In efforts to encourage saving for retirement, Colombia's government enacted Decree 2250 last December, setting down a process for employees to make voluntary contributions to the country's compulsory pension fund - and to make it more enticing, there are tax benefits attached.
By allowing voluntary contributions through payroll, pre-tax, employees can decrease the earnings on which their tax is assessed, while increasing their pension pot for retirement. It increases the accumulated capital needed to take the pension, even if the employee takes it early.
The contributions are now considered exempt income, not earnings constituting income or occasional gain as they were prior to the Decree. However, to be eligible for the tax break, the contributions cannot exceed 30% of monthly income, nor 40% of the sum of deductions and other exemptions. There are also monthly and annual thresholds set by fiscal rules.
In addition, voluntary contributions to the compulsory pension fund retain the minimum profitability established for funds as long as they are in the portfolio of investment chosen by the employee (be it conservative, moderate or major risk) - that is, there is a guaranteed minimum payout. This is in contrast to any voluntary pension fund chosen by employees, whose profitability will depend on market conditions; while high profits could be achieved, these voluntary pensions could also generate large losses.
How to benefit from the tax break
It's important to repeat that: to benefit from the tax break, any voluntary pension contribution must be made to the compulsory pension,...