Up till now there was the Perco, the PERP, Article 83 and Madelin schemes, … Since 1 October, there is now the PER retirement savings plan (or Plan d’Epargne Retraite). Just another acronym? Not really, because this latest arrangement, born out of the Pacte Law, is designed to wrap up all existing retirement savings plans. The aim is make saving for retirement more attractive, easier and more understandable. Will these new features convince employees to take a closer look at this side of wages policy, often misunderstood?
Understandability: one PER but 3 compartments…
The birth of the PER heralds the end of a large number of arrangements with their disparate terms and conditions which made retirement savings so difficult to understand. All of them will be merged into a single arrangement consisting of three closed compartments, which differ depending on the origin of the savings. An employee’s voluntary contributions will be lodged in the first compartment. The second will receive the employer’s “random” payments (profit-sharing, participation or extra contributions). The third is for mandatory payments such as contributions deducted from wages (e.g. Article 83). Each compartment functions in accordance with a different set of rules. This is the main difficulty in comprehending this new retirement savings arrangement.
Availability: easier lump-sum withdrawals
With the PER, all sums paid into the first two compartments can be taken as a withdrawal, on retirement, in the form of a lump sum or a life-long annuity, depending on the saver’s choice. Even better. Several possibilities for early withdrawal have been provided for, particularly for purchasing one’s principal residence or on expiry of rights to unemployment benefits.
Pension plans that only ended in a life-long annuity often gave the saver the impression that their retirement assets had been taken away and were no longer available. Things are much more flexible with a PER. The saver keeps control of his/her savings which can, in certain circumstances, help them through difficult times or help them buy a property.
Portability: employees keeps track of their savings
Depending on career changes, the employee can easily transfer their savings from one PER to another. The product of group savings is no longer attached to the employer. It follows the employee much more easily. The terms and conditions for portability are strictly laid down: the transfer fee is limited to 1% of vested rights and is nil after the first 5 years.
Taxation: more advantageous than life insurance?
With the PER, the various types of profit-sharing bonuses remain tax-free at the outset but subject to capital gains tax at 17.2% when withdrawn. Voluntary contributions paid by the employee into the first compartment are deductible from income tax. Obviously, they are taxed at the then current rate on withdrawal, and capital gains are taxed at 30%. In other words, the PER lets you delay taxation and capitalise on those tax savings. Something which is nearly always a win-win strategy.
There is no shortage of arguments to change the way employees look at retirement savings, even if the transition period will force everyone to get their mouth round new acronyms. Explaining that the PER replaces the PERCO might be a difficult pronunciation exercise. It is up to employers together with their consultants to go into training mode so that this multi-function tool can be better understood and appreciated by the workforce.