[Real Estate Tech] 'Up to 1.15 Million Won' Year-End Tax Settlement 'Bonus Santa' Has Arrived

Employees with total annual salary under 55 million KRW
Up to 7 million KRW annual contribution for Pension Savings and Personal Pension Savings
16.5% tax credit

Direct investment also possible... solid investment returns
70% limit on IRP risky asset investments

[Asia Economy Reporter Ji Yeon-jin] The last tax-saving chance for the 2021 year-end tax settlement remains. Depending on the tax-saving strategy this month, with only one calendar page left this year, the year-end tax settlement can become a "13th-month bonus" or a "tax bomb." We take an in-depth look at pension products and Individual Retirement Pensions (IRP) that offer up to 1.15 million KRW in tax credits if subscribed to by the end of this month, while also helping prepare retirement funds and securing decent returns.

◆ Up to 1.15 million KRW tax credit = By combining pension savings and IRP (Individual Retirement Pension), you can receive a tax refund on contributions up to 7 million KRW annually. Workers with a total salary of 55 million KRW or less who contribute 7 million KRW to pensions can receive a tax credit of 16.5% (13.2% for those exceeding 55 million KRW), resulting in a maximum refund of 1,155,000 KRW (924,000 KRW for those exceeding 55 million KRW) during the year-end tax settlement.

While pension savings and IRP are similar in that they are tax credit pension products, they differ in deduction limits, operational regulations, and early withdrawal conditions. The deduction limit for pension savings is up to 4 million KRW annually, while IRP allows up to 7 million KRW. However, since IRP’s 7 million KRW limit includes pension savings, if you contribute 4 million KRW to pension savings, you can add an additional 3 million KRW to IRP. You can also fill the entire 7 million KRW with IRP alone. If you make a lump-sum payment by the end of this year, you can receive tax benefits.

Another advantage of pension accounts is that gains and losses across invested financial products are aggregated for tax purposes. Taxes are only paid on profits when receiving the pension, based on the net gains from all invested products. The tax rate is also low, ranging from 3.3% to 5.5%. It is also attractive that you do not pay taxes during the process of selling and reinvesting products. For general financial products, taxes must be paid on gains when selling. Domestic equity funds are almost tax-free, but overseas funds or bond funds are subject to a 15.4% tax on gains.

◆ The power of long-term installment investment = Pension savings are broadly divided into pension savings trusts, pension savings insurance, and pension savings funds. Like IRP, pension savings funds can generate decent returns through direct investment. According to a survey by the Financial Supervisory Service last year, the average return on pension savings after fees was 4.18%. Among these, pension savings funds had the highest return at 17.25%, while life insurance and trusts showed low returns of 1.77% and 1.72%, respectively.

Unlike other pension products, pension savings funds and IRP can maximize returns through long-term installment investments. Kang Chang-hee, head of the Trust Asset Management Pension Forum, said, "The best method is to make monthly installment contributions," but added, "Many cases involve lump-sum payments at year-end for tax benefits without selecting products carefully, but even principal-guaranteed products require active subscription efforts."

For example, if you contribute 100,000 KRW monthly for a year, totaling 1.2 million KRW, and continue this for 10 years, the principal would be 12 million KRW. Even assuming fund prices fluctuate and drop by half at some point, the evaluated amount after 10 years would be 24.1 million KRW, more than double the principal. Kang emphasized, "If you stop midway because the stock price falls, you cannot experience the power of installment investment."

◆ Practical portfolio, ‘100 minus your age’ = Pension savings funds or IRP allow investors to freely construct portfolios considering their own risk tolerance, investment capability, and remaining years until retirement. There is no limit on the number of products you can subscribe to. However, pension savings funds have no separate regulations on asset allocation, allowing 100% of installment funds to be invested in equity funds or ETFs (Exchange-Traded Funds). In contrast, IRP limits investment in risky assets such as funds to 70%, with the remainder managed in safe assets like deposits. Typically, IRP recommends investing the proportion of risky assets equal to 100 minus your age.

IRP also allows exceptions for diversified investments that reduce risk, such as bond-mixed funds (with equity ratios within 40%) or IRP-exclusive Target Date Funds (TDF), where up to 100% of installment funds can be invested. TDFs are currently popular investment products. They aggressively grow assets when investors are young and increase the proportion of safe assets like bonds as retirement approaches, enabling stable retirement asset planning.

When choosing products, it is advisable to check whether they are savings products like deposits or investment products like stocks or funds, and for funds, verify if the management company is competent. For example, with equity-linked securities (ELS), always check the fine print, and for funds, consider whether fees are reasonable.