PPR: Prepare for retirement and increase IRS reimbursement

When we reach retirement age and we stopped exercising our profession, we began to receive the old age pension🇧🇷 However, this value is less than active income that we received in the exercise of our activity. for what it is important to raise savings until that period, in order to have a supplement to the pension. We can prepare for retirement through an emergency fund, or by investing in financial products such as a Retirement Savings Plan (PPR).In this article we explain the advantages of preparing for retirement through a PPRwhat types exist and which one is most appropriate for each case, the associated tax benefits and how redemptions work.

Why should I prepare for retirement by investing in a PPR?

A PPR has main objective to be a long-term savings instrument, to build a nest egg until retirement age. Therefore, investing in the PPR can be a way to prepare the reform🇧🇷 And the sooner you subscribe to this financial product, the better. Since, if it is an early concern, not only can you save more money, but you can benefit from attractive compound interest and more tax benefits. By investing in a PPR in a period of your life when you are in a stable situation, in professional and financial terms, you manage to ensure a safety net when it comes to reform. This is because the value you gain with this product can be a good supplement to old-age pension🇧🇷 Remember that the amount you will receive from retirement will be less than the amount of income you receive in working age, while you are practicing your profession. can perform a PPR at any age, at any point in your life🇧🇷 But you should bear in mind that, if you do it close to the age of 50, the earnings may not be so high if you don’t invest a significant amount monthly or annually, in order to reach the amount you want to complement your retirement.

What is the current retirement age and average life expectancy?

Currently, you can retire without penalties if you have 15 years of discounts. In 2023, you can ask for your retirement at 66 years and 4 months, which compares with 66 years and 7 months in 2022. This decrease is due to the fact that the average life expectancy has fallen, according to the National Institute of Statistics (INE), by 4.6 months for men and 3.7 months for women, relative to 2018-2020 data. At birth, in general, people can now expect to live about 81 years🇧🇷 However, it is the first time since 1989 that the average life expectancy and, consequently, the retirement age have dropped. This was an estimate that had been rising since that period, showing that we are living longer and longer🇧🇷 Which reinforces the importance of our worry financially about the period in which we will be retired🇧🇷 According to INE, this period corresponds, on average, from the age of 65 (close to retirement age), 17 more years for men and 21 more years for women🇧🇷

What types of PPR are there and which one is best for me?

Types of PPR

There are several types of PPR, and you must choose the one best suited to your investor profile and objectives🇧🇷 First, you can choose between PPR Funds and PPR Insurance🇧🇷 Within these, you still have different options. Us PPR Fundsyou can choose the background depending on the level of risk you want to take, and there are risk-free funds on the market, with guaranteed capital and/or income and low valuation expectations, as well as funds with high risk, but higher potential returns. In this case, the capital is expressed in units of participation with a certain value, which increases or decreases according to its profitability. Are managed by pension fund management companies, but capital contributions are made by the subscriber. So, can know daily the value of the units participation on the websites of management entities and even transferring the money invested from one fund to another or to another institution. Us PPR Insurancethe capital is invested in a autonomous backgroundwhereby there are no major risks associatedbut the income is minimal🇧🇷 In this product, as a rule, your capital is guaranteed, so it is a conservative investment option. The goal is to get a small maximization of your money in the long run, not taking a big risk of losing your savings. In this product, the yield is released on an annual basis and you can expect a low potential yield as it tracks interest rates. In both cases, you should always find out about the pre-contractual conditions of the policy, including redemption conditions, as there may be associated penalties and fees. Also read: Types of PPR: what are the differences and advantages for your future?

What type of PPR is right for me?

