PERA: Philippines's Version of 401(K)

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source: http://www.forbes.com

The Philippines has been one of the youngest capital markets which is seeing growth in the recent years. There are so many things that we have to catch up with the rest of the world. If you would talk to a common Pinoy and ask what kind of investment they have they might either scratch their head or maybe say a time deposit in the local bank. 

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fireupyourfinances.sulit.com.ph - Monday, March 26, 2012

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There are so  many companies in the Philippines but the bulk of ownership of these companies is in the hands of public or government funds and foreign investors. I guess we, the Filipino people, should be the one taking a greater part in these companies. In order to do that we must have an effort to educate the common Pinoy and debunk the myth that only the rich can be an investor in our own country.

With that the Philippine Legislature finally made a law that will at least help Pinoys have a chance in participating in the capital market of the country. Republic Act 9505 which is also known as the PERA Law (Personal Equity and Retirement Account Act of 2008) is a contributory retirement account which an individual can avail. 

source: http://www.perakoto.com

It is an additional retirement vehicle made available to the Filipino besides Social Security and other pension funded funds. To read the law please click here.

I have found an article written by Francis Lim, former president of the Philippine Stock Exchange, in the Philippine Daily Inquirer which best explains the PERA Law. 

Below is an excerpt of the article:

The PERA retirement system: Ready for take-off?

By: Francis Lim
Philippine Daily Inquirer

(excerpt starts here)
 

The PERA Law

The PERA Law was on the drawing board of Congress for about 10 years before it was signed by then President Gloria Macapagal-Arroyo on Aug. 22, 2008.

Modesty aside, the PERA Law was one of the five capital market-related laws whose enactment I pushed as president of the Philippine Stock Exchange (PSE).

Senator Edgardo J. Angara and Congressman Sonny Angara were very instrumental in the passage of this law. And why did we push for it?

Aside from seeking to help our countrymen prepare for their personal retirement, the PERA Law was envisioned to develop our capital markets.

The law seeks to achieve this objective by increasing the country’s savings deposit base that will hopefully be invested in our capital markets. Towards this end, the PERA Law gives additional incentives to PERA savings that are invested in eligible PERA investment products.

These products include stocks listed and traded on the PSE and Philippine Dealing and Exchange Corp., mutual funds, government securities, exchange-traded funds and bonds, insurance pension products, unit investment trust funds and other investment products that may be allowed in the future.

Establishing PERA accounts

Any natural person with capacity to contract (18 years old and above) with a tax identification number may be a contributor to a PERA account. The idea is for the contributors to keep their PERA alive until age of 55 so that they have something to use for retirement, on top of what they would receive under the Social Security System and the Labor Code.

The law and regulations provide stiff penalties for early withdrawal of PERA savings, subject only to very limited exceptions like permanent disability of the contributor.

While contributors may withdraw their PERA upon reaching 55 years of age, the PERA Law gives them the option to keep their PERA beyond that age.  In fact, the tax regulations provide that a person over 55 years may still establish PERA accounts.

A contributor may have up to five PERA accounts at any one time, with each PERA account confined to one category of investment product. However, the law allows only one BIR-accredited administrator (banks, securities brokers, investment houses, insurance companies and brokers, etc.), whose job is to administer and oversee all the contributor’s PERA accounts.

The contributor may manage his own PERA accounts, but he may appoint an investment manager (like a trust entity or investment company adviser) for his PERA accounts.

Only entities with a trust license from the BSP can be an administrator and investment manager at the same time.

Incentives

a.) Tax credit—the contributor shall be entitled to a 5-percent tax credit of his annual contribution. The maximum annual contribution is P100,000 per person or P200,000  for married couples.

This basic tax incentive is a tax credit system or deduction from income tax payable to the government, not merely a tax deduction from the gross income of the contributor.

To illustrate, if a married couple has P100,000 income tax payable for a given year and has put aside P200,000 in PERA, they can deduct  P10,000 (5 percent of P200,000) from their income tax, thereby paying the government only P90,000 for that year.

