Private pension plan (third pillar) in Luxembourg. Is it worth it?

5 comments

1. Bravo for the detailed post! Your approach is different from the other posts as you consider that you will reinvest the tax benefit. That gives you the extra revenue that makes it more profitable. You also mention that you will rebalance the ETF into fixed income assets, certainly at lower income, but that can make it again less profitable, depending on your strategy there.

2. Probably one of the best analyses I’ve seen on any financial topic on this sub over the past couple of years.

   Only things you aren’t speaking to are the additional 7% solidarity tax, and the (I assume) high chance that you would receive pay increases taking you into the 40% and 41% brackets over the coming 30 years. Whilst we don’t know the effective tax rates during this time, it is almost certain to factor in at some point. Overall though the impact is probably pretty equivalent for either option.

   I went for the 3rd pillar after my analysis, and for what it’s worth Foyer’s fee structure is significantly cheaper over the lifetime compared with the rest of the options in the market (as at Dec 21).

3. I did the exact same thing and concluded that the tax benefit outweighs the cons even if I hate feeding the insurances to this degree.
   Couple of things I included in my considerations:
   – allocate 100% in a guaranteed return fund with lower management fees. I consider this like a low yield savings account with guaranteed capital and cumulative tax benefit.
   – stopped at 60 years instead of 65
   – included the possibility to stop contributing whenever I please, i.e. if I retire early and want to move abroad between 50 and 60 i just let it run to 60 and then cash out.

   There is no way this product would ever be sold if it weren’t for the tax benefit. Taxpayers are effectively subsidizing big insurance companies, it’s so sad that this product is being sold as taking your pension matters in your own hand to have a safe retirement. If the legislator were after that, they’d allow for a proper scheme in which the taxpayer can choose to invest into whatever they want at much lower fees.

   Btw, small correction to OP: you’re assuming a marginal tax rate of 39%, not an effective one.

4. Thanks for this very interesting and detailed analysis. However I think that you did a slight logical error and **double-counted** the tax benefit of the pension plan in your comparison, which as a result underestimates the return of your ETF plan.

   You are correct and smart to assume that you reinvest the tax benefit of the pension plan to calculate the return of the pension plan. But if you do that and want to have a valid comparison with the ETF plan, you have to assume that you invest the same amount in the ETF plan (3.200 €) than in the pension plan. But in your example you subtract your marginal tax rate from the gross amount that you invest per year, and as a result only invest 61%*3.200=1952€ in the ETF plan. Therefore you double count the tax benefit.

   To illustrate and better explain my point here an example. A comparison between plans is valid, if for a given gross income you arrive at the same net disposable income after taxes and investment. Given a salary of 100.000€/year (for simplicity I assume a **flat** tax rate of 39% instead of the marginal rates):

   **Pension plan:**

   * Gross: 100.000 €
   * Investment: 3.200 € –> Amount left: 96.800 €
   * Tax (39%): 0.39*96.800=37752€ –> Amount left: 59.048€
   * Tax benefit reinvested: 3200*0.39=1248€ –> Amount left: **57.800€**

   **ETF plan** (with your reasoning):

   * Gross: 100.000 €
   * Tax (39%): 39.000€ –> Amount left: 61.000€
   * Investment: (1-0.39)*3200=1952€ –> Amount left **59.048** €

   So you would have more money left in your ETF plan example, hence why you would need to invest 3.200€ and not 1.952 €. (To calculate the precise net amount left you would need to calculate with the marginal tax rates and not a flat rate as I did. But the results and conclusions should not be impacted too much by this simplification)

   To summarize, you do an analysis with a slight mistake in my opinion, and therefore also get to the wrong conclusion that it is beneficial to invest into the pension fund instead to invest in ETFs. The short-term tax benefit of pensions plans does generally not offset the higher costs of them in the long term in comparison to an all ETF plan (Even more so when you consider that you have to pay taxes when your pension plan is paid out to you). Hence it is in my opinion advisable to invest only in ETFs (stocks and bonds) and not in a pension plan.

