[PB Notebook] Pension? Lump Sum?… Retirement Pay Receiving Methods in the 100-Year Life Era

Choi Hyesook, Head of PB Department, Hana Bank Seo Apgujeong Gold Center

There is a concept called 'Mode of age at death.' It refers to the age at which the most members of a society die. It is a realistic indicator that reveals the lifespan of people living in this land, rather than life expectancy, which means the expected lifespan of newborns aged 0. How about Korea? The mode of age at death in Korea (average from 2015 to 2019) is 85.6 years for men and 90 years for women.

Accordingly, many people at branch offices recently worry about the core of retirement funds, 'retirement pay,' and the method of receiving it. Recently, a customer who retired several years ago and received retirement pay into an Individual Retirement Pension (IRP) account requested a consultation. They wanted to know in detail the differences between receiving retirement pay as a pension and as a lump sum, as well as the differences in receiving conditions. In conclusion, receiving retirement pay as a pension allows one to enjoy both tax benefits and investment returns simultaneously.

If a worker receives retirement pay as a lump sum, retirement income tax is imposed on the retirement pay. As of last year, the retirement income tax rate ranges from 6% to 45%. Additionally, a miscellaneous income tax of 16.5% is imposed on the income earned from managing this retirement pay.

On the other hand, if retirement pay is received into an IRP account and then taken as a pension, tax benefits can be enjoyed. Only 70% of the retirement income tax is imposed, and for amounts received after the 11th year of retirement, only 60% is imposed. Pension income tax rates are 5.5% for ages 55 to 69, 4.4% for ages 70 to 79, and only 3.3% after age 80. When receiving a pension, in addition to the returns from asset management, retirement income tax can be reduced by about 30-40%, and a low tax rate of 3.3-5.5% can be applied to investment returns.

Retirement income tax varies depending on retirement income, length of service, and whether there has been an interim settlement. The larger the retirement pay and the shorter the length of service, the higher the tax. For example, consider a retiree with retirement pay of 1 billion KRW. If received as a lump sum with 20 years of service, the retirement income tax to be paid is 201.75 million KRW; with 30 years of service, it reaches 163.03 million KRW.

However, when managing this amount in an IRP account and receiving it as a pension, retirement income tax is reduced by approximately 60.525 million KRW (20 years of service) and 48.909 million KRW (30 years of service), respectively. If the goal is to save on retirement income tax, receiving it as a pension can be a reasonable choice.

What about the eligibility and methods for starting pension payments from IRP and retirement pensions? The eligibility for starting pension payments applies to those who have deposited retirement pay or personal contributions and retirement pay into an IRP. It is available for those aged 55 or older. If only personal contributions are deposited for income deduction purposes, the application can be made after five years from the initial deposit date (subscription date) and upon reaching age 55.

As for pension payment methods, one can choose 'period designation method,' which evenly divides the pension amount over the payment period; 'amount and period designation method,' which allows application for a minimum of 20,000 KRW or more; or 'free withdrawal method,' which allows one-time pension withdrawals whenever desired.

When receiving payments, if the pension is received within the annual limit amount, a reduction in retirement income tax (30-40%) is also possible. However, if multiple personal products are held, the withdrawal order must be specified, and if the investment products are changed, the withdrawal order must be re-specified. These points should be noted.

Emergency early withdrawals are also possible. In cases requiring urgent funds such as overseas migration before or after pension receipt, death or natural disasters, nursing care for the subscriber or dependents for more than three months, or hospitalization for more than 15 days due to disasters, these qualify as 'unavoidable early termination (withdrawal) reasons.' Therefore, early termination (withdrawal) is possible with the same tax benefits as pension receipt.

According to the Korea Economic Research Institute, the average retirement age of middle-aged and older job seekers last year was 50.5 years. This means that even after retirement, men must manage 35 more years of life, and women 40 years. Now is the time to celebrate retirement with a broader perspective and design the latter half of life, which is not short, spanning 30 to 40 years, centered on 'myself.'

Choi Hyesook, Head of PB, Hana Bank Seo Apgujeong Gold Center