Retirement savings plan perks to cost P10B yearly

Business World
Vol. XIX, No. 123
Friday, January 13, 2006 MANILA, PHILIPPINES

Today’s Headlines

Retirement savings plan perks to cost P10B yearly

Legislative proposals for tax-free individual retirement schemes similar to the US 401(k) plans could result in lost tax revenues of as much as P10 billion annually, latest Finance department estimates show.

Allowing contributions to the proposed Personal Equity and Retirement Accounts (PERA) to be tax-deductible will cost the government P1.22 billion annually. The bulk of forgone revenues, however, is expected to come from a provision exempting interest income earned by PERA accounts from the 20% final withholding tax.

If PERA investment income is tax-exempt, lost revenues could be anywhere from P1.16 billion to as high as P8.82 billion yearly, the estimates showed.

Senate Bill 1343 filed by Senator Ralph G. Recto allows all contributions made within certain limits to be 100% deductible from the taxable income of the contributor. All earnings of the PERA accounts are also tax-exempt until withdrawn. All distributions, withdrawals or early withdrawals will be taxed as income to the contributor in the tax year in which the funds are received.

A similar bill filed by Senator Edgardo J. Angara, meanwhile, grants a 5% tax credit on PERA contributions.

Approval of the PERA proposal is expected to be one of the Senate’s priorities when it resumes session next week.

The Finance department wants further studies on the PERA "so that it will be a truly regulated privately funded retirement scheme."

"The PERA proposal should also be evaluated in conjunction with the reform of the pension system, and other capital and financial market reforms," it said.

The proposed retirement plan, though, "has the potential to mobilize savings that can positively contribute to capital formation and investments."

Finance officials have warned that the existing proposals may not result in increased savings as bank accounts would merely be converted into PERAs to avail of tax breaks. The bill also does not fit with the department’s objective of rationalizing all incentives to widen the tax base.

The Senate Committee on Banks, Financial Institutions, and Currencies has formed a technical working group to draft a substitute bill to the ones filed by Senators Recto and Angara, as well as those filed by Senators Manuel A. Roxas II and Sergio R. Osmeña III.

PERAs can be administered by a bank or trust company accredited by the Bangko Sentral ng Pilipinas, investment companies, investment houses accredited by the Securities and Exchange Commission, and life insurance and pre-need companies accredited by the Insurance Commission.

Under Mr. Recto’s proposal, an individual can contribute up to 15% of total annual compensation every year, but not exceeding 15% of the annualized average monthly salary credit computed by the Social Security System (SSS). Self-employed individuals, meanwhile, can contribute up to 23% of the SSS annualized average monthly salary credit. Distributions will be made upon retirement.

Individuals participating in an employer-sponsored retirement plan may withdraw their PERA assets either in a lump sum or in installments. For self-employed persons, at least 50% of the assets must be withdrawn in the form of an annuity with a minimum term of five years.

PERA contributions may be put in listed stocks; corporate or government bonds or commercial papers; investments in foreign currencies including the currencies themselves; asset-backed securities, trust funds, and mutual funds; and cash and bank deposits. -- Felipe F. Salvosa II