The True Impact of Voluntary Retirement Savings in Mexico

Most of the Mexican population thinks they will not have enough money for their retirement. According to the latest National Institute of Statistics and Geography survey (INEGI, they expect to support themselves with other means in addition to their pension, such as continuing to work (71 percent), government contributions (57 percent) and money from their family (50 percent). On the other hand, the Organization for Economic Cooperation and Development (OECD) has presented an objective of reaching a 70 percent replacement rate in Latin America, i.e. the relationship between the pension and the worker's income level.

Today at most, 6.5 percent of a Mexican salary goes into the mandatory pension system in Mexico, known as AFORE. However, the reasonable assumption of returns on such investments means the replacement rate will be less than 30 percent, according to the assessment from OECD. (That's pretty far from the ideal replacement rate when they reach retirement, which is 65 years old).

In simple terms: the savings in the AFORE are not enough to ensure a good pension in Mexico. Also, due to the high rates of informal employment in Mexico, there is a high number of people who do not even have an AFORE. That is why voluntary savings alternatives for retirement take on a special relevance, as a means to start preparing early for the needs that will arise in the future.

Voluntary Saving Options in Mexico There are several types of voluntary savings accounts to invest in and increase the future retirement pension in Mexico. Among them are voluntary cash deposits in the Afore, private pension plans, plans with life insurance companies, and finally the Personal Retirement Plan (better known as PPR for its acronym in Spanish).

These types of accounts have quite useful fiscal or tax benefits. However, the PPR alternative, I think, has the most flexibility. This kind of account allows both full-time employees and freelance workers to save additional money in conjunction with the mandatory contribution, without even having the need for an AFORE, or an employer.

The other great advantage of a PPR is that it is a savings tool with a wide range of offers in the market, so that each person can choose their own PPR according to their specific needs or budget. That is, you’d have all the freedom to choose according to what suits you best. In this way, the PPR is flexible and can be well adapted to the extent of your needs.

If you are looking for a voluntary savings account for your retirement, then you should explore the options and choose a PPR you like. How to Find a Good PPR What I recommend when choosing a retirement plan is to select a simple and tailored alternative. Mainly choosing an option that does not have mandatory or recurring minimum amounts, does not have early withdrawal penalties, and is very clear about the cost and size of the commissions. In addition, especially for generations comfortable with digital media, I advise opening accounts that are easy to open and 100 percent digital. And finally, the tax benefits with a PPR are many, and they are important to understand.

Among the most popular is the tax advantage of a PPR, since up to 10 percent (capped at 5 UMAs, which this year is MX$175,505.40) of your yearly income that you contribute to the PPR can be deducted from the total income on which your taxes are calculated each year. For practical purposes, it means that the total amount of the contributions you make in a year will be subtracted from the income on which you paid income taxes in that same year, and by deducting taxes, you have the opportunity to claim money in your favor in the next year. Another great tax advantage of PPRs is the tax exemption on capital gains and dividends. Both benefits, combined, impact greatly in favor of your assets and wealth, and will help increase your pension by up to tens of thousands of pesos at the time of your retirement.

In short, it seems to me that there is a need to improve access and the democratization of these important tax benefits for retirement savings, encouraging citizen and financial knowledge around these types of accounts, so that they can begin to be used much more, and thus, the future pensions of millions of Mexican men and women will be increasingly better.

At Fintual, we believe in democratizing access to wealth management services in Latin America, and offering a retirement savings product in Mexico was essential to us. We recently launched a 100 percent digital Personal Retirement Plan (PPR) for our clients, with no minimum amount or additional insurance, as well as having one of the lowest commissions on the market.