Why Every Office Worker Must Enroll in a 'Private Pension' [AldonSseulJob]

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If you are an office worker, you have probably seen your payslip at least once.

If you have looked closely at your payslip, you have probably seen the 'National Pension' item as well.

As everyone knows, in Korea, the public pension called 'National Pension' provides a fixed monthly amount after the age of 65.

The money we pay monthly into the National Pension is exactly this cost.

However, the reality is that the National Pension alone does not completely eliminate anxiety about old age.

Did you know there is also a 'private pension' besides the National Pension?

We will explain what this private pension is, what types of products exist, and why you need to subscribe to a private pension even though you already have the National Pension.

Pensions: Is it only the National Pension?

For the 2030 generation and younger people who are far from words like 'retirement' or 'retiring',

pensions might feel vague and distant.

When thinking of pensions, it is easy to only think of the National Pension.

Korea's pension system consists of National Pension, Retirement Pension, and Personal Pension.

There are three types in total.

To briefly explain their differences,

National Pension is a type of social security,

Retirement Pension is guaranteed by the company (it allows receiving retirement pay in the form of a pension rather than a lump sum),

and Personal Pension can be seen as self-guaranteed for a comfortable life.

[Image source=Yonhap News]

What exactly is a private pension?

Earlier, we said Korea's pension system can be divided into National Pension, Retirement Pension, and Personal Pension.

You might wonder, what exactly is a private pension?

Private pension is a broad term encompassing all pension products that individuals subscribe to.

In other words, personal pensions are included in private pensions.

Also, institutional private pensions like retirement pensions provided by workplaces are included.

It is the opposite concept of public pensions (mainly the National Pension), meaning it is a pension that individuals choose to subscribe to voluntarily, not provided by the government.

Simply put, personal pensions, retirement pensions, and private pensions are all collectively called 'private pensions'.

What types of private pensions exist, and where can you subscribe?

Private pensions are broadly divided into Pension Savings and IRP (Individual Retirement Pension).

All private pensions are products you can subscribe to at banks, insurance companies, and securities firms, and after paying for a certain period, you can receive them in pension form.

Pension savings include pension savings funds and pension savings insurance. You might intuitively understand what funds and insurance are.

Some of you might be curious about what IRP is.

Individual IRP is used as an additional pension product besides pension savings.

IRP can also be subscribed to at banks, securities firms, and insurance companies, and the products included are flexible.

All can be subscribed to by visiting financial institutions directly or through the internet or mobile applications, and after opening an account, you can choose various asset management methods.

You can diversify investments into various products such as deposits, funds, ETFs, etc.

You can pay up to 18 million KRW annually, and up to 9 million KRW is eligible for tax deduction benefits.

When receiving retirement pay, you can transfer it to an IRP account to manage your retirement funds.

For pension savings and IRP, when you receive the pension later, pension income tax is levied at a low rate of 3.3~5.5% instead of financial income tax.

Why must office workers subscribe to private pensions?

Everyone agrees that preparing for old age in the era of 100-year lifespans is important,

but you might wonder why office workers must subscribe to private pensions.

As mentioned briefly earlier,

the biggest reason is the 'tax deduction' benefit.

If you look at your payslip, you might have been surprised that the amount you actually receive is significantly different from the listed salary.

As an office worker, you receive your salary after withholding tax at the company.

In other words, taxes are deducted first, then you receive your salary.

Then, the following year, if the total tax withheld exceeds your income tax liability, you get a refund; if less, you pay more.

If you have subscribed to a private pension, you get a tax deduction.

Especially in Korea, tax brackets are set, so as your years of service and salary increase, you pay more taxes.

If you subscribe to pension products eligible for tax deduction, you can enjoy significant tax savings.

While working, you get income deduction benefits, and after retirement, you receive a pension.

It also alleviates worries about early retirement.

Nowadays, many worry about retirement age.

There is no guarantee you can work until retirement age, and you might retire early for various reasons.

Public pensions can be received only after age 60 at the earliest, but private pensions sold by financial companies can start as early as age 55.

This reduces the burden even if you retire early.

Lastly, there is the advantage of being able to manage with various products.

You can subscribe with deposits and switch to funds when the stock market improves,

or switch to bonds when the stock market is bad, adjusting asset allocation according to economic conditions.

For general deposit products, funds are locked during the contract period.

No matter how good the stock market is, you cannot switch to stocks directly; you have to cancel early and subscribe to a new fund, which is inconvenient.

Within pension funds or IRP accounts, product changes are possible, so you can reorganize your portfolio according to the situation.

So, how much tax deduction benefit can you get?

The most important question: how much tax deduction benefit can you receive?

For pension savings, you can get tax deduction benefits up to 6 million KRW,

and for IRP, including the pension savings limit, up to 9 million KRW in tax deductions.

In other words, if you pay into both pension savings and IRP, you can get tax deduction benefits for up to 9 million KRW.

Alternatively, you can get tax deductions up to 9 million KRW only from the IRP account.

The tax deduction limit for IRP accounts is 9 million KRW annually, but the annual payment limit is up to 18 million KRW.

The tax deduction rate ranges from 12% to 15% depending on total salary.

If your annual income is 55 million KRW or less, a 15% tax deduction rate applies,

and if it exceeds 55 million KRW, 12% applies.

For self-employed or freelancers who pay comprehensive income tax, the threshold is 45 million KRW.

If annual income is 45 million KRW or less, 15% applies; if more, 12% applies.

Private pension products with many advantages: what to watch out for?

Private pensions have many advantages, but

you should be aware of precautions to avoid disruptions in your financial planning.

Note that private pension products must be received only as pensions.

If you withdraw as a lump sum or cancel early, you must repay all the tax deduction benefits you received.

In other words, it is better to approach it as a long-term investment.

[Image source=Yonhap News]

In the era of 100-year lifespans and without the concept of lifetime employment,

younger generations should rather pay more attention to pensions.

Especially with frequent news about National Pension depletion and pension system reforms,

private pension products that allow you to prepare early, take advantage of tax benefits, and prepare for old age,

there is no reason not to subscribe.

I hope this was useful money-saving information for you today,

and thank you to all readers who took the time to read.

'Subscribe' and 'Like' are great encouragements.