Irish Chamber Examines Luxembourg Pension Scheme
The pension system in Luxembourg is currently one of the best, however, the Irish Luxembourg Chamber of Commerce (ILCC) saw the importance of clearing up misconceptions with the organisation of an information evening that took place on Wednesday 23 October at the Banque de Luxembourgin Luxembourg city.
Around 50 people attend the event which was introduced by Ailbhe Jennings of the ILCC.
The two speakers at the event were Marco Moes of La Baloise as well as Michael Doyle, a Financial Advisor with The Spectrum IFA Group, and who is also the president of the Scottish Association and the founder of The Business Lunch in Luxembourg.
Mr Doyle addressed the issue of common misconceptions within the state pension scheme. Currently, the Luxembourg Government has a reserve of €11 million which will be exhausted in the next 25-30 years under the current system.
Marco Moes explained that the pension scheme can be broken down into three key pillars; the first is the Legal Retirement State Pension, the second is the Employer’s Pension Scheme and the third is a Private Pension Scheme. Complimentary pension schemes are also an option.
To qualify to receive a state pension in Luxembourg, an individual must have been employed in Luxembourg for a minimum of a year and a minimum of 10 years overall in any EU member state, Canada or Switzerland, countries with which Luxembourg has signed agreements. Currently, employees contribute 8%, employers contribute 8% and the state contributes another 8% towards an individual’s pension. For those who are self-employed, the individual’s contribution rises to 16% and the state contributes 8%. There are also Survivors Pensions and Orphans Pensions which family members may be entitled to after the claimant’s death. It is also important to note that this income is taxable.
Due to an increase in life expectancy and an increase in exported pensions, there have been concerns over the current pension schemes’ durability. This has brought many questions to light, including: will Luxembourg follow in the UK’s footsteps of increasing the retirement age? Will there be a percentage increase in contributions? Will there be a reduction in escalation of payment? Will there be a reduction in pension income?
Currently, salaries increase at a rate of 2-3% per annum whereas pensions lag behind with 1.9% which is not consistent with inflation. To combat these differences, alternative retirement funding options include relying on individual savings capital or creating independent and flexible saving plans which should be portable and, therefore, cross-border friendly, as otherwise these savings might then be liable for high taxes.
With regards to the second pillar, Employer Pension Schemes are on a voluntary basis and are more common in large financial companies, service providers for the financial sector and some industrial companies. Eligibility for these schemes is dependent on employers as is the level of benefits contribution. The categorisation of Employer Pension Schemes falls into the following main categories; a Defined Benefit Plan which is usually 10% of the last earned salary as annuity and 150% of the last earned annual salary, and a Defined Contribution Plan which is usually 5% of each earned salary and an investment in a classic insurance product.
Photo by Elizabeth Thompson (L-R): Michael Doyle, Ailbhe Jennings, Marco Moes