It is never too early to save

Without delving too much into the obvious, we Filipinos are familiar with the time-worn adage: “He who has the gold makes the rules.” Wealth can buy security, and you  wouldn’t have to worry about the crime rate outside your gated community. But that’s beside the point because the PERA we are talking about is the Personal Equity and  Retirement Account Law, and the security to which I refer is not the physical kind, but the financial one.

Let’s face it, times are changing. Society is becoming hypercompetitive. People are focusing more intently on their careers, starting families later and having fewer  children. People are living longer and more active lives in their retirement. Social norms are also shifting. Whereas children were expected to care for their parents in their old age, there’s no longer any guarantee that this will stay over the next few decades whether because they are unable to support their aging parents or parents no longer  view piggybacking on their children as appropriate. Whatever the case, it seems the dog-eat-dog world is slowly creeping in to loosen the filial bonds that tie us together.  Which begs the question, who can you rely on in your old age?
You probably haven’t even given it any attention. Between printing the wedding invites, hiring a photographer, trimming the guest list, and doing the myriad of other tasks just to get to the altar, who can blame you for not sitting down to strategize your financial security for the next 30- plus years? After all, are flowers really that expensive? And what costs do photographers incur that make them charge as much as they do? Go ahead, plan the wedding, print the P800 invites, get the flowers from Holland-but do consider this a gentle reminder that planning for your financial future, like your wedding, is a joint venture with your partner. Who can you run to? The SSS? Let me tell you another one.  Today we have the Personal Equity and Retirement Account, which is only being introduced this year. In a nutshell, it allows each person to earn a 5% tax credit on the money they put into their PERA account, subject to a current maximum deposit of one hundred thousand pesos per year (if you’re an OFW that’s two hundred thousand). Of course the effective P5,000 yearly tax credit is really just a pittance to encourage people to start saving. Where PERA gets exciting  is the taxfree treatment for your investments.

The more financially savvy of you might interject at this point and say “the government already waives the 20 percent final withholding tax on deposits over 5 years.”  That’s correct, but there now exists a possibility that some of your stock and bond investments can be lodged in your PERA account. Suppose you invest in some Retail  Treasury Bonds which are issued by the Philippine government and therefore safer than parking your money in a bank (trust me, if push comes to shove the government  can literally just crank the presses and  print pesos to pay you). Any coupons you receive are currently charged a 20 percent withholding tax before you even get them.  PERA means that instead of the government sharing in your hard earned savings, the money that would have gone to taxes can now be reinvested and compounded
for future growth. In addition, PERA has some built-n protections for your peace of mind. If you keep your retirement savings in a bank earning a low but steady return that you are content with, you could approximate the tax-free returns of PERA invested in the same manner. Say 15 years from now a creditor like the BIR slaps you with a substantial tax bill for some inheritance you received but already splurged on that lavish St. Tropez vacation. What happens? Well, the short of it is they can go to your  bank and freeze your account until they get their pound of flesh. PERA, on the other hand, is protected. The BIR, or any of the other people to whom you owe money, simply cannot touch it. Some people open accounts with minimum eight-digit balances in banks to get this sort of protection in the form of trust accounts. Now it’s available to the common man.

The saying “nothing is certain but death and taxes” actually means that when you die the government will certainly tax whatever you bequeath to your heirs. The  inheritance tax, or more derisively known as the death tax, is a tax on the transfer of assets from someone who has just passed away to his remaining heirs. It is currently assessed at 20 percent of the value of the assets. PERA ensures that when it’s your turn to pass through the pearly gates, the taxman goes away empty-handed. You get to  designate a beneficiary who will get your money tax-free.
Of course there are some drawbacks to PERA. Early withdrawal from your PERA will incur a tax penalty that the bank will calculate based on all the tax freebies you’ve received-that is, unless you can present a medical certificate that you’ve been hospitalized with an illness for over 30 days. To enjoy the tax free withdrawal privileges, you must reach 55 years and should have contributed to your PERA for over five years. Also, you are not allowed to pledge your PERA as collateral to secure a loan or line of  credit.
So where can you avail yourself of this new PERA account? It’s still so fresh out of the oven that banks are still getting accredited to handle them. To be sure, the law itself  as signed in 2008, but it has taken all this time to finalize its implementing rules because of the protections that were built into PERA and the freebies that the  government is providing. Eventually, companies may start offering additional incentives to their employees by matching contributions into their PERA accounts (without prejudice to their legal obligations to the SSS). Banks and other financial institutions should begin rolling out their respective products in the next few months and when they do, recognize it, use it, and spread the word.

-Carlo Eh