In the Philippines, the transition from active employment to retirement is governed primarily by Republic Act No. 7641, which amended Article 287 of the Labor Code. This law establishes the legal framework for retirement pay and sets the parameters for when an employer can Compulsory retire an employee.

Understanding these rules is crucial for both employers managing their workforce and employees planning their future.

1. The Retirement Age Thresholds

The Labor Code provides two distinct age milestones regarding retirement in the private sector:

Optional Retirement (60 years old): An employee who reaches the age of sixty (60) years or more, but not beyond sixty-five (65) years, may choose to retire, provided they have served at least five (5) years in the establishment.
Compulsory Retirement (65 years old): Upon reaching the age of sixty-five (65), retirement becomes mandatory. At this point, the employer has the right to terminate the employment relationship based on age.

Important Note: These ages apply in the absence of a retirement plan or agreement in the establishment. If a Collective Bargaining Agreement (CBA) or an employment contract specifies a different age, those terms may prevail, provided they do not provide benefits lower than those mandated by law.

2. Eligibility for Retirement Pay

To be entitled to retirement pay under the law, an employee must meet the following criteria:

Age: Must be at least 60 years old (optional) or 65 years old (compulsory).
Length of Service: Must have served the employer for at least five (5) years. This includes all periods of operation, regardless of whether the service was continuous or broken.

3. Computation of Retirement Pay

In the absence of an applicable agreement, the minimum retirement pay is calculated based on the following formula:

Retirement Pay = (1/2 Month Salary) × Years of Service

Under the law, a "1/2 Month Salary" is specifically defined and is actually equivalent to 22.5 days of salary. This is broken down as follows:

15 days of salary based on the latest salary rate.
5 days of Service Incentive Leave (SIL).
2.5 days representing 1/12 of the 13th-month pay.

Mathematical Representation:

A fraction of at least six (6) months is considered as one (1) whole year for the purpose of computation.

4. Exceptions and Special Categories

Certain industries and roles have different rules regarding retirement:

Underground Mine Workers: Under RA 8558, the optional retirement age is 50, and the compulsory retirement age is 60.
Racehorse Jockeys: The compulsory retirement age is 55, provided they have served for at least five years.
Surface Mine Workers: Similar to underground miners, specialized rules may apply depending on the hazardous nature of the work.
Retail/Service/Agricultural Establishments: Small businesses regularly employing not more than ten (10) employees are exempted from the requirement to pay the retirement benefits mandated by RA 7641.

5. Early Retirement Programs

Employers and employees can mutually agree to an early retirement age (e.g., 50 or 55 years old) through a CBA or a retirement plan. Once an employee voluntarily signs up for or accepts an early retirement package, it is legally binding.

However, an employer cannot unilaterally force an employee to retire earlier than 65 unless there is a pre-existing agreement or policy that the employee consented to upon hiring or through a union. Forced early retirement without a valid agreement can be flagged as illegal dismissal.

6. Tax Exemptions

Under the National Internal Revenue Code (NIRC), retirement benefits received by officials and employees of private firms are exempt from income tax, provided that:

The employer maintains a reasonable retirement plan approved by the Bureau of Internal Revenue (BIR).
The retiring official or employee has been in the service of the same employer for at least ten (10) years.
The retiring official or employee is at least fifty (50) years of age at the time of retirement.
The tax exemption is availed of by the employee only once.

7. SSS vs. RA 7641

It is a common misconception that SSS pension replaces the employer's obligation to pay retirement pay. In the Philippines, retirement pay from the employer is distinct and separate from SSS benefits. An eligible employee is entitled to receive both their retirement pay from their company and their monthly pension or lump sum from the Social Security System.