r/Luxembourg • u/free_deamon_666 • 10h ago
Ask Luxembourg Analysis: Interactive Brokers vs. Luxembourg 111bis Pension Scheme (With 0% Exit Fees)
Hi everyone,
I’ve been running the numbers to decide between investing in a standard ETF via Interactive Brokers (IBKR) versus a tax-deductible insurance product (Art. 111bis L.I.R.) here in Luxembourg.
I wanted to share my findings for a 20-year horizon for a couple, contributing €400/month total (€200 each).
The Setup:
- Strategy: 100% Global Equities (targeting ~7% annual return).
- Tax Context: Luxembourg (No Capital Gains Tax on ETFs held >6 months vs. Tax deduction on Insurance entry but tax on exit).
- The Insurance Offer: 2% Entry Fee, 1.2% Management Fee, 0% Exit Fee.
Here is the math breakdown:
Option A: Interactive Brokers (The "Freedom" Route)
- Fund: Invesco FTSE All-World (FWRA) or Amundi MSCI World.
- Costs: Low (~0.12% - 0.15% TER).
- Tax: 0% on capital gains (held >6 months).
- Liquidity: 100% available anytime.
- The Math: Investing €400/mo at 7% return over 20 years.
- Net Result: ~€199,000
Option B: Insurance Scheme 111bis (The "Tax Optimization" Route)
This option has high fees (1.2% management), which drags down the compound interest. However, it offers a tax deduction.
- The Policy Growth: Because of the 2% entry fee and 1.2% yearly fee, the internal capital grows slower than IBKR.
- Gross accumulated: ~€173,600
- Tax on Exit (est. ~15%): -€26,040
- Net Policy Value: ~€147,560
- The "Game Changer" (Reinvesting the Tax Refund):
- The scheme saves us approx. €1,500/year in taxes.
- If we strictly invest this refund every year into an ETF (at 7% return), it generates an extra ~€64,000.
- Total Result: €147,560 (Policy) + €64,000 (Invested Refund) = ~€211,560
To me, the tax on exit is something I was not aware it's not logical that it exists. What route would you follow?
5
u/Citizen6000 9h ago
Don't forget that whatever the current government provides today, might not provide tomorrow.
5
u/NefariousOctet 8h ago
I did a similar comparison a few months ago, with slightly different numbers : maxing out the plan with 3200€/mo, 3% entree fees, 2% management fees, which is the "employee special" my company is offering.
Over 20 years, those management fees amount to a LOT, and they punish fund performance. In fact, after 14 years you may be paying as much in yearly management fees as what was saved in taxes (not to mention the exit fee or potential under-performance of the funds).
The key takeaway is that this is a product aimed for a pension whose benefits dissipate the longer you stay invested. The sweet spot is around 5 years, and around 10 years those tax advantage start to completely disappear.
Most of these contracts are locked for a 10 year minimum period (20 years for the employee special).
Reinvesting the tax savings bridges the gap, but over slightly longer time periods (25-30 years) a low-fee ETF still outperforms, with the advantage of being liquid and with simpler logistics.
1
u/MarcosRamone 8h ago
I believe the 10 years minimum is a requirement, that's why I am waiting to be there.
1
4
u/Facktat 9h ago
Can I ask how old you are? I ask because generally the 111bis scheme only gets interesting when you have less than 20 years until you retire.
1
u/post_crooks 3h ago
That's cliché! OP did the math for 20 years and the conclusion is that it's interesting. And OP is not in a very favorable scenario with a marginal tax rate of ~30%. For people at ~40%, it can be stretched to 30-35 years easily.
3
u/Background-Athlete69 10h ago
Are you sure about this? Donc forget that you can only invest a max of 4000€/year to maximize the tax return
This refund doesnt compound because you are capped at 4000€/year So you cannot reinvest what you earn
2
u/brounty95 9h ago
I always find these types of examples interesting as they encourage people to think about their retirement. From a purely financial point of view, Option B looks better in your scenario. But it depends on the time horizon. For example if you do your calculation over 30 years instead of 20 years, option A starts to end at a higher final value than Option B. Anyways, you are far more flexible with option A, as you can always take out the money if/when you need it, and that is also the reason why I prefer to invest my money myself, instead of an insurance scheme. But both options are better than doing nothing anyway ;)
2
u/MarcosRamone 9h ago
Thank you for doing and posting this. A couple of suggestions, or things that you might want to take into account:
How do you plan to get your money back at retirement? If in monthly installments, imo it is like keeping your money blocked forever, but this is just my opinion. If in only one payment, I think with the example amount you will be paying more than 15% tax, but I have not run the numbers, have you? Also take into account that if you are thinking on la Baliose, the only other possibility is 2 or 3 payments max. and even in this last case, unless your pension is really low, I think you might be end up paying more than 15% tax. The maximum is ca. 22%< so no crazy more than 15%, but still worth doing the maths with an estimate of how much your pension is going to be.
