Do you think that your pension alone will be enough to maintain your standard of living throughout your retirement years?

November 2024 by Mónica Morais

In Portugal there are products such as Retirement Savings Plans (PPR) and Open Pension Funds (FPA) which offer tax benefits both during the accumulation phase and during the de-accumulation phase, encouraging savings.

During the accumulation phase, these products offer a tax benefit which consists of the possibility of deducting 20% of the amounts invested from the IRS, with a limit of 400, 350 or 300 euros, depending on whether the participant is under 35, between 35 and 50, and over 50 on January 1st of the year in which the investment is made, and according to the taxable income bracket.

When taking advantage of this tax benefit, several points should be taken into consideration:

• If you deliver both types of products, PPR and FPA, this tax benefit can be combined and cannot exceed the limits described;
• This tax benefit is not granted to subscribers after retirement;
• PPRs, unlike FPAs, allow the participant to make repayments outside the established conditions, guaranteeing this product constant liquidity. However, it should be noted that, in this refund situation, you are obliged to return the tax benefit you may have enjoyed in the year of the payments, with a 10% surcharge on each year.
• You are also obliged to return the tax benefit with a 10% increase for each year, in the case of refunds under the conditions laid down in the law for payments for which five years have not yet elapsed.

If the tax benefit in the accumulation phase presents risks of losing it with a penalty, the tax benefits in the deaccumulation phase are quite attractive when compared to other financial products.

The conditions laid down by law that make it possible to reimburse PPRs are retirement on old age or over 60 years of age for the participant or the Participant's Spouse when the PPR is a joint asset of the couple and payment of installments on credit agreements guaranteed by a mortgage on a property intended for the participant's own permanent home.

In these three repayment conditions there is a five-year permanence requirement, unless the first delivery is more than five years old and you have invested more than 35% in the first half of the contract.

PPRs can also be reimbursed in cases of long-term unemployment, incapacity for work or serious illness of the participant or any member of their household.

If you repay the PPR under one of the conditions described and invested before 2006, the income will be taxed at a reduced rate of 4% at the time of repayment, while investments made after 2006 will have a withholding rate of 8%.

We have verified that the reduction in the tax benefit on the refund is not retroactive. We can guarantee, at the time of the contribution, the rate to be applied to the income obtained in the refund, since these are guaranteed for the years of verification of the law.
PPRs also offer the possibility of reimbursement outside of any of the conditions described above, providing total liquidity at any time. Even so, these refunds offer tax advantages when taxing income over other financial products, since a tax rate of 21.5% is applied to income. In cases where more than 35% of the investment is made in the first half of the contract, this tax is reduced to 17.2% for contracts that are more than five years old and less than eight years old, and to 8.6% for contracts that are more than eight years old.

As for the Open Pension Funds, these can be reimbursed when the Participant is in old-age retirement, invalidity or early retirement, and also in pre-retirement. There is also the possibility of reimbursement in cases where the Participant is in a situation of long-term unemployment, incapacity for work or serious illness.

Upon reimbursement, Open Pension Funds do not require a five-year unavailability period after their delivery. Therefore, in retirement, you can invest in these products, repaying them at any time and benefiting from an 8% income tax. Since the Tax Benefit attributed at the time of the contributions does not occur after retirement, there is no penalty for not maintaining the investment for a period of five years.

We can say that Open Pension Funds have immediate liquidity after retirement.