We have now had a third 10% AFP withdrawal agreed. This means that anyone can access up to 30% of their fund and use this money for any purpose they desire. We are also fast approaching the deadline of 30th of July 2021 to submit the first withdrawal request or lose the opportunity .
Those with very small pension funds can access up to 100% of their AFP and those with large funds could access up to 450 UF (13.281.192 CLP at time of writing).
So – what should you be doing about this news?
Foreign Residents in Chile:
If you are a foreign national that would be keen to extract your whole AFP fund at some stage – it appears to make sense to withdraw all 3 tranches of your fund now, even if you are not under financial pressure.
The first and third withdrawals are free of tax, the second withdrawal will be taxed as income if you earn over 18m CLP per year (official reference is 30 UTA-unidades tributarias anuales). As laws stand, full AFP withdrawals for foreign people under law 18.156, normally when leaving Chile, are taxed as income. Paying tax on just 10% of the fund now is likely to mean less tax than if you have to pay it on the full 80% of the residual fund in the future.
Additionally, the steps required to obtain these funds is much ‘lighter’ than the standard process, which is becoming ever more challenging. Taking these factors into consideration, the withdrawal of all three tranches now would seem to be the sensible course of action.
However, it is important to acknowledge that these savings were intended to help provide security in your financial future and so should be used accordingly.
You could clear high interest credit card debt or loans, add to your “emergency fund” savings or place them in a more relevant long term savings or investment account.
As a foreign person living in Chile you have the option elect to make your pension contributions to a more flexible international pension. It could be a great opportunity to review your overall financial planning and where the Chilean AFP sits within that. This article we wrote gives further information on the options available to foreign people living in Chile:
If you would like help on this topic or in building your own personalised financial plan then please complete the below form to request a consultation.
Chilean Nationals and foreign people retiring in Chile:
The question is a bit trickier for Chilean nationals. If you need this money to support yourself and your family through difficult times, you should of course access funds for that purpose. If not, you should very carefully consider the impact that making a withdrawal could have on your long term pension planning.
This money is intended to help provide security in your financial future. If you do decide to take the withdrawal, it is important to use it constructively.
You could use it to reduce short term debt such as loans, or credit and store cards to allow yourself room to make a proper long term plan. You could add it to your “emergency fund” savings or place it in an alternative, more flexible, tax beneficial pension account such as APV or Cuenta 2.
This would make sense in the case of the first and the third withdrawals as they are not taxed. It does not make financial sense to take the second withdrawal as you would be taxed on this as income. The only reason to access the second withdrawal is if you are under significant financial strain or have little or no faith in the future of the AFP system.
Most importantly, try to resist the temptation to spend it on non-essential items that will not provide any obvious financial benefits.
Before making a withdrawal, you must first ask yourself – am I disciplined enough to use this money positively, or will I be tempted to spend it?
The process is actually very simple. You need to access your AFP website and follow the basic instructions. You are able to make all three withdrawals or a combination of them in one visit. Money can be deposited in your local Chilean bank account or if you already left Chile you can choose international bank deposit via Transferwise (without any transfer fees applied to you).
If you would like help on this topic or in building your own personalised financial plan then please complete the below form to request a consultation.