First, consider the your goals with a PPR, to conclude which type is most suitable for you🇧🇷 put the following questions: Why do you want to create a PPR? Is it to supplement the old-age pension? To create long-term savings? How old are you now? The younger you are, logically, the more risks you can take with a PPR🇧🇷 Since you have time to recover savings if you lose them. On the contrary, the older you are, the less risk you should take, in order to reach retirement age with a guaranteed income. If you want to invest in a PPR with the objective of obtaining associated tax benefits the 20% deduction for the IRS collection, and tax benefits on exit with taxation on capital gains lower than other investments, watch the operation🇧🇷 In tax terms, there are advantages of not redeeming a PPR before 5 years🇧🇷 So, if you leave your money for a period of, say, eight years, you will pay less capital gains tax compared to most savings products, whose income is taxed at 28%. If you want to invest in a PPR to monetize your savings over a period of one or two years, you should choose a PPR with a lower early redemption fee🇧🇷 Since, in this case, it is not supposed to declare the product to the IRS. The important thing is know the level of risk you want to take🇧🇷 And be aware that, in general, by investing in a riskier PPR, you can achieve a higher return, but also lose part of your capital. While if you apply the money to a safer PPR, the return will be lower and you don’t run the risk of losing your savings.

Investing in a PPR gives you access to IRS tax benefits

As we have already mentioned, one of the great advantages of investing in a PPR is having access to tax benefits. With a PPR, manages to deduct 20% of the amounts invested per year from the IRS collection, with age limits. Until the 35 yearsif you invest 2,000 euros you can deduct up to 400 euros🇧🇷 from 35 years old to 50 years oldby investing 1,750 euros you can deduct up to 350 eurosand two 50 years until retirement age, investing 1,500 euros deducts up to 300 euros🇧🇷 But know that if Redeeming your PPR in advance, outside the legal conditions, is penalized having to return the amount you received, plus 10% for each year that passed. Also read: Guide on PPR: No more doubts about Retirement Savings Plans

Attention: You can only make PPR redemptions in specific situations

in order to not be penalized when redeeming the PPR, it must be framed in specific conditionsin accordance with the legislation in force: Have over 60 years🇧🇷 To be in old-age pension🇧🇷 Long-term unemployment situation or any member of your household; permanent disability for work or any member of your household, regardless of the cause; Serious illness or another member of the household; In case of death or your spouse (if the PPR is a common asset). In this case, the value of the plan is handed over to the heirs and, if so stipulated, to the beneficiary. In case of payment of credit agreement installments secured by a mortgage on a property intended for the permanent residence of the PPR subscriber. Here, only early redemption is allowed without penalties for paying credit installments. If you want to amortize the mortgage with the PPR value, penalties apply. You should also know that, in addition to one of the above conditions, to benefit from redemption without penalties, in most cases, you need to have your PPR for more than five years and having made at least 35% of total deliveries during the first half of the term of the contract.

In 2023 there are extraordinary rules on PPR redemptions

As part of a package of measures to mitigate the effects of inflation, the Government approved a new exceptional rule (Law n.º 19/2022) which allows monthly redemptions of an amount equivalent to the Social Support Index (IAS) without penalties, until December 31, 2023. Once the measure is already in effectthe value will change from January 1, due to the increase in the IAS in 2023. until the end of December 2022, you can redeem, without penalties, 443.20 euros🇧🇷 In 2023, with the increase in the IAS, the value of PPR redemptions will be higher. Monthly, will be able to redeem, until the end of the year, 480.43 euros a month. Which is equivalent to a total of 5,765.16 euros that you can redeem from your PPR without penalty. Even if you have enjoyed the tax benefits, with this transitional measure is exempt from returning the IRS deductionand the “fine” of 10% for each year that passed, when redeeming the PPR.

The key is to build savings

Now that you know how PPRs workassociated with long-term savings, ponder if it is a good solution for your case. There are also other savings solutions🇧🇷 The decision will depend on your investor profile, needs, goals, among other factors. The essential thing is that be able to build savings🇧🇷 You can make other decisions later on, namely riskier ones that don’t put your finances at risk. But be sure to find solutions to save, even if they are adaptations of your daily life. Whether it’s 10 or 100 euros a month, saving regularly is the first step🇧🇷 In a first phase, you can even start by investing your money in a emergency fund🇧🇷 There are numerous possibilities that can help you increase your financial slack. Search, find out and make decisions. The important thing is to start and you will see that saving quickly becomes a habit🇧🇷 Read also: Is saving just stop spending?