Personally, I don’t want to grow old poor. I’m sure you don’t want to be poor when you grow old either. And I bet that nobody in the world ever wants to be old and poor. So in order to help Pinoys prepare to be not poor when they’re old, I will discuss PERA in-depth, and why you need one right now.
Retirement planning is a crucial yet regretfully neglected part of financial planning in the Philippines. People usually put off saving for retirement in the last 5 to 10 years of their working lives.
Unfortunately, the money they save is not enough, what with all the medical bills, lifestyle adjustments, and inflation eating up the funds only a few short years later.
This is if they’re lucky. Most of the time, people are not able to save up anything for retirement. They have to rely on small pensions from SSS or GSIS which are frankly never enough. Worse, they are reduced to relying on their children’s sense of obligation and guilt to maintain them until death.
Basically, their kids become the retirement plan. Sounds familiar, huh? Many of us are in this predicament. It’s bearable if you’re a big earner. But if you just left college and still building a career but are required to share your income with an entire household, the situation can be very demotivating. Of course, you love your parents but at the back of your mind, you swear that you won’t do this to your kids when you retire. You will be smarter than your parents.
Reddit’s r/Philippines subreddit is littered with confessions/pleas for help and advice from anonymous young Pinoys in similar situations and looking for a way out. They are rightfully worried about their own futures and subsequent retirement. My very rough estimate is that 2 in 3 working young adults are supporting parents who no longer work/have no retirement plans. Or maybe I just live amongst and/or hang out with the poor? I dunno…possibly?
This is a grim way to start the post but my goal is to scare the shit out of people so that they will start investing for retirement. Luckily for you, I’m obsessed with being not poor when I grow old, so I will try to break down the benefits of PERA for your future and hopefully convince you to get one right now.
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What is PERA?
PERA, which stands for Personal Equity Retirement Account is a scheme that allows Filipinos to voluntarily invest for their retirement. It was enabled through Republic Act 9505, passed in 2008 but only implemented in December 2016. This scheme allows:
- Filipinos of legal age and with a tax identification number (TIN) to invest up to Php 100,000 for those based in the Philippines and up to Php 200,000 for overseas Filipinos.
- Income tax exemption from the investments and its reinvestment.
- Claim 5% income tax credit of your total PERA contribution.
- PERA cannot be touched in case of insolvency
- Provision for the possibility of private employers to contribute to their employee’s PERA up to the maximum amount allowed. This is provided that the employer complies first with the mandatory Social Security System (SSS) contribution and retirement pay.
Let’s break down the benefits of PERA.
Breaking down PERA benefits
Range of allowed investment amount
First of all, you must be a Philippine citizen of legal age with a tax identification number (TIN). Filipinos who are based in the Philippines are allowed to invest up to Php 100,000 a year. Overseas Filipinos are allowed to invest up to Php 200,ooo a year.
I think this rule is crazy because why are overseas Filipinos allowed to invest 100% more than those who remained in the country? I don’t know what the intention of the framers of the PERA law was in setting these limits. Were they thinking that those in the country can’t afford to invest Php 100,000 a year, max, in PERA? Did they think that overseas Filipinos deserve to have a better retirement than those who stayed in the country, like 100% better? Or perhaps they imagined that those in the Philippines are already well covered by SSS or GSIS? But SSS is also available to overseas Filipinos.
This is maddening and I hope that this will be adjusted soon (paging: Secretary of Finance!!!) to increase the investment limits and make it equal for both those who stayed in the country and those who left for better opportunities overseas.
Income tax exemption
So far, the only PERA products offered are based on equities, bonds, and money markets. Here I will focus on equities because I recommend people to invest in equities-based PERA instruments, especially if they are young and a long time away from retirement age.
In the Philippines, the sale of shares for stocks traded in the Philippine Stock Exchange is charged a stock transaction tax. With the implementation of TRAIN Law, the stock transaction tax is now at 0.6% of the total value of the transaction/investment. Before TRAIN, this tax was set at 0.5% of the total value of the transaction/investment. This increase represented a 20% increase in taxes, which will be deducted from the entire investment.
For example, let’s assume that you sold Jollibee shares worth Php 1 million (just thinking of a nice, round number, and also, disregarding associated fees for illustrative purposes), your stock transaction tax would have been Php 5,000. If in 2018 you sold your shares amounting to the same value, your taxes would have been Php6,000, a big increase.
