Subscribing to a PPR is something more and more common these days. After all, there are PPR for all tastes. Some for anyone save for retirement e enjoy tax benefits without running risks. Others for those who just want to form a short/medium term savings, with the objective of early redemption. But there are also PPR where capital is not guaranteed and the possibility of earning above average is much higher. Regardless of the purpose of your PPR, you must be aware that if Redeeming your PPR before the deadline is subject to penalties.
Penalties for redeeming a PPR early vary depending on a number of factors. Since the most problematic scenario orearly redemption of PPR where the holders enjoyed tax benefits at the IRS. But even if you do not declare your PPR with the IRS, thus excluding the possibility of this benefit, there are also contractual penalties for an early redemption. And these penalties (commissions) vary according to your PPR, your contract and even when you will redeem.
However, it is normal that you have some doubts about this topic. And so, below, we explain in more detail what are the penalties for redeeming your PPR before the deadline.
Read more: Guide on PPR: No more doubts about Retirement Savings Plans
Have a PPR and enjoy its tax benefits
Retirement Savings Plans are very attractive products for anyone looking to reinforce their old-age pension or create long-term savings. This is because, unlike other financial products, PPRs entitle you to tax benefits from the IRS. There are two types of tax benefits associated with PPR: entry and exit benefits.
Starting with the tax benefits upon entry, the PPR allow deduct from the collection in the IRS declaration 20% of the amounts applied per year🇧🇷 However, this deduction has the following limits:
- 400 euros, if you are up to 35 years old🇧🇷 The 400 euros deduction corresponds to an investment of 2,000 euros.
- 350 euros from 35 to 50 years old. To benefit from the maximum deduction you need to invest 1,750 euros.
- 300 euros after the age of 50 until retirement age. In this specific case, the maximum benefit is related to an investment of 1,500 euros.
In practice, if you invest in your PPR every year (according to these rules), you can benefit from the deduction for the collection of this amount in your IRS declaration. If the maximum value is not reached, 20% applies to that amount. For example, if you are 40 years old and invest €1500 in your PPR that year, you benefit from a €300 deduction. Ie: 20% x 1500 euros = 300 euros deduction.
Also read: Is it worth declaring the Retirement Savings Plan at the IRS?
Exit tax benefits
In terms of exit tax benefits, PPRs also have advantages. This is because they benefit from lower tax rates the longer their investment is. That is, most savings products and investments are subject to a 28% taxation on earned income.
But PPRs benefit from a rate of 21.5% when redemption occurs before 5 years. However, taxation will be lower if you leave your money invested in the PPR. When you keep your money in a PPR between 5 and 8 years, benefits from a rate of 17.2% on the earnings you earned. If redemption takes place after 8 years, taxation drops to 8.6%.
Translating this into a simple example, let’s assume that over 8 years you invested 10,000 euros in a PPR. If this investment of yours generated 1,000 euros over that period, you will pay around 86 euros of taxes, if you do not meet the legal conditions for redemption. If you fulfill them, will pay 80 euros, as the minimum taxation is 8%. In another type of investment with the same values, it would be taxed at 28%, so you would have to pay 280 euros in taxes.
Also read: How much do I pay in taxes on income obtained with the PPR?
When can I redeem a PPR before the deadline without incurring penalties?
If you want to invest your money in a PPR and be exempt from any type of penalty and only be taxed at 8% on generated income, you need to fit into one of the following situations:
- Right now is over 60 years old;
- reached your old-age pension;
- Are you in a situation of long term unemployment🇧🇷 The same applies if there is a member of your household in this situation.
- In case of death of the subscriber or his/her spouse (in case the PPR is a common good). The value of the PPR is delivered to the heirs and, if so stipulated, to the beneficiary.
- if you are permanently unable to work, regardless of the cause. It applies if the same situation happens to any member of your household.
- there is one serious illness or someone else in your household is suffering from a serious illness;
- If you need pay credit agreement installments secured by a mortgage on a property destined for the own and permanent housing🇧🇷 It should be noted that only the payment of credit installments gives the right to early redemption without penalties. That is, you cannot amortize your credit with the PPR without suffering penalties for early redemption.
However, it should be noted that certain criteria must be met in order not to apply a penalty for redeeming the PPR before the deadline. For example, in most situations, you need to have your PPR for more than 5 years. Also, I need at least 35% of total deliveries have been carried out during the first half of the term of the contract.
Use: If the PPR is a common asset (couple’s property regime), if one of the subscribers is in one of the situations listed, early redemption without penalties is possible. As long as it meets all the other criteria mentioned.
What if I redeem my PPR after enjoying tax benefits?
Although no one is required to hold a PPR until retirement age, when it does get tax benefits, penalties for early redemption can be quite heavy. And why does this happen? Because by not meeting the legal requirements to redeem your PPR without penalties and benefit for a few years from deductions to collection, you may have to return thousands of euros to the State.
That is, in legal terms, your penalty involves returning to the State the amounts deducted from the IRS where you obtained the tax benefits upon entry, plus a penalty of 10% for each year. Imagine you redeemed your PPR at age 30, after having invested 2,000 euros and deducted 400 euros from the collection. If you only got this benefit in one year, you would have to return the 400 euros but 10%. That is, 440 euros.
Bearing in mind that there was an investment of 2,000 euros, this penalty might not fully compensate for the income from your PPR. Therefore, it is essential think carefully about the purpose of your PPR before signing it. If your objective is to carry out a early redemption in the short/medium term, it is best not to enjoy the tax benefits of a PPR🇧🇷 In this way, it will only be subject to the fee associated with the early repayment stipulated in your contract.
I never got tax benefits. Am I penalized for redeeming my PPR before the deadline?
For those who subscribe to a PPR with the aim of monetizing the money for a shorter period of time, it is normal to forego tax benefits, since you will have to return this amount to the State with an increase of 10%. However, this is not the only penalty that exists for redeeming a PPR before the deadline.
Before subscribing to a PPR it is necessary to look carefully at the contractual conditions and whether early redemption is subject to fees and how these are applied. As a rule, most PPRs are subject to application of an early redemption fee. But the values and deadlines will vary from bank to bank or from insurer to insurer.
To get a more concrete idea, you can find a PPR with a fee for early redemption which starts at 1.5% in the first year, drops to 1.2% in the second year, to 0.75% in the third and fourth, and in the fifth to 0.5%. But subsequent commissions may continue until the end of the term established for the PPR or be exempt from paying this commission.
In the end, it all depends on what is stated in the contract. Oftentimes, the advantages and disadvantages of many PPRs include the commissions applied. And a PPR that “offers” higher yields, may not be the most advantageous with certain commissions. This is an essential point to consider before taking out a PPR.
On the ASF page, the Insurance and Pension Funds Supervisory Authority can find several retirement savings plans and the commission charged on each one. However, this does not invalidate the fact that you should read your contract carefully so as not to have an unpleasant surprise if you want to redeem your PPR before the deadline.
Also read: Learn how to choose your PPR
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