We usually hear about 401(k) and Individual Retirement Accounts (IRA) in Hollywood movies and U.S. TV series. Not a lot of Filipinos know this, but we actually already have something similar — a retirement savings program in the form of the Personal Equity and Retirement Account or PERA.
Before we delve into detail about PERA investments in the Philippines, let’s first take a look and understand its American counterparts: 401K and IRA.
US Retirement Savings Programs: 401K vs. IRA
A 401(k) plan is an arrangement between an employer and the employee, in which a certain portion of the employee’s salary is deferred and deposited into a 401(k) plan. Employers offering a 401(k) plan usually match contributions to the retirement plan on behalf of the employees. The amount deferred is usually not taxable until it is withdrawn or distributed from the plan.
An Individual Retirement Account (IRA), meanwhile, is a broader retirement savings program offered by financial institutions in the United States. An individual may voluntarily contribute to this plan (in some types, the employer may also match the employee’s contribution), and it provides tax benefits and investment income until the retirement of the individual, in which case he or she can withdraw the account.
Here in the Philippines, several banks have already started offering PERA investments to investors starting 2017. Here is a comprehensive primer on this brand-new retirement investment program for Filipinos.
What is PERA?
PERA or Personal Equity and Retirement Account is a voluntary retirement savings account program that encourages individuals to save and plan for their retirement while enjoying tax incentives both from the amount contributed and the income from investments.
PERA is a personal and voluntary retirement contribution program established by and for the exclusive benefit of the Contributor for the purpose of being invested solely in PERA investment products.
How is PERA different from SSS or GSIS?
In a way, PERA is similar to SSS or GSIS in the sense that they are all retirement savings programs. However, SSS and GSIS are compulsory programs, meaning, required to all salaried employees, while PERA is purely voluntary. Another major difference is that PERA investors are entitled to tax credits, a benefit not available in SSS or GSIS.
As a voluntary retirement savings program, one could say that PERA is a complement to SSS or GSIS, providing additional retirement funds to Filipino individuals.
When was PERA established?
PERA is a product of Republic Act 9505 or the PERA Act of 2008 which was signed into law on August 22, 2008. Tax incentives became effective starting January 1, 2009. Several banks started offering PERA products beginning 2017.
Who are eligible to open a PERA account?
Any individual, of legal age, who is employed or self-employed in the Philippines or overseas, earning an income, and with a Philippine Tax Identification Number (TIN) may open a PERA account. The person opening an account is called the Contributor.
How much can I contribute to a PERA account?
Contribution is voluntary and the amount may depend on the contributor, but the maximum that can be contributed every year is P100,000 for residents of the Philippines, and P200,000 for those living and working overseas.
PERA contributions beyond said limits, that is, more than P100,000 or P200,000 as the case may be, will not be accepted by the PERA Administrator.
Who is a PERA Administrator?
A PERA Administrator is an entity which had been pre-qualified by the applicable Regulatory Authority (BSP, SEC, or Insurance Commission) and accredited by the BIR, and is responsible for administering and overseeing the PERA of the Contributor-investor.
As of 2019, only BPI and BDO have been pre-qualified by the BSP and accredited by the BIR as PERA Administrators.
Who are the other parties in the PERA?
Aside from the Contributor (investor) and the PERA Administrator, other parties include:
1. Custodian – a separate and distinct entity unrelated to the Administrator, accredited by the BSP to take custody of PERA assets. PERA Custodians may be Cash Custodians or Securities Custodians.
- Cash Custodian – receives all funds in connection with the PERA; receives instructions from the Administrator with regard to the custody and disposition of all PERA funds and reports to the Contributor, the Administrator and the concerned Regulatory Authority all PERA financial transactions and funds.
- Securities Custodian – maintains custody of all securities, evidence of deposits or investment; receives instructions from the Administrator with regard to the custody and disposition of non-cash PERA assets; and reports to the Contributor, the Administrator and the concerned Regulatory Authority all PERA financial transactions and funds.
At present, Land Bank of the Philippines is one of the parties accredited to act as Cash Custodian for PERA investments.
2. Product Provider – an entity that provides and sells accredited PERA investment products
3. Investment Manager (optional) – a regulated entity accredited by the concerned Regulatory Authority and authorized by the Contributor, pursuant to a written investment management agreement, to make investment decisions for his PERA.
What are the benefits of opening a PERA account?
As a retirement savings program, the contributor upon retirement is entitled to receive the total amount contributed, plus all income associated with his or her PERA account.
In addition, the contributor receives the following benefits because of PERA:
- 5% income tax credit, until the age of 55;
- Tax exemption from all income earned from the PERA investment upon reaching retirement or death; and
- Unlike in SSS or GSIS, the contributor makes all investment decisions, with the help of the Investment Managers, in choosing which investment assets to put his or her money.
What is the 5% tax credit in PERA?
Qualified contributors are entitled to a 5% income tax credit on the aggregate contributions made in one calendar year up to P100,000 for Philippine residents and P200,000 for overseas Filipinos.
For example, if the contributor made P100,000 PERA investment in one year, he or she gets to deduct P5,000 from his/her annual taxable income. The tax credit shall be allowed to be credited against the contributor’s income tax liability.
For self-employed contributors, they shall be issued a PERA tax credit certificate (TCC) by the BIR. For overseas Filipinos, they shall be entitled to claim the 5% tax credit against any national internal revenue tax liabilities, excluding the contributor’s withholding tax liabilities as withholding agent.
When can I withdraw my PERA contributions?
Withdrawal or the distribution from PERA is possible upon reaching the age of fifty five (55) and after making contributions to your PERA for at least five (5) years.
Death, regardless of the age of the Contributor or yearly contributions made, automatically distributes the PERA to the contributor’s heirs or beneficiaries.
These two circumstances are the only instances of a “qualified PERA distribution”.
Can I withdraw my PERA investment before the age of 55?
Yes, but there will be penalties.
In case of distribution that is not “qualified” (i.e., death or retirement), the contributor will have to pay and reimburse the government all tax incentives enjoyed by the PERA investor from the date the benefit accrues to the contributor. This includes, among others the income tax credit of 5%, waived taxes on all investment income, and waived income tax for the employer’s contribution.
Early withdrawal without penalty is only allowed in the following instances:
- for payment of accident or illness-related hospitalization in excess of thirty (30) days (needs a duly notarized doctor’s certificate as proof);
- for payment to a contributor who has been subsequently rendered permanently totally disabled as defined under the Employees Compensation Law or Social Security System Law (needs certification from pertinent government agency); and
- immediate transfer of proceeds to another Qualified/Eligible PERA investment Product and/or another Administrator within 2 working days from the withdrawal
How do I start investing in PERA?
First, the contributor must look for an administrator who will oversee the account. At present, only BPI and BDO have been accredited as PERA Administrators. That means, a Contributor can only choose between BDO or BPI at the moment.
Take note that there can only be one (1) administrator for all of the contributor’s PERA accounts. Once the administrator is assigned, the contributor chooses a custodian who will receive the funds.
The custodian could be an investment manager or a trust entity accredited by the Bangko Sentral ng Pilipinas (BSP). The custodian will operate independently from the administrator.
With the guidance of an administrator and a custodian, the contributor may now choose which PERA investment products to invest in.
Where will my PERA investment be invested?
You, as the Contributor, will make the decision on where your PERA investment will be placed by the Administrator. These investment products may be:
- UITF or Unit Investment Trust Funds
- Mutual Funds
- Stocks
- Insurance pension products
- Government securities
- Etc. as long as these have been accredited by their respective regulators.
Ready to retire? Happy investing!
