Do you think that the value of 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) that provide tax benefits both in the accumulation and decumulation phases, encouraging savings.

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

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

• If you make deliveries for both types of products, PPR and FPA, this tax benefit is cumulative and cannot, as a whole, exceed the limits described;
• This tax benefit is not granted to subscribers after retirement;
• PPRs, unlike FPAs, allow participants to make reimbursements outside of the established conditions, guaranteeing constant liquidity for this product. However, it should be noted that, in this refund situation, you are obliged to return the tax benefit that you may have enjoyed in the year of deliveries, with an increase of 10% for each year.
• You are also obliged to return the tax benefit with a 10% increase for each year, in the case of refunds within the conditions provided for in the law for deliveries that have not yet been made for five years.

If the tax benefit in the accumulation phase presents risks of loss with penalty, the tax benefits in the decumulation phase are quite attractive when compared with other financial products.

The conditions established by law that allow for the reimbursement of PPRs are retirement due to old age or over 60 years of age of the participant or the Participant's Spouse when the PPR is a joint asset of the couple and payment of installments of credit contracts guaranteed by a mortgage on a property intended for the participant's own and permanent residence.

In these three repayment conditions there is a requirement to remain for five years, except if the first delivery is more than five years old and you have invested more than 35% in the first half of the contract.

Reimbursement of PPRs is also possible in cases of long-term unemployment, incapacity to work or in cases of serious illness of the participant or any member of their household.

If you make a PPR refund under one of the conditions described and have invested before 2006, at the time of refund, the income will be taxed at a reduced rate of 4%, while investments made from 2006 onwards will have a withholding tax rate on the income obtained of 8%.

We verified that the reduction in the tax benefit in the refund is not retroactive. We can guarantee, at the time of contribution, the rate to be applied to the income obtained in the refund, since these are guaranteed for the years in which the law is in force.
In PPRs, the possibility of reimbursement outside of any of the conditions previously described is also foreseen, 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 in the first half of the contract, this taxation is reduced to 17.2% for contracts lasting more than five years and less than eight years and to 8.6% for contracts lasting more than eight years.

As for Open Pension Funds, these can be reimbursed when the Participant is in a situation of retirement due to old age, disability or early retirement and also in pre-retirement. The possibility of reimbursement is also foreseen 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 granted at the time of 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.