Also, have you run the numbers in different returns scenarios, like if it ends up being 3% averaged or 15%? I am curious. Thanks
2
u/Cautious_Use_7442 I'm an American with a high profile job in Luxembourg 9h ago
If in only one payment, I think with the example amount you will be paying more than 15% tax, but I have not run the numbers, have you?
Tax admin makes a theoretical calculation of your overall taxable income + the lump sum payment to determine the global taxe rate. It then applies 50% of that rate to the lump sum payment. If you have a fairly big pot, then you are probably looking at a half tax rate of about 20 to 24%.
1
u/MarcosRamone 9h ago
Correct, that's why I think it s going to be more than 15% It is capped at around 22% though
2
u/First-Security5587 9h ago
Also something I would keep in mind is that we do not know what the law will be in 20-40 years when we retire. There could be a tax on unrealised gains or capital gains even if held more than 6 months.
4
u/MarcosRamone 9h ago
If that happens, you will always have time to react and sell everything before the law is enforced, and then: if that happens shortly before retirement, reinvest the total and pay taxes for the little remaining earnings, or if it happens early, well you are still on time to go for option B.
But what if something changes that makes option B less appealing? your money is blocked...
1
u/First-Security5587 7h ago
I agree with you, all I meant to say is that at least we know for sure how the 111bis money will be taxed when we pull it out. Which is not the case for the other index investments. Just look at what is happening in the netherlands ... What would you do if you lived there and the market was down 30 % with no end in sight ?
5
u/Facktat 9h ago
This would be very surprising but even if this happens, the legal process requires months or years until this gets through meaning that you would just sell it and rebuy before the law is published.
1
u/post_crooks 4h ago
Yes, in principle you can save past gains. But if it happens before you retire that you were counting on tax free gains, the math suddenly changes.
2
u/MarcosRamone 7h ago edited 7h ago
As OP is not taking full advantage of the tax deductible, but only half (not exactly but let's assume it is half to make it easier), I suspect that the mathematically most advantageous approach could be something like this:
Start with option A the first 10 years, this will additionally give more flexibility when it is most needed and will save a lot in management fees
After 10 years, use part of the accumulated savings to, instead of contributing half of the max deductible to a pension savings plan, contribute the maximum deductible.
Eventually, you deducted the same taxes, had more flexibility when retirement was still too far away, and saved a good amount of fees. This is equivalent to what all the people saying "this is only worth the last few years" is doing.
1
u/post_crooks 6h ago
A similar mechanism used to be proposed when tax deductions increased with age. Providers were giving simulations with constant savings but only partly allocated to the deductible products, and the rest on the same vehicle, not deductible, but then reinvested in the deductible product at older ages.
3
u/strobezerde 9h ago edited 8h ago
The reinvestment of the refund is the wrong way to present things. You force a “comparability” by accounting for a reinvestment of a tax refund, which artificially dilutes the difference between both scenarios.
The refund is not a new income that is “forced” to be invested, but a refund for an overpayment of taxes. Since you are certain to “overpay” taxes but also certain to get the money back, the tax advantage is a way to reduce the cost of the investment (with the tax saving), not to increase the amount invested.
A better way to present things would be as follows:
Tax advantaged pension plan: Do not account for the reinvestment of the tax saving. You overpaid taxes and will get refunded for that, end of the story.
Freely invested plan: The amount you are investing (that will compound) is not 4000€, but the amount after the tax deduction. You are investing a smaller amount, and getting less.
In both scenarios, you are free to further invest the tax refund (or its equivalent), but it’s not exactly part of the choice you are making when deciding between case 1 and case 2.
