How do you prepare for your retirement? Financially speaking, there are at least three commonly known ways through which a Filipino can save for his retirement. There is the Social Security System (SSS) for private employees, the self-employed, and overseas Filipino workers (OFWs). There is the Government Service Insurance system, the SSS counterpart for government employees. And then there are retirement savings accounts offered by various private finance institutions such as banks and insurance companies. But now there’s a fourth method worth exploring and investing into: the PERA program.
That’s a catchy name, but what is the PERA program?
For starters, PERA stands for Personal Equity and Retirement Account. PERA, a voluntary retirement account for interested individual investors, was formulated pursuant to the Personal Equity and Retirement Account (PERA) Act of 2008 but was only implemented eight years after it was passed into law. The Bureau of Internal Revenue only got to define the guidelines of the PERA program in July 2016.
Through the PERA program, the Bangko Sentral ng Pilipinas (BSP) will supervise and authorize various institutions that are willing to administer these voluntary retirement accounts. As of this writing, some of the financial institutions that publicly have PERA offerings include Bank of the Philippine Islands and BDO Unibank.
Why is the PERA program created?
The government perhaps recognized that the mandatory social security programs currently in place might not be sufficient enough to sustain some people’s retirement plans. And frankly, that’s an understatement, because as we all know, current pensions, even when recently increased, aren’t enough for a lot of people’s plans post-retirement.
Such reality necessitated the creation of this program as an alternative, supplemental retirement savings vehicle that will reserve more funds for people willing to think way ahead into their futures. Indeed, PERA is available to any person over 18 years old, as long as he has a tax identification number. Blessed be the 18-year-old who thinks 50 years into his future.
So how is this one different?
Unlike the SSS or GSIS, the PERA is not a requirement, but a voluntary account to be created by people willing to invest more into their retirement. So it is similar to corporate pension programs, except that it has boundaries and incentives set by the BSP. And unlike the privately-offered investment vehicles, which may be subject to capital gains tax or other related taxes, a PERA investment offers the reverse: tax credits and exemptions.
Oooh, for once I get to win over the taxman. So how do these incentives exactly work?
Wait a second there, buddy, don’t you want to know how to create an account via the PERA program?
How to open an account?
- You can open up a PERA and put in money there, just like what you do for a savings account. Except you can have up to five PERA investments only. You can put as little as you want (of course, hopefully, more than the minimal administration and custodial fees) or as much as P100,000 per year, or even more if you’re feeling generous to your future geriatric self. But you should know that yearly savings exceeding P100,000 (P200,000 for OFWs) will not be subjected to the tax incentives offered.
What are the incentives?
A PERA offers a 5% income tax credit on the actual contribution. You can then use that credit to reduce your income tax. Now that’s something worth lining up for at BIR: to get money.
Aside from that, a PERA features a tax exemption depending on where your PERA is invested. Because it can be used on a variety of investment vehicles, depending on the company that offers it. The tax exemption is 20% on final withholding tax from interest on bank deposits, deposit substitutes, and trust funds, and 10% final withholding tax on dividends. A PERA holder is also exempted from capital gains tax on the disposition of shares of stock, and regular income tax on PERA products.
In addition, PERA assets shall not be considered your assets for purpose of insolvency and estate taxes. Yay! Tax exemptions! So when can I withdraw from this fund, then?
Can I withdraw my money?
Since this is a retirement fund, you can withdraw once you reached 55 years old and have made contributions for at least five years. Funds can be received by lump sum or monthly installments. You can also opt to get money from PERA earlier than that, but you’ll get penalties for being a bad boy using that money before retirement.
Of course, there are exemptions to that penalty. If you withdraw from your one PERA investment to shift the investment to another PERA product up to two days after withdrawal, you’ll have no penalties. Also, you can draw on the PERA investment without consequence if you suddenly figured into an accident- or illness-related hospitalization in excess of 30 days, or if you have a permanent total disability. In addition, upon a contributor’s death, regardless how soon, all contributions can be drawn. So in a way, PERA also works as some sort of an insurance product.
That was a morbid last paragraph. But hey, thanks for sharing this, man.
No problem! Because here at GoBear, we give you tips and tricks on how to better manage your money, whether through selecting the best credit card, car insurance, travel insurance or personal loan product or through blogs like these.