[Practical Finance] When Retiring with Only a House... How to Utilize Retirement Pension and Pension Savings

50s Household Total Assets 72% in Real Estate
Interested in Pensions but Actually Unfamiliar
Smart Retirement Preparation Tips

[Asia Economy Reporter Oh Hyung-gil] The private pension market is heating up. There is a growing movement to steadily accumulate retirement pensions or pension savings to secure a stable life after retirement and utilize them as a new source of income for the retired generation.

This is because it is difficult to maintain a stable retirement life with only the National Pension. In fact, the average appropriate monthly living expenses for a retired couple are 2.91 million KRW, but the pension amount received by those who have been subscribed to the National Pension for over 20 years is only 920,000 KRW.

According to the Financial Supervisory Service, as of the end of last year, the amount accumulated in retirement pensions reached 221.2 trillion KRW, an increase of 16.4% compared to the previous year. Pension savings, including pension savings insurance, pension savings funds, and pension savings trusts, recorded 143.4 trillion KRW, up 6.1%.

The problem lies in the low rate of return. The overall annual return rate of retirement pensions rose by 1.24 percentage points from the previous year to 2.25%. Pension savings fared slightly better at 3.05%. Especially due to the COVID-19 pandemic, it is expected that the rate of return will decline further. It is time to start wise retirement preparation as soon as possible.

◆ 70% of assets of households in their 50s are 'real estate' = According to a retirement asset survey conducted by Mirae Asset Retirement Research Institute on 1,960 male and female office workers in their 50s, 72.1% of the total assets of households in their 50s are composed of real estate.

The average total asset size of respondents was 660.78 million KRW. Among these, real estate accounted for 476.09 million KRW, and financial assets were 167.94 million KRW. Among financial assets, deposits and savings-type insurance amounted to 67.8 million KRW, accounting for 10.3% of assets. Private pensions accounted for 51.39 million KRW (7.8%), following that. On the other hand, investment assets such as stocks and bonds were relatively small, with domestic holdings at 26.51 million KRW (4.0%) and overseas holdings at 2.18 million KRW (0.3%).

Notably, 96.3% of respondents' households held deposits and savings-type insurance. The possession rate of private pensions (retirement pensions, personal pensions) was also high at 76.0%, indicating that many office workers in their 50s had private pensions. Among them, 23.8% secured more than 100 million KRW. 25.0% of respondents had less than 10 million KRW, 26.3% had between 10 million and 50 million KRW, and 24.9% had between 50 million and 100 million KRW.

However, 4 out of 10 office workers in their 50s did not know their expected National Pension amount. This indicates a lack of interest in retirement preparation. While 61.0% knew their expected National Pension amount, only 47.9% knew their private pension holdings.

The report pointed out, "Office workers in their 50s seem to consider pension assets important and show considerable interest in securing pension income, but their actual pension asset management behavior does not meet that level," adding, "They should reflect their interest in pensions in their household financial situation and attempt retirement planning utilizing pensions."

◆ How should pensions be utilized? = The best way for office workers to accumulate retirement funds is to use retirement pensions and pension savings, which can achieve both retirement preparation and tax savings.

Pension savings accounts require a minimum payment period of 5 years or more, allow annual contributions up to 18 million KRW, and pensions can be received from age 55. New products available include pension savings insurance from insurance companies and pension savings funds from asset management companies. Currently, pension savings trusts offered by banks have been discontinued.

At year-end tax settlement, a tax credit of 13.2% (including local income tax) up to 4 million KRW is available, and if total salary is 55 million KRW or less, or comprehensive income is 40 million KRW or less, a tax credit of 16.5% (including local income tax) can be received.

Individual Retirement Pension accounts (IRP) were only available to workers covered by the retirement pension system before July 2017, but since July 26, 2017, self-employed individuals, workers not covered by the retirement pension system, as well as public officials and private school faculty with income, can all join.

When contributing 7 million KRW annually, a full tax credit of up to 16.5% (including local income tax) is possible, and the 7 million KRW annual limit is combined with the pension savings account limit. Since the tax deduction benefit is based on the total amount paid in a year including pension savings, lump-sum payments at year-end can also receive the deduction benefit. However, if the account is terminated early or funds are withdrawn, a 16.5% miscellaneous income tax will be imposed.

Depending on age, it is necessary to set contribution amounts and payment periods to maintain the plan until the end, considering financial plans such as home expansion, children's education expenses, and wedding funds. Experts advise considering 'Target Date Funds (TDF)' if there is insufficient time for asset management.

TDF is a lifecycle asset allocation product that reduces the proportion of risky assets like stocks and increases the proportion of safe assets like bonds as the expected retirement date approaches. Lee Dong-geun, a researcher at Mirae Asset Retirement Research Institute, said, "Due to the recent COVID-19 pandemic, the stock market crashed, impacting the returns of performance-based retirement pension products and pension savings funds," adding, "Since pensions are long-term investment products, patience can help overcome these challenges."