Further note that unlike in other countries such as the US, the Philippines charge the stock transaction tax against the total amount of the transaction/investment and NOT only against the profit or capital gains. There is a reason why if you Google “capital gains tax Philippines” you get a totally different explanation and computation from the one I just gave above.
PERA’s income tax exemption is what made me really excited about participating in the scheme. If you invest in PERA, your investment will be exempt from the above-mentioned tax. You get to keep the entire value of your investments to yourself (except the annual management fees charged by your PERA administrator). Plus, your retirement money will also be protected from future changes in the tax law.
Income tax credit
Those who invested in PERA are eligible to receive a tax credit of 5% of the total investment amount. The Omnibus Investment Code of the Philippines (EO 226), article 21, states (emphasis mine):
that tax credits are any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued…The tax credit shall be used to pay taxes, duties, charges and fees to the National Government…Provided further that such tax credits shall be valid only for a period of ten (10) years from the date of issuance.
For example, if you invested Php100,000 in a year, you are eligible to receive P5,000 tax credit. The Secretary of Finance will issue you a tax credit certificate (TCC, which will be coursed through your PERA administrator). The tax credit will not be given to you in cash; unfortunately, PERA does not allow tax credit refunds. The tax credit can only be used to pay taxes and other fees due to the Philippine government.
This tax credit is valid for ten years, not only in the year when the investment was made. Keep in mind though that the TCC is only valid for five years. This means that if the TCC holder has not yet used the TCC five years after its issuance, they have to apply for revalidation before the end of the fifth year. The revalidation will extend the TCC for five more years.
If you are an employee, the credit can be deducted from the withholding tax from the income earned from your employer. If you’re a self-employed freelancer or businessperson, you can use the tax credit to pay your taxes. Overseas Filipinos can apply the income tax credit for taxes they owe the Philippine government if any. However, as of January 2019, the BIR has not yet finalized the process for the tax credit. I will post an update once there is more clarity on this.
Safe from insolvency and estate tax
In the event that you become bankrupt, PERA will not be touched and will not be considered in settling your debts to your creditors. Likewise, in the event that you die before withdrawing your whole PERA funds, it cannot be used to settle estate taxes and instead, go directly to your heirs.
Can be another form of employee incentive in the future
In addition to SSS or GSIS, PERA may also be an incentive that employers can grant to their employees in the future. At the moment, I haven’t heard of any company that grants PERA as an incentive but at least the enabling law is already in place, making this a huge possibility in the future.
Control where to invest retirement funds
Another great benefit of PERA is that it allows the contributor to control the financial instrument their retirement funds will be invested in, unlike SSS and GSIS wherein members have absolutely no say as to where their contributions are invested.
The PERA Act allows Pinoys to invest in the following vehicles as long as they PERA-qualified products:
- mutual funds
- entity contract
- insurance pension products
- pre-need pension plans
- shares of stocks
- other securities listed and traded in a local exchange, exchange-traded bonds or any other investment product of outlet which may be allowed by the concerned Regulatory Authority
So far, BPI and BDO – the only banks allowed by the BSP to offer PERA-qualified products – only offer equity, bonds, and money-market PERA products.
Hopefully, banks and other investment institutions offer more PERA-qualified products in the future to cater to the different risk appetites and needs of investors.
Another way PERA will allow you to have stronger control over your retirement investment is by letting contributors have a maximum of five PERA accounts with 1 administrator, and even transfer administrators.
Contributors have the option to divide and diversify their PERA contributions between investment vehicles. You can devise your own, personalized retirement investment strategy depending on your risk appetite and needs. For example, in your 20s and 30s, you might opt to put all your retirement money in equities. By the time you approach your 50s and 60s, you can transfer them to bonds or money markets instead. You can do all these without paying taxes. Isn’t that great?
Time is your friend
Another factor that makes PERA a very powerful tool for retirement is time. PERA was not designed to be a short-term investment. As a matter of fact, because this is a retirement account, you can only withdraw from your PERA account once you hit 55 years old AND have invested for at least five years. Otherwise, you will be penalized.
The earlier you start investing in PERA, the longer time you have for your money to grow.
To illustrate, say you’re interested in investing your retirement money in an equity-based, PERA-qualified account. You’re in your mid-20s and you’re not sure when you’ll retire, maybe in 20, 25, 30 years. You decided to contribute Php100,000 annually. You can use the table below as a reference to check how much you’ll get in what year.
We will assume that your equity PERA account had an average annual return of 10%, which is very achievable, especially if it’s pegged to the PSEi. (Please ignore the US$ sign, I got this calculator from a US-based site. Still, the underlying computations are the same.)
