PERA: Investments for retirement without taxes

Retiring comfortably means planning and beginning early. A financially educated individual will have a lot of eggs in several baskets and not just depend on one form of savings or pension or another.

Investing at a young age can be a good way to build your wealth and prepare for your golden years. But the profits you earn from investments come with taxes. Given the different types of taxes that apply to your income, saving for your retirement savings can be a challenge.

This was a problem for many Filipinos trying to save for their future until the government launched the Personal Equity and Retirement Account or PERA. Here’s how you can reduce your passive income tax down to zero percent and help you save more for your retirement.

What is the personal equity and retirement account?

PERA is a three-in-one investment, savings, and retirement account designed to provide financial security and tax benefits for Filipino adults who save up for retirement. If you’ve heard of the United States’ Roth IRA or Roth 401(k), this is the Philippines’ equivalent of it.

The Personal Equity and Retirement Account of 2008 was signed into law in 2008, but it wasn’t until 2016 before it became fully operational and available to the public.

When you invest money into your PERA, you have the option of investing that money into several investment instruments in the market. You can choose where you want to invest your money depending on how much risk you want to take when investing.

However, unlike Unit Investment Trust Funds and mutual funds, PERA offers several tax benefits:

• 5% annual tax credit
• Tax-exempt employer contributions
• Tax exemption for investment earnings
• Tax-free withdrawals (at the age of 55 years and with at least five years of contributions)
• Protection against creditors

PERA is designed to exempt contributors from taxes so that they can grow their money and save much more for their retirement.

Who can open a PERA account?

Any Filipino at least 18 years old with their own Tax Identification Number (or TIN) can open a PERA. You can open up to five PERA accounts, but they must be all under one administrator.

Once you have your account, you can contribute up to P100,000 per year. For OFWs, you can contribute up to P200,000 per year. Any in excess of the limit will not be subjected to the 5% tax credit benefit.

How to open a PERA account

First, you’ll have to visit a bank that serves as an administrator of PERA products. Take note that not all banks provide PERA accounts, so research on which bank you want to put your savings account in to make sure.

Processes for withdrawing, contributing, and investing vary between banks that serve as an administrator, so contact your bank of choice for more information.

Why PERA?

PERA can help you habitually save and invest so that you can retire comfortably. Furthermore, the money you put in your PERA can grow. Like UITFs and mutual funds, a PERA lets you invest in stocks, bonds, and other financial instruments without having to manage them. This means there are levels of risk you can choose for your PERA, depending on what instruments it carries. That’s why it’s important to fill out the client suitability assessment form to determine which investment products are best suited for you.

After making contributions for at least five years and reaching the age of 55, you have the option to withdraw from your account without having to pay the usual income taxes, such as withholding tax, capital gains tax, dividends tax, etc. You can opt to receive your PERA funds as a lump sum (one-time payment) or through a fixed payment schedule similar to an SSS or GSIS pension.

If you pass away before you are able to withdraw, your loved ones can claim the funds in your account, free of income and estate taxes, as long as you have declared them as your beneficiaries. This applies even if you pass away before the age of 55.

Having a PERA allows you to invest in several types of instruments in the market. These include stocks and securities, UITFs, insurance, bonds, and other types of investment options that fall under Republic Act No. 9505.

Your contributions to the SSS or GSIS today may not result in a pension plan that can support the lifestyle you want to have after retirement. You could invest without a PERA and live off your earnings, but this will be subjected to different taxes that apply, which can accumulate into a huge amount that could have gone into your retirement plans.

Like other forms of investments, your PERA does have risks. Your money can be affected by the market, so it’s important to have sound financial advice to make smart decisions for your future.

Overall, PERA is a great way to watch your money grow into a retirement fund that can keep you afloat in your later years. Without the taxes eating up your earnings, PERA provides you a way to invest in your future without worrying about taxes being deducted and you earning significantly less. As long as you have the dedication to keep the money stored for your future, you can watch it grow into a significant nest egg that will keep you comfortable long into your golden years.