Pension Plans You Should Have Started Yesterday

Many currently employed Filipinos are riding on a happy-go-lucky nimbus that they will have enough funds in their golden years, even without a retirement plan in the works.  But as they near the retirement age, their ironclad positivity begins to deteriorate as they realize that the money that they saved in the bank is simply not going to be enough.

Besides from the mistake of not having a retirement plan, the idea of just saving up is another deathtrap that many Filipinos fall for. Especially for low to modest salary earners, tucking part of their earnings until they retire are usually not enough to sustain their staple needs, medicine, and way of life.

Why Saving Alone Is Not Enough for Retirement

In a survey that targets Filipinos between 18 – 45, 83% of them intends to use their savings account as their main source of retirement funds.  With the interest rates at the bank in the Philippines ranging between 0.25% and 1.75%, a savings account which receives a regular P3,000/mo deposit would generate an earning of less than P1,000 per year.

In a span of 30 years of consistent P3,000/mo deposit, the employee will receive roughly P1 million pesos to retire with. If the retiree plans to live off that money for another 30 years, he or she would have to limit the spending to the amount they put, which in this case is P3,000/mo.

Even with senior discounts, living off on a P3,000 per month budget (or P100/day) is not an easy feat, especially with housing bills, food, and maintenance medicine factored in.  There will be plenty of sacrifices, which is probably not the comfortable living that one might have envisioned when they retire.

However, the good side about the act of saving is that it shows the willingness to not age in a frugal existence. Most importantly, it allows anyone to come up with the capital for schemes that will generate additional funds upon retirement. Below are examples of what one could invest their savings in:

PERA Option

The Personal Equity and Retirement Account (PERA) was first introduced in 2008 by Bangko Sentral ng Pilipinas (BSP), and it took some time before it was fully implemented. Basically, PERA is a voluntary retirement program that is similar to a savings account but with added tax benefits and freedom to choose how their funds are invested by the bank.

Here’s a rundown on this option:

a) The maximum yearly contribution is P100,000 for Filipino residents in the Philippines and P200,000 for OFWs and Filipinos living abroad

b) 5% tax credit is issued to qualified contributors. It is deducted to the income tax liability of the contributor. For example, a P100,000 investment is entitled to a P5,000 deduction in a year.

c) PERA funds can be withdrawn or distributed automatically at the age of 55. The funds can also be withdrawn earlier than that, but expect the following condition for the penalties:

-The total amount is the sum of all the tax incentives such as the 5% tax credit, income tax, and investment tax.

-The penalty is only applicable if the reason for withdrawal is any of the following:

  • The full withdrawn amount is to be used for accidents or hospital bills incurred after 30 days (notarized doctor’s note is required.
  • Transferred to another PERA investment type or PERA administrator within 2 days of withdrawal
  • Payment to a disabled contributor (certification of proof disability from a government agency required) 

d) The contributor may choose any of the following to invest their PERA funding in:

e) As of the moment, Banco de Oro (BDO) and Bank of the Philippine Island (BPI) are the only ones who pre-qualify and are accredited by the Philippine Bureau of Internal Revenue (BIR).

To get started, the PERA applicant needs the following:

  1. Government ID
  2. Philippine Tax Identification Number (TIN)
  3. Income tax return or TIN ID
  4. P1,000 minimum
  5. A savings or checking account with the bank you are applying in

PERA is a great option as a nesting egg for retirement, but before jumping into this option, one must know that going with PERA comes with a few uncertainties. Since the contributor’s funds will be used for stock investments, the contributor needs to know that their investment is subjected to market and liquidity risks.

Furthermore, PERA is a long-term investment that requires consistent payments for at least five years. If one couldn’t comply, there is a risk that the BIR takes back all the total amount of tax incentives that the contributor benefitted from.

Social Security System (SSS) Retirement Plan

The mandatory SSS deductions that employees get in their salary accrues into a liveable pension amount of P10,900, given that the employee had been consistently contributing for 30 years. The contributor may also opt for a lump sum with the interest added in.

Recently, in line with the upcoming hike in the SSS deductions (from 11% to 17%), the pension was approved to go up to P20,300 by 2026. Other benefits will also get a boost such as the sick benefit credit (from P430 to P900), maternity leave (from P41,600 to P78,000), and funeral benefit (from P29,600 to P38,000).

But for now, the monthly pension is calculated the following way:

The Monthly Pension Shall be the Highest of:
a) 300 + (20% x AMSC*) + (2% of x AMSC) x (CYS** – 10); or
b) 40% x AMSC; or
c) The minimum pension of P1,200, if with at least 10 CYS; or P2,400, if with at least 20 CYS, whichever is applicable

*AMSC – Average Monthly Salary Credit

**CYS – Credited Years of Service

Per the SSS, to get the most out of the retirement plan, the contributor may choose to retire after the age of 60. The monthly pensions will be adjusted accordingly when the contributor finally decides to retire.

Much like PERA, the SSS retirement plan comes with certain risks. Even with the hike, the SSS funds would eventually be depleted by 2040, meaning if nothing changes, the Gen Z’ers would not be able to benefit from the SSS retirement plan.

Life Insurance with Retirement Plan

Among the other options mentioned, getting a life insurance with a retirement plan is the most lucrative. Regardless when one started early or later, as long as the face amount has been paid for and meeting other criteria required by the insurance company, the payout could reach up to millions.

In a sample calculation provided by licensed financial advisor Dads Valencia, a P100,000 venture may grow up to P215,000 in 10 years, with the right investment personality.

For life insurances, the main fallback lies in the fine print or policies. Misunderstanding the coverage and requirements to meet the criteria to fit in a certain bracket could lead to wrong expectations on how much one will receive upon retirement.

However, the dilemma above could easily be curbed by having the insurance advisor explain in details the fine print. Also, ask questions about the policy to have a better depiction of what it would be like upon retirement.

Quick Tips on Saving Money

None of the options above would be of any benefit if there is no money saved (except for the SSS Retirement Plan which is automatically deducted). Here are some tips on how to save:

Tip #1: Don’t Spend More Than You Earn

  • -Forking out cash more than the daily earnings would easily send anyone into debt

Tip #2: Practice mindful spending

  • -Pay attention to what is being spent on

Tip #3: Invest in yourself

  • -Getting better education through workshops, classes, etc would make one get a better position and more earnings

For many Filipinos, retirement planning is a must-do task that is usually done when it is too late. With all the other expenses that come first and the enduring bahala na attitude, financial planning for retirement ends up in the back burner for too long. However, the sooner one deals with it, the better life will be as a senior citizen.

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About the Writer - Rayan Ramos


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