The so-called ‘third pillar’ of Luxembourg’s pension provision, personal pensions, has taken on greater importance even though the employment-based pension system (the ‘first pillar’) is relatively well funded, with annual contributions equivalent to 24% of gross salary, split three ways between the individual, the employer and the government. Company pension schemes represent the second pillar.
To encourage individuals to build up the third pillar of private pensions, the government has improved the tax regime for contributions. Pension savers have always benefited from a reduction in their taxable income for pension contributions, but previously this varied according to their age at the start of the year. For those under 40, the maximum annual deduction was €1,500, rising in five-yearly steps to €3,200 for those aged between 55 and 74. Now the tax reform has introduced a single €3,200 rate of tax allowance for everyone, regardless of their age.
The deduction is subject to certain conditions. The payment of benefits may not begin until at least 10 years after subscription to the pension scheme, and the start of retirement benefits must take place after the age of 60, but before recipients reach 75. In addition, at least 50% of the total benefits must come in the form of a monthly annuity payment.