Note that in case of overseas Filipinos, the annual cap is P200,000 per individual and P400,000 per couple. The law doubled the annual cap for overseas Filipinos to help substantially increase their inward

remittances into the country.

b.) Employer contribution—a private employer may contribute to its employees’ PERA to the extent of the maximum amount allowable to the contributor. The contributions shall be allowed as a deduction from the employer’s gross income for income tax purposes.

More importantly, the employer’s contribution shall not form part of the employee’s taxable income; hence, it is exempt from the withholding tax on income, whether withholding tax on compensation or fringe benefits.

c.) Tax-exempt investment income—all income earned from PERA investments is tax exempt. For example, they are exempt from the (a) 20 percent final withholding tax from interest on bank deposits or deposit substitutes; (b) capital gains tax; (c) 10 percent dividend tax; and (d) regular income tax.

Again, to illustrate, if a contributor used his PERA savings to buy shares of stock of Philippine Long Distance Telephone Co. or the Ayala or SM group of companies and receives dividends from such investments, his dividends shall be exempt from the 10-percent dividend tax prescribed by the National Internal Revenue Code.

d.) Tax-free distributions—all distributions of PERA assets, which include the annual contributions and their income, upon retirement of the contributor and provided he has made PERA contributions for at least five years, are tax-exempt. Distributions to the heirs of the contributor upon his death are exempt from estate tax.

e.) Nontax incentives—PERA assets are exempt from attachment, garnishment, and levy on execution. Neither can they be alienated nor pledged or encumbered. PERA assets are not considered part of the contributor’s assets for purposes of insolvency. In short, all PERA assets are beyond the reach of the creditors of the contributor.

To read full article please go to the Philippine Daily Inquirer.

If you are a US citizen or you are working or have worked in the United States you might think that PERA is a version of the 401(k). It is in a way same because they are means of funding one's retirement by enticing a contributor by way of tax incentive(which in the case of a 401k is a deferral of the income tax until one reaches its legal retirement age in the US). Below is an excerpt from the IRS(the equivalent of BIR in the US):
 

Topic 424 - 401(k) Plans

A 401(k) plan is a type of tax-qualified deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pretax basis. Generally, these deferred wages (commonly referred to as elective contributions) are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 (PDF) since they were not included in the taxable wages on your Form W-2 (PDF). However, they are included as wages subject to social security, Medicare, and federal unemployment taxes.

The amount that an employee may elect to defer to a 401(k) plan is limited by the Internal Revenue Code. In addition, your elective contributions may be limited based on the terms of your 401(k) plan. Refer to Publication 525, Taxable and Nontaxable Income, for more information about elective contributions. Employers should refer to Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), for information about setting up and maintaining retirement plans for employees, including 401(k) plans.

Distributions from a 401(k) plan may qualify for optional lump-sum distribution treatment or rollover treatment as long as they meet the respective requirements. For more information, refer to Topic 412, Lump-Sum Distributions, and Topic 413, Rollovers from Retirement Plans.

Many 401(k) plans allow employees to make a hardship withdrawal because of immediate and heavy financial needs. Generally, hardship distributions from a 401(k) plan are limited to the amount of the employees' elective contributions only, and do not include any income earned on the deferred amounts. Hardship distributions are not treated as eligible rollover distributions.

Distributions received before age 59 1/2 are subject to an early distribution penalty of 10% additional tax unless an exception applies. For more information about the treatment of retirement plan distributions, refer to Publication 575, Pension and Annuity Income.

- source: http://www.irs.gov/taxtopics/tc424.html

    

PERA is a new concept which is still in the implementation stage. The BIR has just made the implementing rules in regards to how to implement this law. Employer's as well are still looking at this if such will be beneficial to their company.  But nonetheless if such is fully implemented and a greater number of the Philippine working population avail of this retirement vehicle it would surely help the local capital market and boost the Philippines's economy through internal capital sourcing.

To learn more about PERA you can also check a blog post by Kris Diane Domingo in her blog Moneylifeblood(click here)