Q: I’ve been researching about retirement savings in the Philippines and found something called the PERA Law. There doesn’t seem to be a lot of information about it, though. Would it be a good option for retirement planning?—Joseph, via e-mail
A: The PERA Law would indeed be a good choice for your retirement savings—when it gets off the ground. Right now, there are only a few ways for people to save for retirement.
You could rely on pensions from the Social Security System or the Government Service Insurance System. You could open an investment account just for retirement. A savings account, because the low interest rates don’t beat inflation, won’t be enough, even as a MoneyMax.ph retirement survey says that 83 percent of adults 18-45 years old are using savings accounts as their main retirement fund source. For retirement, people must find long-term investment vehicles that will beat inflation and provide tax advantages.
For us in the Philippines, the PERA Law can be the ticket.
The Personal Equity and Retirement Account (PERA) Law has been kicking around for a long time, but hasn’t been implemented yet, even though it was formally established in 2008.
The last Bangko Sentral ng Pilipinas announcement about the law indicated a January 2015 target launch date, but that obviously hasn’t been met. There are still guidelines and processes that the BSP has to work out with the banks and other administrating entities, which is causing the delay.
In any case, the PERA Law will surely come into effect in the future, and here’s what you should know about it.
What is PERA?
The PERA Law is a personal and voluntary retirement savings plan that will be provided to all Filipinos who want to participate.
It’s not supposed to replace the SSS or GSIS —instead, it’s an addition to them. This is good news for overseas Filipino workers, who may not be contributing to either of those funds but still need to save for retirement.
This is also good if you want another source of retirement income other than SSS, whose fund life is only projected to last until 2042 (as of Aug. 2015).
Who can open a PERA, and how?
As long as you have a Tax Identification Number and income, you can open an account anytime. The maximum amount each person can put into a PERA yearly is P100,000; for OFWs, it’s P200,000. To open an account, you choose an administrator, who will be in charge of all your PERA accounts (you can have up to five). The administrator will be “banks, trust entities and other entities” accredited by the BSP.
You will also have an investment manager, whom you will authorize to make investment decisions for your PERA. A custodian, separate from the administrator, will be the one receiving the funds connected to your PERA and will provide you with regular reports about what’s happening to your money. The process will be clearer once products are actually offered.
Will my money be at risk?
If you’re worried about risk, the law requires that PERA investment products be non-speculative, readily marketable, and with regular income payments to investors.
There will be a variety of PERA investment products you can choose from; we’ll know more once the law is in effect and the banks and other entities make their PERA investment products available to the public.
What’s the advantage of opening a PERA?
The main advantage of PERA is the tax breaks you get. You can get a tax credit of 5 percent of your annual PERA contributions every year.
So if you pay P150,000 in income tax for one year, but you contributed P100,000 to your PERA, you can get 5 percent (P5,000) credit, so you only have to pay P145,000 in income tax that year.
Plus, your money in PERA grows tax-free. It’s exempt from withholding tax, capital gains tax, the 10 percent tax on cash received from corporations, and income tax.
If you make withdrawals from your PERA at the age of 55 and up (after contributing for at least five years), you won’t be taxed at all. In the case of death, the assets in your PERA account will be distributed to your heirs tax-free (even if it happens before you turn 55).
Additionally, your PERA doesn’t count toward your assets, so it cannot be seized or levied upon by creditors, and cannot be dissolved if you declare bankruptcy. It’s there for your retirement, no matter what happens to you financially.
Similar to the 401k plans in the US, employers can also contribute to your PERA, as long as the combined contributions don’t exceed your annual limit. You still make the investment decisions regarding your PERA, even if your employers contribute to it.
Because the aim of PERA is long-term retirement savings, you will be penalized if you withdraw early. However, if you’re making the withdrawal because of an accident—or illness-related hospitalization of at least 30 days, or because of total permanent disability, you can get your money with no penalties.
If you want to keep contributing to your PERA beyond 55, you can simply continue doing so, and withdraw at a later date with no penalties.
There’ll be a lot more information about the PERA Law once it’s implemented, which I hope will be soon. A product like this will make it simpler for Filipinos to save for retirement, and thus to provide a secure financial future for themselves in their golden years.
Once it’s available, consider making PERA part of your investment plan.
(Randell Tiongson is Registered Financial Planner of RFP. Catch him at his seminars for the OFWs in Doha and Al Khor in Qatar, Sharjah and Dubai in UAE and Singapore this September and October. To learn about estate planning, attend the 4th Chartered Trust and Estate Planner (CTEP) program on Oct. 10-Nov. 21. To register, e-mail info@rfp.ph or text <name><email><CTEP> at 0917-3464126.)