1. National Pension
The National Pension is a system established by the government to help citizens prepare for retirement, particularly for those who lack awareness of retirement planning. Since many people do not actively save for their old age, the National Pension serves as a crucial safety net.
Among its various benefits, the Old-Age Pension is the most significant. It provides financial stability when individuals can no longer work due to aging. However, despite its advantages, the National Pension has certain limitations. Therefore, it is recommended to supplement it with retirement pensions and private pensions for a more secure retirement.
2. Retirement Pension
A retirement pension helps employees save for retirement through their severance pay. It comes in three forms:
- Defined Benefit (DB) Plan: Employees receive a fixed retirement benefit, making it similar to traditional severance pay.
- Defined Contribution (DC) Plan: Suitable for employees on annual salary or performance-based pay, those expecting low wage growth, or those frequently changing jobs. Employees contribute to their pension and manage their own investments.
- Individual Retirement Account (IRA): If an employee retires or changes jobs, they can transfer their severance pay into an IRA and invest it in various financial products. This allows them to receive a lump sum or pension payments later.
3. Private Pension
Along with the National Pension and Retirement Pension, the Private Pension is one of the three key retirement savings plans. Depending on the financial institution, it is classified into:
- Pension Trust (offered by banks)
- Pension Insurance (offered by insurance companies)
- Pension Funds (offered by securities firms)
In the past, Pension Trusts and Pension Insurance were more popular due to their stability and principal protection. However, as interest rates have declined, many people now prefer Pension Funds for potentially higher returns.
Private Pension Benefits
The Private Pension offers significant tax benefits. To qualify, individuals must contribute for at least five years and start receiving benefits after the age of 55, with a minimum payout period of 10 years.
- Tax Deduction: Up to KRW 4 million per year
- Tax Credit Rate for Employees:
- 13.2% for those with a pre-tax salary of KRW 55 million or more
- 16.5% for those with a pre-tax salary below KRW 55 million
- Tax Credit Rate for the Self-Employed: Based on KRW 40 million in comprehensive income
I am not a full-time employee, but since there is a KRW 4 million tax deduction, I decided to contribute the maximum amount annually.
Comparison of Private Pension Types
1. Pension Trust (Offered by Banks)
- Pros:
- Up to KRW 4 million per year in tax deductions
- Principal protection
- Cons:
- Low returns compared to other options
- Taxation on Withdrawals:
- 5.5% if withdrawn between 55 and 70 years old
- 4.4% if withdrawn between 70 and 80 years old
- 3.3% if withdrawn after 80 years old
- Early Withdrawal Penalty: If withdrawn within 5 years of enrollment, additional taxes apply.
2. Pension Insurance (Offered by Insurance Companies)
- Pros:
- Allows pension withdrawals from age 45
- Can provide a fixed-term pension rather than only paying upon death
- Tax-free on pension withdrawals
- Lump sum withdrawals after 10 years are also tax-free
- Cons:
- No tax deduction benefits during the contribution period
- If withdrawn within 10 years, 15.4% tax is imposed on profits
3. Pension Fund (Offered by Securities Firms)
- Pros:
- Higher potential returns compared to Pension Trusts and Pension Insurance
- Suitable for long-term investments since financial markets generally trend upwards over time
- Provides KRW 4 million tax deduction benefits, similar to Pension Trusts
- Cons:
- Risk of principal loss due to market fluctuations
I personally enrolled in a Pension Fund, believing it offers higher returns over the long run. I contributed one year’s worth upfront and, for now, have invested it in a Money Market Fund (MMF) as I am still learning how to manage it effectively.
