[Seungseop Song's Financial Light] 'DB·DC·IRP'... What is the Best Way to Receive Retirement Pensions?

Photo by Ministry of Employment and Labor

[Asia Economy Reporter Song Seungseop] Have you ever imagined life after retirement? If the monthly salary you used to receive regularly from your job no longer comes in, what money will you live on? How should you manage and grow your retirement funds efficiently? 'Retirement pension' is one of the representative means of preparing for old age. Let me explain the concept and types of retirement pensions in an easy-to-understand way.

A retirement pension is a system designed to secure income and stabilize the life of workers in their old age. When a company deposits the money it must pay as severance pay with a financial institution, the funds are managed either by the employer (company) or the employee. The accumulated funds can be received by the worker as a pension or lump sum when they leave the company.

What is the difference from severance pay? When you enroll in a retirement pension, the company steadily accumulates reserves. The risk of not receiving severance pay due to company circumstances is reduced. It is also beneficial for the company because it can reduce corporate tax by the amount of reserves set aside for employees. Severance pay is based on the final wage, so it lacks flexibility, but the retirement pension system adjusts the benefits according to changing wages, making it useful for financial management and retirement planning.

Types of Retirement Pension Systems. Photo by Ministry of Employment and Labor

Retirement pensions are broadly classified into three types: Defined Benefit (DB), Defined Contribution (DC), and Individual Retirement Pension (IRP). The operation system and the way you receive money differ slightly depending on which retirement pension you join.

DB means that the amount you receive upon retirement is predetermined. If you choose DB, the company deposits the contribution to a financial institution annually and manages it responsibly. From the worker's perspective, it does not matter how much profit or loss the company makes from managing the retirement benefits. Regardless of the management results, you simply receive the predetermined retirement benefit.

DC is the opposite. The amount the company must pay is fixed. According to regulations, the company must pay at least 1/12 of the total annual wages each year. The worker can manage this money directly and can also contribute additional funds. The structure allows you to receive more pension at retirement based on the returns earned. You can receive it as a lump sum or pension after age 55.

IRP is a retirement pension system that workers can voluntarily join. You can continue to accumulate and manage the severance pay received when you leave a job in the middle. You can contribute up to 18 million KRW annually, with a tax credit of up to 7 million KRW, which is an advantage. The earnings from IRP are tax-exempt until you receive the retirement benefits and can be received as a pension or lump sum.

Previously, only retired workers or those who wanted to accumulate additional severance pay could join IRP. However, since July 2017, the eligibility was expanded to 'all employed persons with income.' Now, self-employed individuals, workers with less than one year of service, and short-term workers can also join.

Each system has its pros and cons. DB is stable because the retirement pension is guaranteed. There is no risk of loss from fund management. The company can also reduce costs by managing retirement benefits well. If a worker chooses DC, they have the advantage of potentially increasing their retirement benefits annually through investment. IRP allows continuous accumulation of retirement benefits even when changing companies, enabling diverse retirement planning.

Advanced country-type three-tier pension system. Photo by Ministry of Employment and Labor

How you receive your severance pay is also important. According to current law, workers who have worked at one company for more than one year receive retirement benefits upon retirement. In principle, retirement pension subscribers should transfer their retirement benefits to an IRP account when they retire. If transferred to an IRP, you can withdraw it like a pension after age 55. However, you can receive a lump sum in cash if you meet conditions such as ▲retirement age over 55 ▲loan repayment secured by retirement benefits ▲retirement benefits under 3 million KRW.

Experts generally say it is advantageous to receive payments over a long period. This is because retirement income tax is reduced by 30-40% when received as a pension. Especially, the larger the retirement pension amount, the more beneficial the pension payment method is. Earnings from retirement pensions also enjoy tax benefits depending on age. Older individuals are subject to lower pension income tax rates. Ultimately, the longer you receive payments in installments, the lower your taxes.

Above all, retirement pensions are the foundation of the advanced 'three-tier pension' system. The three-tier pension means using the national pension for 'basic living,' the company retirement pension for 'stable living,' and personal pensions for 'comfortable living.' As we enter the era of 100-year lifespans, wise retirement fund preparation measures are necessary.