How does the pension system work in Luxembourg? An explanation of the 3 pillars of retirement.
- Lux-Assurances
- May 20
- 3 min read
In Luxembourg, retirement is based on a model structured around three complementary pillars. This system aims to provide residents with a stable income at the end of their career, while offering personalised savings solutions. But in the face of demographic challenges, adjustments may be needed in the years ahead. In this article, we explain how the current system works, with a focus on the 3rd pillar, individual retirement savings, an essential lever for securing your future.
The Luxembourg pension system: a three-pillar mechanism
The Luxembourg pension system is based on a three-pillar approach, with each pillar playing a specific role in providing for retirement:
1st pillar: the statutory pension scheme
The 1st pillar is the compulsory public scheme managed by the Caisse Nationale d'Assurance Pension (CNAP). It is based on a pay-as-you-go system, with working people contributing to fund the pensions of current retirees. This system works well, but the working population is shrinking in relation to the number of pensioners, making it increasingly fragile.
Current discussions are focusing on the need to extend the contribution period or the effective retirement age in the medium term, to get closer to the statutory age of 65.
The Luxembourg statutory scheme comprises :
Compulsory contributions for all employees, self-employed persons and civil servants.
The amount of the pension is calculated on the basis of the number of years contributed and the income received.
Possibility of applying for an early pension under certain conditions.
The 2nd pillar: occupational pension provision
The 2nd pillar refers to supplementary company pension provision. Voluntary and set up at the initiative of employers, this pillar provides additional income at retirement. It can be funded by employer and/or employee contributions.
However, this pillar is reserved for companies that choose to offer it, which is not always the case.
The 3rd pillar: individual retirement savings
The 3rd pillar is private retirement provision, which is optional but highly recommended for securing your financial future. These are individual retirement savings solutions that are accessible to all, and particularly advantageous from a tax point of view.
With demographic pressure and forthcoming reforms, it's more important than ever to take control of your financial future.
Why invest in individual retirement savings (3rd pillar)?
This third pillar allows you to take control of your retirement by setting aside money on a regular basis, according to your objectives and profile. By taking out a contract like Horizon by Foyer, you benefit from:
Additional income when you retire:
This capital or annuity will supplement your statutory pension, and provide you with a more comfortable standard of living once you retire.
A significant tax advantage:
Contributions paid into an individual retirement savings contract are tax deductible up to €3,200 per year and per person (Article 111bis L.I.R.) since the 2017 tax year. This means you reduce your tax base while saving for your future.
Great flexibility:
At retirement age (60 at the earliest, 75 at the latest), you can opt for :
- a monthly life annuity or
- free disposal of all or part of your capital, with the option of making annual withdrawals.
In the event of disability or serious illness, your annuity or capital sum can be paid out before retirement age.
D’un cadre sécurisé:
The contracts offered by Foyer benefit from a regulated and transparent framework, with professional management tailored to your long-term needs.
b. Who can take out a 3rd pillar product in Luxembourg?
Any individual resident in Luxembourg for tax purposes can take out an individual retirement savings product, whether they are employed, self-employed or cross-border commuters (subject to certain tax conditions).
Prepare for your retirement today
The Luxembourg pension system provides a solid foundation, but does not in itself guarantee that your standard of living will be maintained in retirement. By looking ahead and taking out an individual savings plan like Horizon, you can optimise your future while benefiting from tax breaks.
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