Preparing for retirement is one of the many financial goals you can set for yourself. A Personal Equity and Retirement Account (PERA) is one of the ways that might help you reach it.
PERA is a government-initiated voluntary savings and investing program to help anyone with a Tax Identification Number (TIN) prepare for retirement.
Essentially, PERA accounts are like Unit Investment Trust Funds (UITFs) and mutual funds, where you entrust money to a fund manager who invests it for you based on your risk profile. However, they have one key difference: tax benefits.
PERA benefits
When the money you invest grows through a UITF or mutual fund, it’s subject to taxes. You just might not feel them because they’re already computed and applied when you redeem. But with PERA, you get all your earnings from the investment without having to pay the usual income taxes (e.g. withholding tax, capital gains tax, dividend tax).
That doesn’t mean, however, that PERA is totally tax-free. You’ll still have to pay non-income taxes related to the kinds of assets inside it (if it contains stocks, for example, it’s subject to stock transaction-related taxes).
Another benefit of PERA is you get a 5% tax credit on the contributions you make every year. These credits can be used to pay for taxes. With P1,000 in tax credits and P25,000 in taxes for the year, for instance, you can use your tax credits and pay only P24,000.
If you’re employed, you can ask if your employer can contribute to your PERA. However, they might have a provident fund which you can also look into.
Your PERA is also protected from insolvency which means, in case you go bankrupt, people you owe debts to can’t take it away.
Finally, in case you die (knock on wood), all the money in your PERA account goes directly to your heirs, exempted from income and estate taxes.
How to get the benefits
While they all sound great, take note that the benefits of PERA are subject to some conditions. First, you’ll only be entitled to the tax benefit if you’re 55 years old when you withdraw your money and you’ve been invested in it for at least 5 years.
Next, the 5% tax credit from contributions is only applicable for up to P100,000 in contributions per year. If you’re an overseas Filipino worker (OFW), it’s P200,000.
Since PERA was made to encourage people to save and invest for their retirement, it encourages long-term investing and penalizes early withdrawals. To be specific, you’ll have to pay early withdrawal fees in the amount of all the tax credits you’ve availed plus 20% of the income your investment has made.
There are only 3 cases that let you withdraw early without fees or penalties:
- You were hospitalized for more than 30 days because of an accident or illness.
- You became disabled and are unable to work as a result.
- You’re transferring the money to a different institution also offering PERA within 15 days.
On the topic of fees, like UITFs and mutual funds, your fund manager will also charge you fees throughout the course of your investment in PERA.
Finally, PERA is not commonly offered. Being a relatively new product, only a few banks offer it, as of writing.
Prepping for retirement
PERA isn’t meant to replace government pension programs, namely, Social Security Service (SSS) or Government Service Insurance System (GSIS). Rather, it’s something that you can use to supplement them.
At the same time, PERA doesn’t replace other investments. By nature, it’s a long-term investment and you can have only a maximum of 5 accounts. Depending on your needs and goals, it would be good to have other kinds of investments.
All in all, if you’re interested preparing for retirement, consider investing in PERA. Its benefits make it useful for saving up, no matter how old you are.
