Taxwise Or Otherwise
By Marvin Madrigalejo and John Ian Keng
Many of us look forward to retirement — the phase of life where we enjoy life and step away from the usual routines and responsibilities. However, in the Philippines, this dream can sometimes feel elusive. The reason is simple: the mandated retirement pay, and the SSS pension may not suffice for a comfortable life.
Under Republic Act (RA) 7641, or the Philippine Retirement Law, private-sector employers without sponsored retirement plans must provide retirement pay to qualified employees. This pay is equivalent to half a month’s salary for every year of service (with a fraction of at least six months being counted as one whole year). To qualify, employees must be between 60 to 65 years old, and must have served for at least five years with the same company. Based on the Department of Labor and Employment’s (DoLE) Handbook on Workers’ Statutory Monetary Benefits, “half a month” is equivalent to 22.5 days, which represents the typical number of working days in a month. Effectively, it is one month’s pay per year of service.
Consider this scenario: an employee with a monthly salary of P45,000 upon retirement, having worked for 20 years, would receive approximately P900,000 as a one-time lump sum upon retirement, plus an SSS pension of P6,548 monthly. At first glance, this might seem substantial. Before retirement, the employee’s net take-home pay after taxes and contributions might be closer to P40,000. Compare this to a P6,548 pension, and the monthly shortfall is about P33,452. Even if we assume modest retirement expenses estimated at P20,000 a month for essentials like food, utilities, and basic healthcare, the gap is considerable. The one-time lump sum on retirement could be depleted in just five to six years — and that’s without factoring in inflation and medical emergencies. Many retirees also continue to support their families post-retirement, and, thus, the financial strain becomes even heavier.
With average life expectancy of around 72 years, an individual’s retirement phase could span 15 to 20 years — a long time to rely on a small pension and a one-time payout. This scenario underscores the need for early and proactive preparation for retirement. For companies, providing a better retirement package presents an opportunity to attract talent; it is not just a compensation benefit — it is a strategic advantage. A strategically well-designed employer-sponsored retirement plan can bridge the gap between what the SSS provides and what retirees need. It helps reduce old-age poverty, minimizes dependency on family support, and positions companies as employers of choice.
Another law, RA 4917, allows companies to establish private, tax-qualified retirement plans for their employees. These plans enable companies to make tax-deductible contributions while offering tax-exempt benefits to qualified employees, provided certain criteria are met. To qualify, the retirement plan must be reasonable, permanent, and registered with the Bureau of Internal Revenue (BIR). Under Revenue Regulations No. 15-2025, or the Revised Private Retirement Benefit Plan Regulations, retirement plans duly approved by the BIR as evidenced by a certificate of tax qualification for tax exemption (Tax Qualified Plan) are entitled to several incentives, including exemptions from income tax and withholding tax as follows:
(1) Exemption from income/withholding tax of the retirement benefits and all amounts received by the employees on account of their retirement;
(2) Exemption from income/withholding tax of the income derived by the retirement fund from various investments;
(3) Tax deductibility of the contributions made by employers to the retirement fund:
(a) contributions during the taxable year to cover the pension liability accrued during the taxable year up to the extent of the normal cost; and
(b) contributions during the taxable year in excess of the Normal Cost but only if such amount has not been claimed as deduction in previous years, and this must be apportioned in equal parts over a period of 10 consecutive years beginning with the year of contribution.
In order to avail of the tax incentives/privileges above, with respect to Retirement Benefits received by qualified employees, the following requisites must be met:
(1) The Retirement Plan must be reasonable as determined by BIR;
(2) The employee must have been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of retirement; and
(3) The employee must not have previously availed of the tax exemption under a retirement benefit plan of the same or another employer.
Why does this matter? RA 4917 provides companies with the legal and financial framework to create structured, sustainable retirement programs that can significantly impact the quality of life of their retired employees. Beyond the statutory retirement pay, companies can explore implementing defined benefit plans, and defined contribution plans, like provident funds, profit-sharing, or stock bonus plans. Such benefits offer predictability and security for employees and align their interests with company success. Furthermore, hybrid plans, combining features of both benefit and contribution plans, offer flexibility for both employer and employee.
Offering enhanced retirement benefits is more than compliance — it’s a strategic move. With the average SSS pension currently around P6,000 to P7,000 per month, far below living costs, especially in urban areas, competitive retirement benefits attract and retain top talent. They also boost morale, loyalty, and productivity, and reduce turnover and recruitment costs. Companies show genuine care by supporting employees through their working years and beyond, strengthening their reputation.
Importantly, a written retirement plan isn’t just a formality — it’s a necessity. It ensures clarity on eligibility, contributions, and benefits, prevents disputes, and guarantees fairness. Such a plan must be permanent, specify coverage and funding, and prohibit diversion of funds for other purposes. Without one, companies risk non-compliance, tax penalties, and employee dissatisfaction. Aligning a documented plan with long-term workforce management and financial reporting standards is essential.
As we explore the myriad of options available under RA 4917, we can see the potential for transforming retirement planning into a more robust, beneficial system for both companies and employees. In Part 2 of this article, we will delve deeper into implementing these strategic retirement plans, the tax advantages they offer, and how companies can navigate the necessary compliance measures to support a sustainable future for their employees.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Marvin Madrigalejo is a Tax-Client Accounting Services (Tax-CAS) executive director while John Ian Keng is an assurance director at Isla Lipana & Co., the Philippine member firm of the PwC global network.
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