[Finterest] What is PERA, the Philippines’ 401(k)-style retirement account?

MANILA, Philippines – If you’re looking for a New Year’s resolution that will still matter when the year’s excitement fades, retirement is a good place to start, even if it feels a little premature this early in January. More specifically, PERA is one tool worth looking at.

PERA, or the Personal Equity and Retirement Account, is designed to help you build a steady retirement investing habit, with tax perks that ordinary investing doesn’t offer. It isn’t a new type of fund in itself, but instead a legal framework created under the PERA Act of 2008 that sets the rules and incentives for how your retirement money is invested.

If you’re familiar with the 401(k) system in the US, it’s basically the Philippines’ version of that retirement account.

Though it’s been introduced as a concept for almost two decades now, PERA products only really began rolling out years later, as providers built products and went through accreditation. For example, the Bank of the Philippine Island’s (BPI) PERA Money Market Fund lists December 19, 2016 as its launch date, which gives you a sense of how long it took for mainstream offerings to show up.

Then came the more modern layer. The government and private sector started pushing “digital PERA” distribution, including platforms that let investors open and manage PERA accounts online. One milestone is the launch of the country’s first digital PERA platform in September 2020, which was framed as a way to widen access and reduce friction for retail savers.

Since then, more players have entered the space, including firms that aren’t banks. DragonFi, for instance, is a securities broker that now offers PERA account access through its platform, which reflects how PERA has gradually expanded beyond traditional bank channels.

But before anything else, let’s clear out two questions you might have.

“Will this make me rich?” No retirement vehicle can honestly promise that.

“Will this make my investing more efficient?” That is what PERA is designed to do. PERA cannot guarantee gains, but it can make the gains you do earn more valuable by reducing the tax drag that usually chips away at investment income.

PERA is also voluntary. You can open one on your own, and an employer may offer a PERA program, but it is not mandatory in the way SSS contributions are.

Basics of a PERA account

A PERA account is not an investment by itself.

It is a container that holds retirement investments, under a set of rules. Those rules cover who can offer PERA products, what kinds of investments are allowed, what tax benefits apply, and when you can withdraw without losing perks.

When you put money into PERA, your money does not sit there doing nothing. It gets invested into qualified PERA investment products. This distinction matters because PERA is often misunderstood as a special fund. In reality, it is closer to a retirement account that can hold different funds and instruments, as long as they fit the eligibility rules.

That said, here is the “menu” a PERA account is allowed to invest in according to the Bangko Sentral ng Pilipinas (BSP): UITF units, mutual fund shares, annuity contracts, insurance pension products, pre-need pension plans, listed shares traded on a local exchange, exchange-traded bonds, and government securities, plus other categories that regulators may allow under specific conditions

That’s speaking legally. Practically though, what a typical retail investor can actually buy today under PERA is narrower, and usually centers on PERA-qualified funds such as money market, bond, and equity UITFs.

This is also why PERA isn’t a loophole to get any investment you want tax-free. For instance, while some administrators may have certain PERA-eligible stocks for you to invest in, you cannot just pick any stock, any REIT, or any bond you personally like and drop it into a PERA wrapper.

Why do PERA at all if it just buys funds?

So if you are the kind of reader who wants to build a retirement portfolio made of individual stocks and bonds, PERA may still feel restrictive depending on which provider you choose and what they offer right now. That, however, is not a reason to dismiss it outright, especially considering its benefits.

The reason PERA stays compelling is its tax treatment. PERA’s advantages boil down to three things: a 5% tax credit on qualified contributions, tax-exempt investment income, and tax-free withdrawals upon qualified retirement, plus a legal protection that treats PERA assets differently for insolvency and estate purposes.

The easiest benefit to visualize is the tax credit because it behaves like a rebate on what you put in. The PERA Act provides a tax credit equivalent to 5% of your total qualified PERA contributions made in a year, subject to annual contribution limits of P200,000 per year for locally employed and self-employed individuals, and P400,000 per year for overseas Filipinos.

Here is what the tax credit looks like in practice. If you contribute P100,000 this year, the tax credit is P5,000. If you max out P200,000, the tax credit becomes P10,000, and if you are an overseas Filipino contributing P400,000, it becomes P20,000. Those tax credits are valid within five years from issuance and can be used to pay or reduce your income tax.

The second benefit is one that compounds over time: the income earned from PERA investments is exempt from taxes on investment income. Suppose you have a bond fund that earns P20,000 in investment income in a year. In a normal taxable setting, part of that income may be subject to taxes depending on the instrumen. The actual money that you get is less the tax withheld, which is usually around 20%.

When you keep that investment in PERA, the framework is designed so that qualifying investment income can stay inside the account without those investment-income taxes applying the same way, which means more of the return remains invested and compounding.

The third benefit is less talked about, but it matters for peace of mind and long-term planning. The PERA Act states that PERA assets are not considered assets of the contributor for purposes of insolvency and estate taxes, and it also emphasizes non-assignability, meaning these assets generally can’t be attached, garnished, or seized.

In simple terms, PERA is structured to be harder to reach in financial distress, and cleaner to pass on in certain scenarios, which can help it play a role in estate planning. The BSP’s PERA FAQ reinforces this framing and notes that distributions upon death are covered under the rules.

PERA’s caveats

Remember, PERA is built for retirement. That means it has a definition of what retirement looks like in its rules.

To get the tax-free distributions, you have to meet the “55 and 5” rule: you’ve reached age 55 and have completed at least five yearly contributions.

If you withdraw earlier, you forfeit the tax incentives you’ve enjoyed, with all taxes repaid to the Bureau of Internal Revenue (BIR). This includes the 20% tax on total income earned and the 5% tax credit that you’ve received.

There are, however, important exceptions. Withdrawal penalties don’t apply in cases such as accident or illness-related hospitalization in excess of 30 days, permanent total disability, and certain transfers to another PERA investment product and or another administrator within a specified window.

Though this might seem like a tricky restriction, it can also help in building your retirement fund. A normal investment account is liquid. Ordinary investment accounts are liquid, and liquidity is convenient but tempting. PERA adds healthy friction, which makes it easier to leave your retirement money alone, and it works best when you treat contributions as a long-term habit. – Rappler.com

Finterest is Rappler’s series that demystifies the world of money and gives practical advice on managing your personal finances.