How do pensions work in Luxembourg?

When it comes to pensions, Luxembourg isn’t a bad place to be compared with its European neighbours, as the average loss of income is lower. According to the Organisation for Economic Co-operation and Development (OECD), for a person whose average salary during his or her career exceeded national averages by 50%, the gross replacement rate is 72.5% in Luxembourg.

To find out more about how it works, see our article on How to calculate your retirement in Luxembourg.

A system that needs to evolve

However, according to the projections of the European Commission, in order to maintain the national old-age dependency ratio at 2020 levels in 2040, the retirement age would have to be raised to 72 in Luxembourg (from 65 today).

It is too early to say whether this option will be chosen. But there is a good chance that the amount of money paid in will be reduced.

By putting in place a savings and investment strategy that is consistent with your age and profile, you can compensate for this drop in income when the time comes to retire.

When do you need to start preparing for your retirement?

To approach this new stage of your life with peace of mind, you are well advised to start preparing financially as soon as possible. This will allow you to benefit from the multiplier effect without having to tighten your belt later on to put money aside.

Let's imagine the following scenario:

• You decide to take out an AXA Save for Life Pension,
• You pay in €3,200 per year (i.e. €266 per month),
• You think that you will leave the savings plan at age 65.

If you start at the age of 30, your available capital will be about €150,000 (potential interest rate:  3.52%), compared to €74,000 if you start at the age of 45 (potential interest rate: 3.16%)*.

As you can see, the interest rate you can hope to get drops slightly if you start saving later. But why? The closer you get to retirement age, the more secure the investments are so that you do not risk losing money when you leave the savings plan. Less risk also means less potential return. Learn more about how the Save for Life Pension works.

This is why it is important to save, even small amounts as early as possible. As your career takes off and your purchasing power increases, you can save much larger amounts.

How to prepare for retirement at 30?

At 30, the most important thing is to have savings that will allow you to achieve some of your life goals: accept a professional opportunity, finance a big trip, organise a wedding or build up a deposit to buy property. The easiest way to do this is to schedule regular payments into a life insurance policy. This means that your savings remain available at all times to deal with life’s knocks (minus the tax, of course).

As soon as your professional and financial situation allows, buying your own home is an essential step towards preparing for your retirement. By buying in your thirties, the property is likely to be paid off by the time you retire, freeing you from financial worries and providing a good foundation for your retirement.

Alternatively, if you still have some money left over, rather than keeping that cash in a savings account with a very low (or even zero!) interest rate, preparing for your retirement while taking advantage of tax benefits is a great idea.

How to save for retirement at 40?

40 is a pivotal age for retirement savings. If you haven't already done so, it is advisable to build up your capital quickly.

The good news is that the Luxembourg government encourages you to take out pension insurance while allowing you to benefit from a €3,200 tax allowance per year and per person (Article 111bis L.I.R.).

How do you choose your supplementary pension savings? Determining your risk profile is a good starting point.  For example, at AXA Luxembourg, there are two different retirement savings products:

• Alizea, the 100% safe option: your savings are invested in a guaranteed interest rate vehicle with profit sharing. 
• Save for Life Pension, the option that combines traditional savings and stock market investments to boost your potential returns.

From the age of 60, you can choose between a lump sum payment, a monthly life annuity for the rest of your life or a combination of both.

How to prepare for retirement when you hit 50?

This is usually a good time to boost your savings: you often have a more comfortable income and more than 10 years of working life left before you retire. 

Investment funds, structured products, life insurance - there are many ways to make your capital grow, without necessarily committing large sums. Don’t hesitate to discuss this with one of our advisors. 

If you haven't already done so, subscribe to a pension product and increase your payments up to the €3,200 limit per year.

Finally, it is important to consider your life after work to prepare yourself psychologically. What will you want to spend more time on? Family, hobbies, voluntary work, travel... When you retire, you will be free to do whatever you like with your free time! Do you find it difficult to imagine yourself in that position? Did you know that there are training courses to steer you towards the end of your professional career with peace of mind so that you can throw yourself enthusiastically into this new phase of your life.

*The simulation is based on a neutral return scenario (neither optimistic nor pessimistic), which is itself based on the past performance of the AXA PENSION fund. Past performance is not a guarantee of future performance.