etc.) and individuals conducting a commercial, craft or agricultural activity
- In certain cases, the partners of general partnerships (S.N.C., S.C.S. and S.à.R.L.) and directors of public companies (S.A.).
The payment into the pension scheme takes the form of a premium to a Luxembourg insurance company. These payments can be deducted as special expenses, for an amount up to 20% of annual taxable income.
When the premiums are paid, the insurance company levies a flat-rate withholding tax of 20%. This discharges the taxpayer from further tax payments on the contribution.
A social security fee of 0.9% is also levied by the insurance company and paid to the IGSS.
On the policyholder's retirement, no income tax is charged in Luxembourg on capital or annuity payments. This constitutes a significant tax benefit. A social security contribution of 1.4% to dependency insurance is the only charge on this amount.
Contributions to the supplementary pension system are therefore subject to a flat-rate withholding of 20% instead of the 42% marginal rate, for example. This is therefore a tax-efficient solution for taxpayers whose marginal rate is above 20%.
Supplementary benefits and cover
The supplementary pension system can be adapted to the different requirements of self-employed and independent professionals.
- FLEXIBILITY: no minimum term, possibility of adjusting payments at any time (e.g. as personal income increases over the years).
- PROTECTION: supplementary death benefit, accident insurance, disability risk insurance, incapacity for work, etc.
Would you like to set up a pension plan?
We encourage you to take action now in order to maintain your lifestyle and transition to retirement with peace of mind. Our advisers can give you advice and support you in preparing for your retirement, whether you are self-employed, an independent professional or an employee.
If you are not eligible as a self-employed person or independent professional, or in addition to the solution outlined above, we also offer a retirement savings plan, enabling you to deduct tax on up to 3,200 euros of income per annum. Please contact your Adviser for further details.