Joys of tax-free saving and investing
By Ma. Salve Duplito
INQUIRER.net
First Posted 20:41:00 09/28/2008
Filed Under: Economy, Business & Finance
THE LAND OF SMILES CALLED the Philippines is no happy place for a small saver or investor. This is a sentiment that has often been repeated among low-income groups to academicians to Makati-type executives.
It’s not just that developing the discipline to save regularly requires touch sacrifices; it is because the taxman’s bite on every peso your savings and investments earn is huge.
A new law called the Personal Equity Retirement Account (Pera) Bill is pregnant with promises to change all that. Financial professionals and ordinary Filipinos who are savings-conscious can hardly wait for the implementing rules and regulations of the law to be published and enforced.
Nest egg
Republic Act No. 9505 (full text available for download at Inquirer.net) at its core will allow Filipinos to have a voluntary retirement nest egg that lets money compound more quickly because of tax sweeteners.
Everybody knows that living on Social Security System or Government Service Insurance System pension alone means you have to cut it pretty close to the bone.
Also, Filipinos working and living overseas are not required to become members of SSS or GSIS, and while they may volunteer to contribute, most end up not doing so.
When you come home after working overseas, the Pera can serve as your ticket to comfortable golden years, says the bill’s main proponent, Sen. Edgardo Angara.
Yet, few realize what the bill will mean to ordinary Filipinos.
“At this point, frankly speaking, not a lot of people appreciate the Pera Bill. If the government does not do more to educate ordinary Filipinos, the only people who will benefit from this are those who are already saving and investing, when in fact this is for the low- to middle-income and first-time investors,” says Alvin Tabañag, a registered financial planner.
That banks and other financial services companies are not likely to go out of their way to teach the poor about how to get wealthy is expected, says Tabañag, who is also the founder and training director of AdvantagePlus Consulting and creator of www.PinoySmartSavers.com. “They can’t make money out of them,” he says.
Tabañag has made it his personal crusade to teach things like the Pera Bill and other aspects of financial literacy for free to schools, cooperatives and barangays. “The rich already have people working for them who will make them richer. It’s the poor who need this kind of knowledge,” he says.
Pera Bill
The Pera Bill has the potential to make the poor slide closer to financial health because even small amounts of money invested in a personal equity retirement account (Pera) grow much faster without the drag of taxes.
Based on RA 9505, there are three major tax sweeteners for long-term savers who put their money in Pera. One, all earnings from investments and reinvestments are tax exempt, two, contributors get an income tax credit of five percent of their total contribution up to a maximum of P100,000 per year and P200,000 for those working and living overseas, and three, at age 55 or in the event of untimely death, these funds go directly to the contributor or the heirs tax-free. No need for the funds to go into probate and for heirs to pay hefty estate taxes in case of untimely death.
For Filipinos working overseas who are not required to pay income taxes, the tax credit can be deducted from any tax they owe to the government.
Maximize benefits
Although the IRR for the Pera Bill has yet to come out, here are some strategies you can use to maximize its benefits:
1. Start early. The Pera Bill encourages long-term savings because contributors will only benefit if the money stays there until 55 years of age. “Just imagine if you are 25 years old, that would be a 30-year saving time period where you can allow your money to grow tax-free,” Tabañag says.
Based on his computations, Tabañag says the tax credit of someone who works overseas and contributes P200,000 to his Pera could grow to P1 million in 30 years time. If both spouses work overseas and do the same, tax credits alone could reach up to P2 million. “Granted, a million pesos will not feel as significant in 30 years, but a million is a million especially if it’s just a tax bonus,” Tabañag says.
The power of compounding—letting earnings and interest on your investments earn more interest—is a small saver’s best friend because allowed to work its magic over a longer period of time, say 30 years, it can build a bigger nest egg than someone who starts investing bigger amounts at a much later date.
2. Save regularly. Investing experts teach that how much and how often you save matters far more than what your funds return. This is the principle behind such strategies as peso cost averaging where you invest regularly whether the market is up or down.
Suppose you start contributing in January by saving only two percent of your P40,000 salary. But because you are such a brilliant investor, you put your Pera into top-returning funds every year. You would finish 2024 with more than P400,000 in your Pera.
Now suppose you were so clueless about investing that you picked mediocre funds year after year, but you were frugal enough to save a full six percent of your salary. You’d hit 2024 with more than P844,000. That’s right: More than twice as much as the brilliant saver.
3. Maximize your contributions. If you have the funds to invest for the long-term, maximize your contributions, Tabañag advises.
Earnings from bank deposits are taxed 20 percent withholding at source. Mutual funds, cash values from insurance policies and pre-need plans are also taxed at source. When you sell your stocks, you are slapped with a 20 percent capital gains tax and even dividends are taxed. Put all of that under the umbrella of your Pera and you get a lot of drag out of your savings’ sails.
Tax credits, while small at five percent of the total contribution, is also another incentive for putting as much as you can in Pera. Since both spouses can claim tax credits, a family can get a total of P10,000 deducted from their income tax.
4. Keep a healthy balance on your emergency fund. Carlo Cariño, senior partner at the Cariño and Mabalot Law Offices, says contributors should remember to stay liquid and maintain an emergency fund.
“Adhere to the advice to maintain three to six months of your expenses in an emergency fund you have easy access to. What you should put in your Pera account should stay there for the long term or else you will be charged with penalty fees and taxes,” he says.
The penalty fee will be set by the forthcoming IRR of the law.
5. Diversify. The Pera Bill allows contributors to set up five different accounts, and Tabañag says this will be good for contributors looking to diversify their portfolio and minimize their risks. By putting your funds in a good blend of stocks, bonds, mutual funds, unit investment trust funds and other kinds of investments depending on your risk preference, you earn more as well as protect yourself when the market goes south.
6. Don’t obsess about performance but rebalance regularly. It may be tempting to track investment returns on a daily basis and move your money in and out of the market, but this may entice you into the classic mistake of chasing yesterday’s winners. Experts advice rebalancing your portfolio once or twice every year.
This may all look daunting, but saving and investing has never looked more attractive for Filipinos who have long been discouraged from doing so by tax-depressed returns.
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(E-mail the author at lightdream@gmail.com. For more personal finance articles, visit MoneySmarts at http://blogs.inquirer.com/moneysmarts)
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