When should you start saving for your pension?

The question may be odd, especially if you are young and you are just starting out on the career ladder. The last thing you want to do is thinking about your pension.

What is the future of the pensions?

However, a closer look reveals that thinking about your pension when you are a young working person makes sense. Firstly, because when you will retire from working life, your income will decrease by 40% and your standard of living could drop sharply. So, it is better to anticipate as soon as possible this major change. Secondly, the persistent decline in fertility rates and increasing life expectancy have led to an ageing population in Europe and the trend is not about to be reversed. According to Eurostat, the Statistical Office of the European Union, by 2050, 17% of the population will be aged 65 or more, 11% aged 80 and older and only 15% between 0 and 14 years old. In other words, even with a massive immigration in the forthcoming years, the proportion of the working population will decrease in Europe, which could be risky for the pension system as we know it today.   

The 3 pillars

In Luxembourg, the legal age retirement is 65. To be eligible for an old age pension in Luxembourg, you must have held 120 months of mandatory insurance. It is the statutory pension (called the first pillar) based on the “pay-as-you-go” system. Today’s pensions are financed by the social security contributions currently being paid by employed people. The second pillar is the supplementary or extra-legal pension funded by employers for their employees or a part of them. The third pillar is the individual pension savings plan. The individual pension savings plan allows you to top-up your future pension income on your own initiative. By making regular contributions to the plan, you build up a lump sum with interest, which you can then use when you are retired.  

Guaranteed or variable yield?

There are two types of pension savings plan. Either you choose a life insurance policy with a guaranteed yield, or you opt for a pension savings fund with a variable yield. The pension savings fund is an investment fund managed by an asset manager and where you can create, on your own, investment strategy by choosing among a selection of SICAV’S. The capital is not guaranteed because it is linked to the stock market fluctuations but the return may be higher. 

As soon as possible and never too late!

Whatever your choice – guaranteed or variable yield -, the earlier you start, the higher the return of your savings will be. The amount is linked to the accumulation of interest and capital. In addition, if you subscribe to an individual pension savings plan, your contributions are subject, under certain conditions – in particular, your policy must run for a minimum of 10 years -, to tax relief. The tax relief limit is EUR 3,200 per year and per ratepayer, whatever his age.

As you will have understood, once you start to work, you should subscribe to an individual pension savings plan. The pensioner you will be in the forthcoming decades will thank you for your foresight. You may benefit from the tax advantages linked to your individual pension savings plan from the age of 18 to the age of 65.   



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