5. I did a similar calculation few months back when the Foyer salesmen were bugging me.

   |**.**|**Annual Figures**|**Input**|**Inscription**|**Management**|**.**|**.**|
   :–|:–|:–|:–|:–|:–|:–|
   |**.**|**.**|**€ 3,200.00**|**2.00%**|**1.20%**|.|.|
   |.|.|.|.|.|.|.|
   |**Year**|**Input Sum**|**Effective Cost**|**Costs**|**Costs**|**Investment Sum**|**Investment / Input**|
   |1|€ 3,200.00|€ 1,839.68|€ 64.00|€ 38.40|€ 3,097.60|96.80%|
   |2|€ 6,400.00|€ 3,679.36|€ 64.00|€ 37.17|€ 6,196.43|96.82%|
   |3|€ 9,600.00|€ 5,519.04|€ 64.00|€ 74.36|€ 9,258.07|96.44%|
   |4|€ 12,800.00|€ 7,358.72|€ 64.00|€ 111.10|€ 12,282.97|95.96%|
   |5|€ 16,000.00|€ 9,198.40|€ 64.00|€ 147.40|€ 15,271.58|95.45%|
   |6|€ 19,200.00|€ 11,038.08|€ 64.00|€ 183.26|€ 18,224.32|94.92%|
   |7|€ 22,400.00|€ 12,877.76|€ 64.00|€ 218.69|€ 21,141.63|94.38%|
   |8|€ 25,600.00|€ 14,717.44|€ 64.00|€ 253.70|€ 24,023.93|93.84%|
   |9|€ 28,800.00|€ 16,557.12|€ 64.00|€ 288.29|€ 26,871.64|93.30%|
   |10|€ 32,000.00|€ 18,396.80|€ 64.00|€ 322.46|€ 29,685.18|92.77%|
   |11|€ 35,200.00|€ 20,236.48|€ 64.00|€ 356.22|€ 32,464.96|92.23%|
   |12|€ 38,400.00|€ 22,076.16|€ 64.00|€ 389.58|€ 35,211.38|91.70%|
   |13|€ 41,600.00|€ 23,915.84|€ 64.00|€ 422.54|€ 37,924.84|91.17%|
   |14|€ 44,800.00|€ 25,755.52|€ 64.00|€ 455.10|€ 40,605.75|90.64%|
   |15|€ 48,000.00|€ 27,595.20|€ 64.00|€ 487.27|€ 43,254.48|90.11%|
   |16|€ 51,200.00|€ 29,434.88|€ 64.00|€ 519.05|€ 45,871.42|89.59%|
   |17|€ 54,400.00|€ 31,274.56|€ 64.00|€ 550.46|€ 48,456.97|89.08%|
   |18|€ 57,600.00|€ 33,114.24|€ 64.00|€ 581.48|€ 51,011.48|88.56%|
   |19|€ 60,800.00|€ 34,953.92|€ 64.00|€ 612.14|€ 53,535.34|88.05%|
   |20|€ 64,000.00|€ 36,793.60|€ 64.00|€ 642.42|€ 56,028.92|87.55%|
   |21|€ 67,200.00|€ 38,633.28|€ 64.00|€ 672.35|€ 58,492.57|87.04%|
   |22|€ 70,400.00|€ 40,472.96|€ 64.00|€ 701.91|€ 60,926.66|86.54%|
   |23|€ 73,600.00|€ 42,312.64|€ 64.00|€ 731.12|€ 63,331.54|86.05%|
   |24|€ 76,800.00|€ 44,152.32|€ 64.00|€ 759.98|€ 65,707.56|85.56%|
   |.|Total effective costs|€ 44,152.32|.|Total investment|€ 65,707.56|.|
   |.|Effective gains|€ 7,131.48|.|Net after taxes|€ 51,283.80|.|
   |.|**Total return**|**16.15%**|.|.|.|.|
   |.|**CAGR**|**0.63%**|.|.|.|.|

   What I’m doing here is simply calculating the cost/advantage of putting the money into the scheme itself. That gets you a 16.15% gain over 24 years, or a miserable CAGR of 0.63%. The “effective cost” is the money you pay out of pocket outside of the tax deduction to reach that 3200€ investment limit.

   I don’t take into account the actual fund performances because that is not something exclusive to the third pillar, and I can go by myself and look at what the Foyer fund offerings are using as their investments: https://www.capitalatwork.com/wp-content/themes/capitalatwork/documents/FINRPT_UMB_ANN_202212_EN.pdf

   (Also: the funds under management they have is absolute peanuts, for example that fund is only 165M)

   The 100% “ESG Equities at Work” with the highest gains are listed on page 64 of that PDF, and in my view they are complete trash.

   The gains in my view are just too low for the fact that your money is stuck somewhere where you can’t access it, and also stuck with an investment instrument that is probably severely underperforming compared to you just doing your own thing, or even using ETFs in the worst case.

   It might be good for people who “leave it and forget it” type of thinking, but especially the management fees that firms are asking for this is just way too large for a passive investment.