Financial advisor Michael Doyle explains how individuals in Luxembourg can effectively save money for the future, despite low interest rates.
Many of my clients based in Luxembourg have two main concerns:
- the low deposit interest rates they receive;
- how they can save in a tax efficient and effective manner.
Most of you know that, with interest rates at historic lows, bank savings and deposits are not keeping pace with inflation. Many of us have to save for the future, either for our pension provision or for our children’s further education.
Putting this in perspective, a study by the Liverpool Victoria in November 2007 said that university costs increase at approximately 7.5 percent per annum, the current level of inflation for educational costs. In support of this, an article in The Sunday Telegraph (26 August 2007) stated, “School fees have risen 41 percent in the past five years.”
So the question we have to ask ourselves is whether or not by leaving our money in banks we will be able to meet all of our future financial goals.
One potential solution is to save through a life assurance wrapper.
A wrapper is effectively an ‘investment platform’ through which an enormous range of underlying investments can be purchased. Whilst the wrapper will be provided by a life assurance company, it is important to note that you are not paying a premium to purchase additional life assurance (although life cover can be added to some contracts).
Regular premiums can be paid monthly, quarterly or annually. Other contracts are available for single premiums (lump sums) and also for ad hoc contributions.
So what are the benefits of saving within a wrapper here in Luxembourg?
- All investments grow within the wrapper free of income tax and capital gains tax.
- Because the wrapper is considered a life assurance contract, it is not affected by the European Savings Tax Directive, and therefore not taxable.
- The premiums you pay could be tax deductible (depending on personal circumstances).
- You may have access to investments available only to institutional investors.
- Lower minimum entry levels in underlying investments.
- Access to some of the top fund managers in the world.
- The flexibility to change your investment strategy at any time.
- The ability to access your funds if required.
- Higher interest rates. For example, there are currently interest rates of 4.25 percent per annum offered within the wrappers.
Of course, every person’s circumstances are different and you should always seek independent advice before making any financial planning decision.