Occupational pensions for independents

Currently, only employees may benefit from occupational pension schemes in Luxembourg. In spring 2017, the Government proposed draft law n° 7119 to amend the existing law which dated 1999. The draft law has meanwhile become the law of 1 August 2018 on occupational pensions. One important feature of the new law is to allow independents to take out pension schemes in the future (i.e. as from 1.1.2019). The eligible benefits will be retirement benefits, survivors benefits as well as disability benefits. Healthcare benefits are not in the scope of the occupational pension law in Luxembourg.

Taxwise, independents will be allowed to deduct contributions for retirement benefits up to 20 % of their professional income (i.e. turnover – professional costs). A 20 % lumpsum tax will be levied on the contributions. The counterpart is that benefits at retirement age will be tax-free for Luxembourg residents. The pension regulator IGSS also takes a supervisory fee (called “taxe rémunératoire”) of 0,9 % of the premiums.

An example shows how the mechanism works in practice:

Assume an independent has a turnover of 110'000 EUR and professional expenses of 10'000 EUR, bringing his net professional revenues to 100'000 EUR. He would have to pay around 25'000 EUR (25 % of 100'000) social security charges. In this case the maximum base to determine the retirement premium is 20 % of 100'000 (= 20’000 EUR), the social security contributions not being considered. A lumpsum tax (+ supervisory fee) of 4'180 EUR (= 20,9 % of premium) will have to be paid upfront. The tax “gain” for the independent is thus the difference between his/her marginal tax rate and the lumpsum tax rate of 20,9 %.

It is important to point out that the upper limit of 24’000 EUR which was included in the draft law has been skipped in the final text. This means that retirement premiums for amounts exceeding 24’000 EUR will be possible.

The benefits at retirement age can be withdrawn upon retirement, either as a lumpsum or as a life annuity. In both cases the benefits are tax-free for Luxembourg residents but a dependency levy (“assurance-dépendance”) of 1,4 % applies on the payout.

Typically, the retirement benefits can be withdrawn at pension age or early pension age (i.e. age 57 - 64). They can be withdrawn early also in case of departure to a foreign country (affiliation to a public foreign healthcare scheme needs to be proved) or if the accumulated capital is lower than 3 X minimum wage.

Insurance companies are currently working on their products. It is likely that traditional life insurance contracts with capital or yield guarantees and unit-linked contracts will be offered.

There is no minimum duration for contracts like for 3rd pillar pensions (art 111 bis of the tax code) which have to run for 10 years at least. The typical term of the contract would be retirement age (i.e. age 65) with a possible early withdrawal if pension age is earlier.

Apart from retirement benefits, independents will also have the possibility to take out survivors and disability benefits. Premiums will be tax deductible as professional expenses. This means that these premiums do not fall under the general deductions for insurance premiums as per Art 111 of the tax code (672 EUR/person).