[Financial Planning for the 100-Year Life] Six Things to Know Before Subscribing to Retirement Financial Products

Investors who have subscribed to equity-linked securities (ELS) linked to the Hong Kong H Index are very concerned following reports of large-scale losses. ELS are financial products whose returns are determined by fluctuations in stock indices and other factors. The Hong Kong H Index, which was around 12,000 in 2021, has recently plummeted to the 5,000 range. There are concerns that if the index does not recover by early next year when the three-year maturity comes due, investors could face principal losses of 40-50%. Although incomplete sales liability is being discussed due to sales companies not properly explaining the product details, investors who signed the documents also find it difficult to avoid some degree of responsibility.

When subscribing to retirement financial products, no matter how urgent, you must check the following six items. First, confirm whether the product you are subscribing to is a savings product where the financial company is responsible for the management results, or an investment product like stocks or funds that can yield high returns if successful but also carry the risk of principal loss if not.

Second, if the financial product includes conditional clauses, you must fully understand these conditions before subscribing. The recent ELS is a representative example. There are several types of conditional clauses in ELS products. For example, “The principal is guaranteed as long as the index does not fall more than 50%.” However, if you were unaware of such clauses or even if you knew but subscribed thinking “How could the index possibly fall 50%?” and then face a situation like this, you would inevitably be caught off guard.

Third, when subscribing to indirect investment products such as funds, variable insurance, or variable pensions, you must verify whether the company managing the product has proven competence. The entity delivering results is not the sales company such as banks, securities firms, or insurance companies, but the management company. We often receive questions like, “I lost a lot of principal investing in a fund; what should I do?” When asked which company manages the fund, few people know the name of the management company.

Fourth, you must confirm whether the financial product you intend to subscribe to is suitable for you. Elderly retirees should conservatively manage investment-type financial products with target returns set about 1-2% higher than fixed deposit rates. From this perspective, ELS products that require readiness to accept principal loss risks of 40-50% do not comply with the principle of suitability.

Fifth, check for tax benefits. Retirement pension products with tax benefits are divided into those where pension income tax must be paid when receiving the pension and those where income tax is exempt. National Pension, Government Employee Pension, Retirement Pension, and Pension Savings products require pension income tax payment upon receiving the pension after retirement. However, these products provide tax credit benefits equivalent to the amount of contributions when making payments. Since most employees earn more income before retirement than after, it is advantageous to receive tax credits during high-income active years and pay pension income tax when income decreases after retirement. Conversely, if a person such as a government employee or teacher receives a large pension from their main job or has high income from rental business and also receives a large personal pension, they may have to pay a high rate of pension income tax. In such cases, it is advantageous to choose products where pension income tax is exempt.

Sixth, consider the costs associated with subscribing to financial products. First, check whether sales commissions or management fees are excessively high. Even a 0.5% difference in costs can lead to significant differences after 5-10 years. Also, if the financial product is managed overseas, carefully check whether foreign exchange-related fees are not too expensive.

Kang Changhee, Head of the Happy 100-Year Asset Management Research Association