As international financial planners, we spend a lot of time helping our clients understand the best way to secure a comfortable retirement. Rising mortality and government belt tightening present obvious challenges to traditional retirement planning. This 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 all of our international clients based in Chile is the choice of whether to contribute to the Chilean Pension system of AFP, APV and “Deposito Convenido” or to make their own provision internationally. While the answer to this is different for everyone, it is clear that most people do not fully 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 is 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). If you are a foreign resident with “Permanencia Definitiva” you still qualify as you are not a Chilean National.

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) Your employment contract must state that you are making your own provision for old age, health, disability and death (“enfermedad, invalidez, vejez y muerte”) outside of Chile. If it is not in your existing contract you can always add an annex to include this clause. Most AFP´s will insist that this clause was in all the employments contracts you had in Chile.

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 can view the actual law itself on this link:-
https://www.spensiones.cl/portal/institucional/594/w3-article-12780.html

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 AFPs rejecting withdrawal requests and funds being left behind when the individual leaves Chile.

2) I don´t have a choice, I have to pay into the AFP

Again, this could be true in individual situations. The final say on this will rest with your employer as they are the ones that are legally obligated to collect your social security payments from your pay and forward them to the relevent parties. Your employer would need to be engaged so they understand your options. They also have to ensure that your work contract has the correct wording as mentioned above.
If you comply with the four requirements prior to arriving in Chile, you can actually avoid joining the AFP at all and opt out from day one. On the other hand, if you are already contributing to the AFP, you can still choose to leave the system at any time.

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 boletas to pay into statutory pension systems. New laws have since removed the possibility for the self employed to opt out of AFP payments as well as other mandatory deductions. The implementation period has been something of a mess and clarity is hard to come by, however there is a useful summary video that you can watch here:-

https://www.chileatiende.gob.cl/fichas/12016-cotizacion-de-trabajadores-que-emiten-boletas-de-honorarios

and a further useful page here:-

http://www.safp.cl/portal/institucional/594/w3-propertyvalue-9913.html#recuadros_articulo_4130_5

One of the key elements to the law that allows foreign technical workers to opt out of AFP payments (ley 18.156) is that there must be appropriate wording 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.

4) My AFP has nothing to do with my ISAPRE or Fonasa

This is a very common misconception – in some cases even HR departments do not properly understand the relationship between AFP and ISAPRE! In case of sick leave, for most people, an amount of up to 80.2 UF per month (2020) of an employee’s salary is protected via payment from ISAPRE. What many do not understand is that this payment is actually also dependent on whether the individual is currently making AFP contributions. If you have not made your last six AFP payments or indeed do not have an AFP, the ISAPRE provider will not make this payment so your salary may be reduced.

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. Opting out of the AFP can put sick pay and maternity pay at risk.

5) There are no taxation 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 qualifying international provisions for health, retirement, death and disability are not taxable up to a limit of 80.2UF each month (2020). When payments are sent through your staff payroll, they are deductible from your gross wage, giving you tax relief at your highest marginal rate. This means that a high earner can get 35% tax relief on contributions to suitable international plans of up to 80.2 UF per month ( approx $2,700 USD at 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.