It is worth revisiting the Retirement Savings Plans.

Several new features in the framework

In these uncertain times, it has never made more sense to take precautions for the future (or, for many, to think how much it would now be worth, having left savings set aside for more complicated times...).

The Retirement Savings Plan (PPR) was created by Decree-Law as a mechanism to guarantee a complement to retirement, encouraging savings by offering interesting tax benefits. It is true that these have been much more expressive in the past, but even today it allows savings on IRS depending on the investment that each person makes each year, as well as on taxes on capital gains on withdrawals:

IRS Benefit Table:

Exception: Amounts invested by taxpayers after the date of retirement are not deductible for IRS purposes.

The benefits for capital gains tax relief (accumulated value, less the amount invested net of underwriting charges), compensate a lot in comparison to the 28% applied in bank deposits. There are 4 tiers:

Effective rate of 8% (5.6% for residents in the Autonomous Region of the Azores): only valid for refunds made in the situations provided for by law, namely

• Minimum term of 5 years after delivery:
  • From the age of 60 years;
  • Old-age retirement of the subscriber;
  • Paying off home loans.
  • Attendance or entry into vocational or higher education, when generating expenses in the respective year (only in the PPR/E modalities)
• No minimum deadline:
  • Long-term unemployment (more than 12 months)* Serious illness*;
  • Permanent incapacity for work*;
  • Death

(*of the subscriber or any member of his household)

• Outside the conditions set out above, if the reimbursement occurs:

- Until the 5th year of the contract: effective rate of 21.5% (15.05% for residents in the Autonomous Region of the Azores)

- Between the 5th and 8th year of the contract: effective rate of 17.2% (12.04% for residents in the Autonomous Region of the Azores)

- After the 8th year of the contract: effective rate of 8.6% (6.02% for residents in the Autonomous Region of the Azores).

• Annuities: If the refund is paid in the form of regular periodic instalments, i.e. annuities, the IRS category H taxation regime is applied. In other words, it is taxed as if it were a pension.

Exceptional regime in this period of a complex economic climate: Law 19/2022 of 21 October introduced the possibility of PPR/PPRE redemption without penalty

1. How long is this exceptional regime in force? From 01 October 2022 until 31 December 2023.
2. Which policies are covered? All PPR, PPE and PPR/E policies.
3. What is the maximum amount that can be reimbursed under these conditions? The monthly reimbursement limit is equal to the value of the Social Support Index (IAS), which is EUR 443.20 for 2022 and EUR 478.70 for 2023. The limit is per participant (NIF) and not per policy.
4. What are the claim limits? It is not possible to claim a number of monthly refunds. The limits are monthly, i.e. per calendar month, and reimbursements for previous or subsequent months are not admissible.
5. If the redemption amount requested is higher than the value of the IAS, what happens? In this case, the amount up to the IAS limit has no penalties. The remaining amount will be covered by the contractual conditions of the policy and the tax conditions in force.
6. Are there any penalties for amounts redeemed under this exceptional regime? Up to the fixed monthly limit, the amounts redeemed have no penalty for early repayment and are framed as repayments made under the conditions established by law.

https://info.portaldasfinancas.gov.pt/pt/informacao_fiscal/codigos_tributarios/cirs_rep/Pages/irs10.aspx

What are the differences between various PPRs, PPR Funds, Retirement Certificates ("State PPRs") and European PPRs?

The differentiating parameters that you should analyse are:

-Is there a guarantee of the capital invested or a minimum return? In most of the Retirement Savings Plan funds and in the State Retirement Certificate there is no guarantee of capital or return, while in the Retirement Savings Plans of insurance companies this usually exists; in the latter, the minimum return rates are periodically changed and guaranteed for the following annuity and the total return distributed each year is communicated at the beginning of the following year. Retirement Savings Plans can never achieve high returns (given the type of instruments in which the capital is invested), but they are ideal for those seeking the lowest possible risk, especially since the Regulating Entity guarantees control of the amounts managed by the insurers (autonomous funds, guaranteed even in the event of the insurer's bankruptcy).

The Funds (sold by banks or fund management entities), have a daily quotation and most of them do not guarantee capital or minimum return.

- Track record of profitability: although it does not compromise future returns...

- Underwriting charges (what the management entity takes out of each delivery): normally from zero to 2%

- Annual fund management charges: typically 0.5% to 1%

- Charges for reimbursements outside the situations foreseen in the Law or in requests for transfer to another insurer/manager: normally from % to 2%

- Minimum amount of each refund requested

- Flexibility in deliveries (investment): single delivery? Or does it also allow reinforcements, or a regular delivery plan? And what are the minimum amounts?

There are products for all types.

In the specific case of the State Retirement Certificate**, the monthly contribution is compulsorily a percentage of the subscriber's gross income: 2%, 4% or 6%, with the latter option only available to those aged 50 or over (with some situations provided for by law allowing for alteration or suspension of contributions).

**It should be noted that the State Retirement Certificate has the unique characteristic of not allowing early redemptions, for whatever reason. It is only possible to receive all or part of this savings accumulated at the time of retirement.

European pension supplement

Europeans will have a new long-term savings product that will work as a pension supplement. They cannot redeem it before reaching retirement age, but the capital they put in will be guaranteed. A form of saving with the European stamp and whose marketing will have the same basic conditions in all the countries of the European Union. As regards tax benefits, we will have to wait and see what the context is...

Have you turned 65 and are going to register capital gains in the IRS by selling property? You may not know it, but you can reduce that tax dramatically by applying the capital gains to a PPR. Here's how:

IRS Code - Article 10 (Capital Gains)

"7 - The gains provided for in paragraph 5 are also excluded from taxation, provided that the following conditions are cumulatively verified:

1. a) The realisation value, less the amortisation of any loan taken out for the acquisition of the property and, if applicable, the reinvestment referred to in paragraph 5(a), is used for the acquisition of one or more of the following products:
2. i) Life financial insurance contract;
3. ii) Individual membership of an open-ended pension fund; or

iii) Contribution to the public capitalization scheme

1. b) The taxpayer or his or her spouse or unmarried partner, on the date of transfer of the property, is demonstrably retired or is at least 65 years of age;
2. c) The acquisition of a life insurance contract, the individual subscription to an open-end pension fund or the contribution to the public capitalization scheme is made in accordance with the terms of the contract six months later than the date on which it took place;
3. d) If the investment is made by acquisition of a life insurance contract or of individual membership of an open pension fund, these are exclusively aimed at providing the purchaser or his spouse or unmarried partner with a regular periodic benefit for a period equal to or greater than 10 years, of a maximum annual amount equal to 7.5 % of the amount invested;
4. e) The taxpayer shows the intention to reinvest, even partially, mentioning the respective amount in the tax return of the year of sale.

8 - The benefit referred to in the previous number shall not apply if the reinvestment is not made within the period referred to in paragraph c), or if, in any year, the value of the benefits received exceeds the limit set in paragraph d), or if the regular payment of benefits is interrupted, and such gain shall be subject to taxation in the year in which the reinvestment period ends, or if the said limit is exceeded or in the year in which the regular payment of benefits is interrupted, respectively. "

The earlier you start investing in retirement savings plans, the greater the income capitalisation effect. Starting far from retirement age, it can be a good decision to opt for riskier solutions (PPR funds), as in the long run such a risk is mitigated. As retirement age approaches, it may make sense to convert PPRs or invest again in PPRs with guaranteed capital, as is the case with most PPRs in the form of Insurance.

It is worth analysing the options and understanding the differences.

Talk to us, we are happy to help.

It is worth revisiting the Retirement Savings Plans. Several new features in the framework

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