Saving for your retirement
Saving for your retirement
by Senen M. Quizon
‘Do not simply retire from something; have something to retire to.’ — Harry Emerson Fosdick
Think about it. If you do the math, an average person will have to spend more than half of his/her life working to earn a living.
After working for so many years, don’t you think you deserve a comfortable and financially secure retirement?
To achieve the retirement of your dreams, you should have been able to save enough money to put you through your retirement years. The most critical step to attaining this goal is to start saving at an early age, and by making sure you have a plan to help you determine how much you need to save and invest for your retirement.
There are many ways to save for your retirement.
To fund your retirement, you can buy a pension plan, deposit your money in a time or savings account, and/or buy bonds and stocks.
An alternative vehicle which offers flexibility in investment selection is the Personal Equity and Retirement Account (PERA) which is currently awaiting the signature of the President to become a law.
The PERA which was patterned after the US Individual Retirement Account (IRA) is an economic policy instrument introduced as part of the broad strategy to promote capital market development and savings mobilization.
As designed, PERA is available to anyone who has the capacity to contract and possesses a Tax Identification Number (TIN).
A person’s annual contribution to PERA is limited to P100,000 per year. However, a husband and wife may each contribute P100,000 to PERA. If you are an overseas Filipino worker (OFW), you can invest P200,000 or double the maximum allowable contribution.
PERA provides tax advantages for retirement savings which you cannot get from any other investment instruments/products. If you put your money into PERA, you will get a tax credit certificate which you could use to reduce the taxes you owe.
In addition, all income earned from investments and reinvestments, as well as distributions upon retirement and death, will be tax exempt. This exemption also extends to qualified early withdrawals of PERA contributors. Because PERA receives favorable tax treatment, you can accumulate money for retirement at a faster rate than in other investment instruments.
The tax credit which will be granted to you in exchange for contributing to PERA is equivalent to 5% of your PERA contribution. This means that you will receive a 5,000 tax credit if you contribute the maximum annual allowable contribution of P100,000. You can use this tax credit certificate to pay for your income tax due. If you and your spouse each contribute to PERA, both of you can use your PERA tax credit against your respective income tax due.
You will, however, lose this privilege of claiming the tax credit if you and/or your spouse have no taxable income or owe no income tax.
You must be aware that the PERA tax credit is only useful if you owe taxes. If you are a minimum wage earner, and planning to contribute to PERA, you will not enjoy the benefit of claiming a tax credit against your income tax due because you are exempt from income tax and thus, do not have any income tax due to which you could apply your PERA tax credit.
However, it is totally different in the case of our OFWs. The PERA bill allows OFWs to utilize their PERA tax credit against any tax payable by them to the national government under the National Internal Revenue Code (NIRC). This means that although OFWs do not have any income tax due to which they could apply their PERA tax credit, the PERA bill allows them instead to use their PERA tax credit against any of their internal revenue tax liabilities.
It should be noted that at present, income derived by OFWs from their foreign-source income is exempt income tax. Hence, unless they derive any taxable income in the Philippines, they will not have any income tax due where they could offset their PER
A tax credit.
The manner in which the BIR would administer PERA tax credit incentive could influence the way potential contributors, particularly OFWs, will respond to PERA. For cases of OFWs, an important issue is whether or not PERA tax credit will be allowed as credit only against internal revenue taxes which OFWs are directly liable or would they also be allowed as credit against their passed-on tax liabilities like VAT.
The tax credit granted to PERA contributors takes the form of a non-refundable credit which means that in case your tax credit exceeds the tax you owe, you will not get any refund.
However, the PERA bill is silent whether the excess PERA tax credit can be forwarded or not to succeeding years. For maximum impact of tax credit as an incentive, any excess tax credit over tax due of the PERA contributor should be allowed to be carried forward to permit full use of PERA tax credit.
The PERA implementing rules and regulations must likewise consider the effect of PERA on the existing requirement for employers to withhold the exact amount of tax due from employees as part of the yearly withholding tax adjustment. The employer must be provided information on the claim for PERA tax credit of the employees. Any delay encountered in the issuance by the BIR of the PERA tax credit certificate may prevent the employer from making the necessary adjustment in withholding, thus depriving the employee the opportunity to use his PERA tax credit.
All of these issues should be taken to account by the BIR when it issues the PERA implementing rules and regulations.
One of the drawbacks of retirement is not saving enough money to sustain your target lifestyle. If you want to achieve a worry-free retirement, you need to accumulate enough savings to support your retirement goal. PERA is a good retirement savings device which will allow you to look forward to a comfortable and financially secure retirement which you deserve after working so hard for many years.
(The author is a tax manager at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please E-mail Senen.Quizon@pna.ph or call 886-5511.)