Retiring with PERA
Have you planned for your retirement?
One of the biggest problems in the Philippines is the lack of retirement planning. Most people either rely on their family’s wealth and support, while others are misguided with planning their retirement around savings and investing in quick get-rich schemes.
In 2008, one act of legislation has made it possible for a very advantageous way to save up for retirement and stimulate long term investment in our banks – it’s the Personal Equity and Retirement Account (PERA) Law. To know more about PERA and its advantages, Philippine Tatler reached out to the experts to get things straight:
PHILIPPINE TATLER: What are the advantages and disadvantages of using PERA versus a standard savings account or time deposit?
MARIO T. MIRANDA: There are two (2) ways that a PERA is better than a standard savings account or time deposit when choosing between these two (2) for your retirement planning. First, with PERA, you can choose to invest in a PERA-accredited product or a combination of them depending on your risk preference and time to retirement. Thus if you are still young, then you can choose to invest in more aggressive but higher yielding products such as stocks and long-term bonds. With their higher yields, then you are in a better position to beat inflation compared to standard savings or time deposit products especially during these prolonged low interest rate environment.
Second, PERA provides tax-exemption benefits that further improve the returns from your investment. There is a tax credit equivalent to 5% of the total contributions made for the year, as well as exemption from the 20% final withholding tax (FWT). Even if you will not be able to claim or use the tax credit, the exemption from the 20% FWT alone, which is imposed on regular savings/ time deposit, is enough reason to make you consider investing in PERA for your retirement.
It has to be noted though that the objective of PERA is to build one's retirement nest egg. Therefore, clients need to prepare to hold on to their investment over a long period of time. It is not to be considered for regular investing or savings, which can be drawn upon any time.
PT: While there are a number of fiscal incentives in setting up PERA that seem very enticing, are there any risks involved?
MTM: The PERA will have to be invested in PERA-accredited products; among these are government securities, stocks, mutual funds, unit investment trust funds, insurance, and pension products among others. So depending on the choice of the client, the risks also vary. A PERA equity fund, for example, is subject to market/ price risk and liquidity risk, which are the usual risks you are exposed to in a stock investment. Thus, one can expect the usual volatilities in the value of their investment over short periods of time.
Also, consistent with the purpose of PERA, which is regularly setting aside amounts for retirement, one has to make at least five (5) yearly contributions and keep his PERA until age 55. If these conditions are not met, all the tax incentives enjoyed by the PERA Contributor will be returned/ remitted back to the BIR through the PERA Administrator.
PT: Since the law only prescribes capacity to contract as to define a contributor, is it allowed or advisable for parents to create PERA’s for their children who have reached the age of majority?
MTM: As long as the person has the capacity to contract, has regular source of income and has Tax Identification Number (TIN), he/she may open his/her own PERA account.
PT: What is the margin of interest rates compared to a standard savings account and time deposit account from a PERA?
MTM: Although PERA is not yet available in the market today, we expect that interest rates of savings and time deposits will remain the same. The difference will come from the tax exemption benefits inherent to PERA.
To illustrate, a Php100,000 invested in a PERA Time Deposit for five (5) years using the prevailing interest rate of 0.75% per annum (gross of tax), will yield Php3,750 while a Php100,000 placed in a regular Time Deposit at 0.60% per annum interest rate (net of tax) will give you only Php3,000 at the end of five (5) years. Hence, money that is invested in a PERA Time Deposit will earn higher compared to that invested in a regular Time Deposit mainly because of the tax exemption privilege granted to PERA-accredited products.
For the BPI PERA UITFs product offering, there is no guarantee on the interest earnings. Similar to our regular UITF products, these are valued marked-to-market and priced on a daily basis. Depending on the risk appetite of the PERA Contributor, he/she can choose from a BPI PERA money market, fixed income and equity funds.
PT: Seeing that there is only a maximum limit imposed by law, is there a minimum annual contribution required by banks?
MTM: The minimum contribution will be a function of the offering of the various PERA Administrators or the PERA product providers. But recognizing that this product is intended for retail clients, it is to be expected that the amounts will be affordable.
PT: For companies who contribute to the PERA of an employee, may they deduct their contribution from their corporate income tax?
MTM: Employers can claim the actual amount of its qualified employer’s contribution as deduction from its gross income but only to the extent of the employer’s contribution that would complete the maximum allowable PERA contribution of an employee.
PT: Since PERA is technically a retirement fund, is it also exempt from the 20% and 7.5% final taxes on the interest income derived from local bank deposits and foreign currency deposits, respectively?
MTM: PERA-accredited savings or time deposit accounts or deposit substitutes of any currency are exempt from the final withholding taxes on interest income.
PT: How can PERA be maximised as a retirement fund and long-term investment?
MTM: PERA is a tax-exempt retirement planning instrument for Filipinos. A PERA account is available to anyone who has a Tax Identification Number (TIN) and has legal capacity to contract. It encourages personal and voluntary retirement savings through certain tax privileges granted to anyone who has contributed up to a maximum of P100,000 yearly contributions (P200,000 for Overseas Filipinos) for at least five (5) years for as long as they keep the investment in the PERA account until they reach the age of 55.
As the first financial institution accredited by the Bangko Sentral ng Pilipinas (BSP) to be the Administrator of PERA, BPI aims to market the product to both individuals and corporations. Designed as a complete retirement investment vehicle, PERA enjoys exemptions from estate-tax for passing on assets to beneficiaries. It also includes features that make it attractive for corporations. Companies can contribute to employees’ PERA accounts without affecting employee’s taxable income.
Given its numerous benefits, BPI envisions PERA as a way to address the prevailing challenges in retirement planning and hopes it can serve as a staple product for every working Filipino to diversify and complement their existing investment portfolios. PERA intends to empower Filipinos with financial solutions that will help them reach their life goals. It is a retirement investment vehicle that everyone should take advantage of once it is already available in the market to enjoy a worry-free, comfortable retirement.
Mr. Mario T. Miranda is the Head of BPI’s Asset Management and Trust Group. He received his undergraduate degree of Management Engineering from Ateneo de Manila University, and later received his MBA in University of California, Riverside. After some stint in investment houses in the US, he made his mark in BPI and has been in the bank’s Asset Management division for over three decades.