LUXEMBOURG- Legislation passed by the Luxembourg Parliament in December and introduced last week has demonstrated the government is keen to promote third pillar or private pensions. Until the end of 2001, Luxembourg citizens were entitled to pay a tax deductible LuF48,000 (e1,200) into an insurance pension redeemable as a fully taxable life annuity.

Taxing the annuity all but negated the tax relief but the legislative changes have raised the allowances and broadened the options facing individual policyholders. Under the new law, policy holders are able for the first time to take up to half their entitlement in a lump sum and the remaining half in a life annuity.

The life annuity will also be subject to half the previous tax meaning that those deciding to take 50% of their pension in a lump sum will pay a total of 75% less on retirement.

Investment options open to policyholders are being extended from straightforward insurance products to unit-linked products and external pension funds. The precise details have yet to be clarified and are subject to a decision by the tax authorities, due in the first half of the year.

Banks will face stiff competition when they join insurance companies in offering products to private pension holders. Says Fernand Grulms, director of Pecoma Consulting: “It will be a major challenge for the banks to see how they sell these products as insurance companies have their agents and their sales teams.”