“Top 5 Myths about the Chilean AFP System” by Chris Emmott, Financial Planner and ExPat Financial Advisor
Financial planning expert and ExPat financial advisor, Chris Emmott of EBG International, briefly examines the top 5 myths about the Chilean AFP system…
As international financial planners, we spend a lot of time helping our clients understand the best way to secure a comfortable retirement. Just last month, the World Economic Forum published a paper titled, “We’ll Live to 100 – How Can We Afford It?” The paper focused on the ever-growing challenges of global retirement planning, something that is made all the harder when an individual spends large portions of their working life moving between countries and pension systems.
One thing that affects our international clients based in Chile is the choice of whether to contribute to the Chilean system of AFP, APV and “Deposito Convenido” or to make their own provision internationally. While the answer to this is different for everyone, most people do not understand their options and the impact their decisions may have on their long-term financial security. With that in mind, here are the five biggest misconceptions I encounter when talking to people about this subject:
1. As A foreigner, I am entitled to take my money out of the AFP when I leave Chile
This statement can prove to be correct but your ability to retrieve your funds are based on a lot more than your nationality. There are four main requirements for someone to be able to retrieve their funds from the AFP 1) You must be a foreigner (i.e. no Chilean passport/citizenship). Permanent residents qualify as they are not Chilean Nationals. 2) You must be a “Technical worker”. To qualify as a foreign technical worker you must be able to present a duly legalised copy of a university degree or a professional qualification of similar standing. 3) You must have an annexe in your employment contract that states you are making your own provision for old age, health, disability and death and 4) You must be able to produce a duly legalised certificate to demonstrate that you are making provision for these four areas outside of Chile. You should also remember that funds removed from the AFP are taxed as income.
You may hear from friends or colleagues that this process is a straight forward one but this is rarely true anymore. In recent times the “Superintendencia de Pensiones” has taken a backseat on this topic and allowed the AFP companies to interpret legislation as they see fit. This is leading to ever increasing cases of funds being left behind in AFPs when the individual has left Chile.
2) I don´t have a choice, I have to pay into the AFP
Again, this statement could also prove correct as the final say on this will rest with your employer. That said, so long as you can comply with the three requirements to retrieve your funds, you can actually avoid joining the AFP in the first place. Your employer is the one that is legally obligated to collect your social security payments from your pay and forward them to the relevant parties, so they need to accept and understand your options. They also have to add the annexe to your work contract as mentioned above. Then, of course, there is the situation for the self-employed…..
3) As a self-employed person issuing “boletas”, I do not have to pay into AFP
This used to be true as there was no obligation for those working with personal invoices to pay into statutory pension systems. Law 20.255 (2008) introduced measures to gradually bring the self-employed into mandatory AFP contributions. There was a gradual introduction with the option to opt out and the original deadline for mandatory payments has been delayed. From the 1st of January 2018, there should no longer be the possibility to opt out of AFP payments and the self-employed will also need to pay deductions for health care. You can read a summary at the “Superintendencia de Pensiones” website HERE.
One of the key elements to the rule that allows foreign technical workers to opt out of AFP payments (ley 18.156) is that there must be an annexe in the individual’s employment contract. Since a self-employed individual issuing “boletas” does not have an employment contract, it is difficult to see how a foreign person that earns their income from “boletas” can legitimately avoid AFP payments. This is an evolving situation and the answer remains unclear, although the inclusion of SIN EXCEPCIONES in bold type on the above link is not encouraging for those looking to opt out
4) My AFP has nothing to do with my ISAPRE or Fonasa
This is a very common misconception – even most HR departments do not properly understand the relationship between AFP and ISAPRE! “Licencia Medica” (statutory sick pay) is paid at a level of up to 75.7 UF per month. This is paid to individuals by their company and their company claims this through the ISAPRE provider. What many do not understand is that this payment is actually dependent on the individual making AFP contributions. If you have not made your last six AFP payments or indeed do not have an AFP, no money will be forthcoming. This is quite a complex area and anyone that is planning to opt out of AFP payments should discuss this area with their HR department. It should also be noted that maternity leave is paid in the same manner.
5) There are no tax benefits to opting out of AFP but I get tax relief if I stay in and make APV payments
Most people do not realise that payments to an international provision for health, retirement, death and disability are not taxable up to a limit of 75.7UF each month. When payments are sent through your staff payroll, they should be deducted from your gross wage, giving you tax relief at your highest marginal rate, in a similar way as AFP/APV contributions. This means that a high earner can get 35% tax relief on contributions to suitable international plans of around USD$3,000 per month at the time of writing! It should be noted that if you are receiving tax relief on international payments and want to maintain an ISAPRE, this payment would then come from net earnings.
Of course, the Chilean AFP / APV system is a very broad topic, and there is no one right answer in how to approach retirement planning. What is important is to spend some time with an independent financial advisor who can help you understand all of your options – with its respective pros and cons based on your individual circumstance.
About the Author:
Chris Emmott is a founding partner of EBG International, the only internationally regulated financial planning firm in Chile. They provide tailor-made financial solutions developed through comprehensive personal analysis and an in-depth working knowledge of both Chilean and International financial planning matters. Chris is from the United Kingdom where he qualified as a regulated financial planner through the Chartered Insurance Institute (CII) in 1999. Chris worked in the City of London before moving to Chile in 2007 and has been providing financial planning assistance to clients ever since. As part of his commitment to personal development, Chris has achieved further professional qualifications from the CII, CISI (Chartered Insurance and Securities Institute) and STEP (Society of Trust and Estate Practitioners).
For more information, or to schedule a private consultation (either in person or via Skype) with Chris Emmott, visit the EBG International website or call Chris directly at (56) 99 234 2617.
Don’t Miss Out on our Many Activities Organized for the Discover Chile Community!
CLICK HERE to sign-up and start receiving the ‘Discover Chile News Bulletin’ directly to your in-box, and never rely on word-of-mouth or your Facebook newsfeed again! CLICK HERE and take 20 seconds to enter your name and email address. We promise NEVER to share your email address with ANYONE, and we promise never to send out more than two bulletins per month. You may quickly and easily unsubscribe anytime.
If you’re an ExPat living in Chile or are travelling to Chile for business or pleasure, join one of the largest English-speaking communities on Facebook and exchange helpful entertainment and travel tips with others while enjoying special offers and preferential treatment by participating restaurants, vineyards and other local businesses to make the most of your trip to Chile!
Si desea atraer turistas y extranjeros a su negocio, contacta a Penny Ortega en Discover Chile por un periodo de prueba sin costo o llene nuestro formulario de solicitud de inscripción para unirse a la comunidad Discover Chile como Embajador Corporativo
Attract tourists and ExPats living in Chile to your business establishment and contact Penny Ortega at Discover Chile for a free trial or fill out our online form to join the Discover Chile community as a Corporate Ambassador
(56) 22-907-8944 ; (56) 96-365-7602