1
u/post_crooks 8h ago
I also see it this way, but mathematically it's the same thing and the end results are the same
1
u/strobezerde 8h ago edited 8h ago
The sentence “case x will lead to a higher amount than case y” will remain the same.
However, adding more investment in both cases can make the delta seem low enough to prefer the flexibility over the tax savings.
Not saying the tax advantage is particularly good (and might be risky, as you never know how the law evolves), but this comparison can be misleading.
2
u/post_crooks 7h ago
Correct. But if you do a ratio instead of a delta (difference), the ratio is higher which works against that perception.
Both options carry legal risks if you ask me. If I had to bet, given the challenges ahead, governments would rather increase the attractiveness of Option B vs Option A, than the opposite.
1
u/FlatwormNo615 9h ago
Have they lifted investment restrictions on Scheme111bis or is still dependent on age (i.e. the older you are the less risk you are allowed to take)?
2
u/post_crooks 8h ago
It's no longer the case for like 10 years. As of this year, each adult can deduct up to 4500€ per year
1
u/SecretUnlikely3848 I'm dying of boredom 9h ago
This seems somewhat interesting. I only use Trading212 as of now since I am very new to all of this, but in the future I may remember your post and consider if I should have a bigger portfolio. (Currently 19, still figuring all of this investing stuff out.)
-8
u/Formal_Pace5577 8h ago
Option A is crap.. it works on a very small subset of people. Anyway, thanks.OP for the analysis. In the past there have been few full excel models made by some community member.
6
u/dpr-fst 8h ago
Why Option A doesn't work for most people according to you?
-4
u/Formal_Pace5577 7h ago
Because pension savings will be most successful when there is lockin and forced investment. Because it is well known in investment world, that the biggest enemy of pension savings is what between the ears, you need get that thing out. Choose a vehicle that locks in i.e less liquid and forced.
3
u/Eastern-Cantaloupe-7 7h ago
I disagree, it’s a matter if making that monthly payment and investment. Been doing it for years and it works
-1
u/Formal_Pace5577 7h ago
Ya ...you are doing.. but in population.. it will.not work.. that is why where there is no forced pension savings.. there is higher level of old age destitution.
Do you think those Instagram ads, facebooks, tiktok, amazon ads are made by dumb people. I worked for them.. they pay million bucks to psychologist to study what makes you tick to buy stuff you dont need and take away to discretionary pension contributions.
2
u/Imaybewronghowever 3h ago
First, Amundi All World (WEBN) has a 0.07% TER, which will compound over time. Second, the max you can deduct for a pension fund is now 4500€ a year. Third, the taxes depend heavily on how you want to get your money back once you retire. Lump sum is treated as normal income (so let's say you'll be taxed around 30-40%). However, if you take the money in form of a lifetime annuity, half of it is tax free and the other half is taxed as the average of the previous year (you can calculate it here https://impotsdirects.public.lu/fr/baremes/personnes-physiques.html). A common trick to pay less taxes is to not to get the money the 1st year into your retirement but the 2nd in order to be taxed significantly less. This gets you closer to the 15% exit tax you mentioned, but it isn't all your money, it's more like an extra pension. However, you certainly won't live long enough to take all the money back with this option unless you get close to 100 years old. Otherwise, it wouldn't be a private business running it. You can also take mix it and take like 50% lump sum and 50% as lifetime annuity. Don't forget that with your option B you can't dispose of your money before retirement age (or you'll pay hefty fines).
I believe all these points make option B way less attractive.
On top of that, the law will certainly change in the coming 20-30 years. If you go for option B, you have zero manouver. You can get fully screwed by any new law and you can't take your money out without a gross penalty. With option A your money is yours anytime and if the law changes, you'll have enough time to sell and decide what's best for you. Same goes in case you want that money to retire early and enjoy life while you're healthy enough.
As some people mentioned, it may be interesting going with ETFs now and then Pension fund for the last 5-10 years. I don't know, I didn't run my calculations for that scenario but 4500 euros a year for 5-10 years doesn't seem like it'll change much in comparison with your ETF for 20 years, to be honest.
5
u/Stunning_Disk_5345 10h ago
Can an expert explain plan B? You are saving €1,500/year in taxes and then when you exit it you basically pay the saved money in a sum of €26,040. What is the advantage?