If you continuously invested in PERA for 31 years starting with Php100,000 initial investment, you would have contributed a total of Php 3.1 million. By the time you retire, that money would’ve grown to Php 19.839 million (again, we assume that you invested in an equity-based PERA account). The good news is, since PERA is tax-free, you get to enjoy almost this entire amount for yourself (since the bank takes away an annual management fee).
If you invested this money in a mutual fund/UITF/ETF that is not PERA-qualified, you will be charged a stock transaction tax of 0.6% (as of 2018) of the total investment amount. Of course, the tax regime may again change just like what happened with TRAIN.
If you didn’t invest that money at all and just left it in the bank, you just accumulated Php 3.1 million after 31 years, which is not really much if you calculate for future inflation.
Beware of early withdrawal
Withdrawing funds from your PERA account before the 55 and 5 threshold (55 years old and 5 years of investing in PERA) will make you subject to a penalty. The amount will be determined by the Secretary of Finance and payable to the government and will not be less than the tax incentives enjoyed from PERA.
To avoid incurring penalties, make sure that you have your emergency funds set up so as not to dip into your retirement account in the time of need.
Of course, as with all rules, there are exceptions. You may withdraw funds from PERA in case of the following:
- Payment for accident or illness-related hospitalization in excess of thirty (30) days with duly notarized doctor’s certificate attached to the Notice of Withdrawal/Termination/Transfer to be submitted to the PERA processing office.
- If you have been rendered permanently totally disabled as defined under the Employees Compensation Law, Social Security Law and Government Service Insurance System Law.
- Transfer to another PERA qualified product with the same administrator and transfer to another PERA administrator within 15 calendar days
Current status of PERA
Available PERA-qualified accounts
As of January 2019, the BSP has accredited only BPI and BDO to offer PERA-qualified accounts.
Both BPI and BDO offer these products with a minimum of Php 1,000 investment. A savings account with the bank is required to open a PERA account.
At this time, opening a PERA account with either bank can be a frustrating process. A lot of branches are not aware of this scheme yet. Tellers and even bank managers will stare blankly at you when you try to explain to them that you want to open a PERA account.
For BPI, the best way to open one is to email their PERA-dedicated team instead of visiting a branch. Send an email to firstname.lastname@example.org or call them at (63) 816-9035. They will schedule a meeting between you and a PERA staff at the branch nearest you.
While BDO’s employees are similarly clueless about PERA, their process is actually much simpler. If you already have a BDO online banking account, you can open your PERA account from there directly. You only have to answer a short questionnaire and watch a video explaining what PERA is. They will send you communication to complete the process via email. There is no need to go to a branch.
If you are an expat, the better choice for you is actually to open a PERA account with BDO, especially if you already have a BDO account or is lucky to live in a country that has a BDO branch. BPI requires prospective investors to meet with a representative face-to-face.
Income tax credit
As of January 2019, BIR has not yet released the guidelines for the tax credit process.
I believe that everyone should get a PERA account right now. We should take advantage of the time factor and start preparing for our old age while we’re still young. Now is the time to prepare for retirement, not when it’s already on the horizon.
Investing in PERA as early as possible will help us feel secure in our old age and will give us peace of mind. We will be able to enjoy our retirement and avoid being a burden to our children and their future families.
We should also take into consideration, however, that investing in PERA is not “an all-or-nothing” thing. You don’t need to invest Php 100,000 right away if you only have Php50,000 or less to invest. As long as you’re putting away a portion of your income to your PERA, you’ll still end up ahead of those who are not investing for their retirement.
Compared to other widely-available retirement and pension programs such as SSS and GSIS, investing in PERA will give us more control over our financial futures because we have the freedom to choose the instrument where we can put our money.
If you’re aiming for FIRE (financial independence/retire early) and actually want to have a higher amount for retirement than what can be earned through PERA, I still recommend that you fully maximize PERA first before putting your money in taxed instruments.
For example, your first Php 100,000 for retirement should be placed in a PERA account to maximize the tax-free status and the 5% tax credits. The remaining funds can then be placed in other financial instruments of your choice.
I hope that this post will convince you to open a PERA account and invest for your retirement. I’m very passionate about this issue because I have seen a lot of people who suffered greatly because they or somebody close to them were unprepared for retirement.
Is there anything stopping you from putting aside money for retirement through PERA? Do you have any experience you want to share? I’m interested to hear back from you guys.
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