ith the inversion of the demographic pyramid (due to increased life expectancy and decreased birth rate), the social security system is precarious. Therefore, it is important for Portuguese citizens to adopt savings and investment habits as early as possible to complement their retirement.
One of the most commonly used instruments for this purpose is the Savings and Retirement Plan, or PPR, mainly due to its versatility - it caters to both conservative and riskier investment profiles - and the associated tax benefits.
However, before subscribing to any savings and investment instrument, it is crucial to understand the instrument well and clarify any doubts. After understanding what is important to know about PPRs, it's necessary to explore the available options in the market and make a thoughtful evaluation based on some important aspects.
In this article, we explain the key factors to consider when choosing a PPR.
Goal
Like any savings and investment instrument, setting a goal is essential. What is the purpose of subscribing to a PPR? Is it a long-term or medium-term goal? What is the investment amount, and what about additional contributions? How frequently will the contributions be made?
Whether it's to take advantage of the entry (or exit) tax benefit or for a specific purchase goal (education, a car, or a home), it's crucial to think about and define the PPR's objective. With the goal in mind, making the right choice becomes easier.
Minimum and Maximum Investment Limits
PPRs have minimum investment limits, which vary widely. Similarly, there are PPRs with maximum investment limits, also variable.
Depending on the available amount for establishing the PPR, subsequent contributions, and the investor's goal, some PPRs may be ruled out.
Investor Profile and PPR Risk
There are investment instruments for all types of investors. To make the right choice, it is necessary to first understand the investor's profile and then see which instruments align with it.
Beliefs and experiences influence each person's investor profile, characterised by their risk tolerance and how comfortable they are with the possibility of losing invested money. According to the National Financial Training Plan (PNFF) portal in Portugal, investors fall into one of these four profiles: conservative or prudent, balanced or moderate, dynamic, and bold. Conservative or balanced investors seek instruments with capital guarantee, while dynamic or bold investors are willing (and comfortable) to lose part or all of the invested capital.
Regarding the instrument itself, there are different types of PPRs, as mentioned in this article. PPR insurance policies have guaranteed capital, while PPR funds do not. The latter have their risk level represented by a numerical value ranging from 1 to 7, where 1 corresponds to low risk, and level 7 corresponds to high risk.
Once the analysis of the investor's profile and the risk of available instruments is done, simply cross-reference the information to find the best option. A moderate investor will probably opt for a PPR insurance policy, while a bold investor may easily choose a PPR fund with a risk level of 7.
Age of the investor
The age at which a PPR is subscribed is important since, depending on the remaining time in the "active life," there is less or more ability to recover potential capital losses.
For younger investors, investing in higher-risk instruments is more "comfortable" since, in the event of capital loss, there is still room to make investments that can offset that loss. For an investor closer to retirement age, it is more prudent to invest in safer instruments, as there is not enough time to correct potential losses.
Although this is commonly shared advice, it is up to the investor to decide what is best for them and what aligns with the defined goal.
Composition of assets and profitability
PPR insurance policies are managed by insurers, and PPR funds are managed by fund management companies. When an investor subscribes to a PPR, they are thus delegating the management of part of their assets to third parties, so it is important to stay informed about the insurer or fund management entity.
The composition of the investment portfolio is another crucial point to consider. Despite directly impacting the risk of the PPR, as mentioned earlier, the assets in the portfolio deserve extra attention. A PPR's assets can include bonds (government or private debt), stocks, and units of participation in investment funds, among others, which determine whether the PPR has higher or lower risk and profitability.
In addition to knowing the values in which the fund is invested, it is interesting to know the areas or sectors of investment. In the case of an investor hesitating between two PPR funds, with the same stock participation value, the sector of activity of the companies (energy, technology, consumer goods, etc.) can be the deciding factor, as it can impact the fund's profitability depending on the economic situation.
Regarding profitability, although past returns are not a guarantee of future returns, it is essential to check the PPR's performance in recent years, always taking into account the socio-economic situation at each moment, which can justify positive or negative results. In addition to the economic situation, the entity responsible for managing the PPR also impacts its performance. While not decisive, it is important to consider the past profitability of a PPR when choosing this investment instrument.
Commissions and associated costs
As important as checking the past profitability of the PPR and potential gains is knowing the commissions and associated costs. Sometimes, associated commissions can negate potential gains, so attention is needed at the time of choosing a PPR.
PPR management commissions may include subscription, deposit, management, and redemption fees.
The subscription fee applies to the initial invested amount and all subsequent reinforcements. In the case of a PPR with a 1% subscription fee, if the initial amount available is €1,000, €10 will be immediately deducted, and the initial invested amount will be €990.
The deposit fee is used to remunerate the entity holding the securities and is reflected in the unit participation value, so the presented profitability is net of this value.
The management fee is deducted from the PPR's profitability and is used to pay for the services of the management entity. Like the deposit fee, the management fee is typically reflected in the unit participation value of the PPR.
The redemption or refund fee is a fee paid to the brokerage or financial institution, applied to the redeemed value (invested or not, depending on the contractual conditions of the PPR).
It is possible to transfer money from one PPR to another. A PPR fund can be transferred to another PPR fund or to an insurance PPR without costs. In the case of insurance PPRs, a transfer fee of up to 0.5% of the transferred amount may be charged.
After evaluating all these points, the number of options tailored to each investor becomes more limited, making the task of choosing a PPR and preparing for the future much simpler.
