[PB Notebook] The Season of 'Retirement Pension' Returns... Need to Review the Start Strategy

Daesu Kim, Head of PB Team at Shinhan PWM Yeouido Center

The season for retirement pensions has returned. More precisely, it is time to fill the annual contribution amount for the retirement pension (IRP) for year-end tax settlement. Starting this year, since the tax credit has increased to 9 million KRW (the contribution limit remains the same at 18 million KRW), it is necessary to make additional contributions to cover the shortfall.

However, it is also true that many hesitate to decide on additional contributions right away. This is because the overall returns on retirement pension investment products, such as lifecycle funds (TDF), have not been favorable. Even aside from this, many investors have not been managing their subscribed IRP products very thoroughly.

At times like this, investors need to consider how to manage their current IRP holdings and how to utilize them in retirement. Especially for investors who are approaching retirement or have already retired, it is important to carefully review the 'retirement pension commencement strategy.'

The conditions for starting an IRP pension are threefold: 'more than 5 years since subscription, age 55 or older, and receiving payments for more than 10 years.' If all these conditions are met, the pension can be started at any time. If your subscription period has exceeded 5 years and you are currently over 55 years old, consider starting your pension. If you have or expect a fixed income, there is no need to start the pension immediately, but if you have no significant fixed income after retirement, you should actively consider starting the IRP pension.

One reason to consider starting the pension is the 'more than 10 years' receiving condition. Under current law, the pension income tax rate is applied at a low rate (3.3~5.5%) only if the pension receiving period is 10 years or longer. For some, 10 years may feel short, but for retirees over 60 without income, it can be a burdensome period.

Therefore, rather than unilaterally delaying the start of the pension, it is wise to start each pension product you hold one by one. Even after starting an IRP, you can open another IRP account to make contributions for tax credits or to secure your retirement funds. This is similar to the game of Yutnori, where you can either move all your pieces at once or move them individually. Thus, you can receive monthly pensions from your existing retirement pension while making new contributions to another retirement pension, and once that account passes 5 years, you can start receiving a pension from it as well.

However, there are several factors to consider when starting a retirement pension. First, whether the amount received from private pensions exceeds 12 million KRW annually. Under current law, if this is the case, comprehensive income tax is imposed by combining it with other comprehensive income amounts. Therefore, it is important to design your pension so that the amount you receive annually does not exceed 12 million KRW. This can be adjusted by extending the receiving period to 15 years or choosing a flexible withdrawal method.

At the time of pension commencement, you must also decide whether to receive all the accumulated retirement pension funds as a pension or to partially withdraw some early for use. In other words, if you want to use part of your severance pay for purposes such as business establishment or your child's wedding expenses and start the rest as a pension, you need to actively utilize these options.

Gathering scattered retirement pensions into one place to understand the total scale of prepared pension resources is fundamental. Recently, active account transfers among retirement pension product groups have been occurring for this reason. However, in some cases, transferring contracts to an IRP is not always advantageous. For example, in the case of pension trusts, the pension receiving period is 5 years or more, which is shorter than the IRP’s 10 years, so it may be more beneficial to start separately.

Daesu Kim, Head of PB Team, Shinhan PWM Yeouido Center