Maximize your retirement income with the PCE

In order to significantly improve the income of future retirees, employers have the option of setting up a supplementary pension plan for their employees. Are you the owner of a small business or self-employed? The Supplementary Company Pension (PCE), also known as the second pillar of retirement in Luxembourg, is also available to you.

The PCE is also often an additional means of recruiting or reducing staff turnover in the company, even if the transfer of acquired rights has reduced this second aspect.

Two different schemes for a second pillar

Unlike the first pillar, which is managed by the state, the second pillar is based on private, optional pension schemes financed by the employer and, in some cases, partly by the employee. There are two ways of setting up this second pillar:

The defined contribution plan, which is riskier for the employee but more flexible

In this type of plan, the emphasis is on contributions made over time, with no guarantee as to the amount that will be paid out at retirement.

• Fixed contributions: The employer, and sometimes the employee, make regular contributions to an individual retirement account.
• Investment performance: The final amount available to the employee depends on the returns on the investments made with the contributions. Thus, the risk is borne by the employee.
• Uncertainty about benefits: At retirement, the amount paid depends on the amounts accumulated and the returns obtained, with no guarantee as to the amount of the benefits.
• Flexibility: This plan is often more flexible for the employee, who can adjust their contributions or decide how to invest their funds.

Defined benefit plan, more rigid for the employee but less risky

In this type of plan, the employee knows in advance the amount they will receive upon retirement, based on a predetermined calculation formula.

• Guaranteed benefits: The amount of the pension is determined based on criteria such as average salary at the end of the career, years of service, etc.
• Variable contributions: The contributions required to guarantee benefits are adjusted according to changing financial needs. The employer assumes the investment risk.
• Less flexibility for the employee: The employee has no control over how the money is invested, but enjoys greater security regarding the amount of their pension.
• Example: This is typically the case with public pension plans or pension plans offered by large companies.

Find out more about the three pillars of the Luxembourg pension system

3 cumulative advantages of the second pillar old-age pension

In addition to the supplementary retirement income, which is the first and main advantage of this scheme for Luxembourg employees, there are two other reasons for subscribing to a Supplementary Company Pension or second pillar.

Tax advantages of the second pillar

In the Supplementary Company Pension, contributions paid by the employer are not subject to tax. In addition, employee contributions may be deductible from income tax within certain limits.

In the case presented above, by paying €80 per month, Justine will be able to deduct €960 per year from her taxable income.

Currently, the maximum amount that can be deducted from contributions paid by an employee to a supplementary pension plan is €1,200 per year.

Changing employers? No problem if...

If you change employers, under certain conditions you can transfer the rights you have acquired under a supplementary company pension plan to a new pension plan.

If you leave your employer, it is important to check your acquired rights and see if they can be transferred to another plan.

For example: John has been working for a company for 10 years and has accumulated €30,000 in a defined contribution plan. When he changes employers, he can transfer his acquired rights to the new plan offered by his new employer if that employer has set up this type of financial benefit.

John transfers this €30,000 capital without penalty and continues to save for his retirement.

Upon retirement, the accumulated savings can be paid out as a lump sum or as an annuity (regular payments for life), depending on the terms of the pension contract.

You increase your income when you retire

The second pillar of retirement in Luxembourg is a valuable option for employees who want to secure additional income for their retirement.

By taking advantage of voluntary savings and tax deductions, the PCE allows you to improve your standard of living once you reach retirement age. However, as this solution is often dependent on employer policy, it is essential for each employee to fully understand the specifics of their plan and maximize its benefits.

Other supplementary savings products

Beyond the second pillar, there are other supplementary retirement savings products that are worth considering to further enhance your financial security in retirement. These optionsinclude :

• The third pillar: This is an individual retirement savings plan, often in the form of a life insurance policy, which also offers tax advantages under certain conditions. Products such as investment life insurance or private pension funds are good options for supplementing retirement income. Learn more about the three pillars
• Home savings plans (PEL): In addition to their main purpose (saving for the purchase of real estate), they can be used in the long term to build up assets for retirement.
• Long-term financial investments: Investing in financial products such as stocks, bonds, or diversified investment funds can be a good strategy for growing your savings over the long term.

It is therefore wise to consider a combined approach, taking into account your profile, needs, and retirement goals. This diversification allows you to optimize your future income while adapting to the vagaries of life and the economy.

How can you receive an old-age pension in Luxembourg?