"Low Tax Rate Up to 1.25 Million Won per Month"… How to Smartly Save Taxes on Pension

The Financial Supervisory Service (FSS) advised that tax-saving strategies are necessary when receiving retirement pensions. If private pension income, such as from pension savings, is kept below 1.25 million KRW per month, a lower tax rate is applied, reducing the burden on retirees. Instead of receiving the retirement lump sum at once, receiving it as a pension can reduce the tax burden by up to 40%.

According to the 'Financial Tips' released by the FSS on the 19th, due to amendments in the Income Tax Act, from this year, the threshold for pension income subject to separate taxation when calculating comprehensive income tax has increased from 12 million KRW to 15 million KRW annually. If the annual pension income is less than 15 million KRW, it can be excluded from comprehensive income tax and taxed separately at a lower rate of 3-5%.

Therefore, the FSS explains that for tax savings, it is necessary to adjust the annual pension receipt amount to be below 15 million KRW. If pension income exceeds 15 million KRW, one can compare the options of comprehensive taxation (6.6%~49.5%) by combining the entire pension income with other income or separate taxation (16.5%) and choose the more advantageous method.

Delaying the start of pension payments is also one way to save on taxes. Under current law, pension income tax rates vary depending on the age of the pension recipient, so if salary or business income continues after age 55 or if there is financial capacity, it is better to delay pension receipt. For fixed-term pensions, pension income tax rates are 5.5% for recipients aged 55-69, 4.4% for those aged 70-79, and 3.3% for those 80 and older. For lifetime pensions, the tax rate is 4.4% for ages 55-79 and 3.3% for those 80 and older.

Additionally, the longer the period over which retirement pay or retirement pensions are received, the greater the tax benefits. If retirement pay is received below the annual pension receipt limit, 30% of the retirement income tax is reduced for up to 10 years of pension receipt. From the 11th year onward, 40% of the retirement income tax is reduced, allowing for approximately an additional 10 percentage points in tax savings. Also, from the 11th year of pension receipt, the withdrawal limit no longer applies, allowing free withdrawals.

In cases of unavoidable early withdrawal from pension savings, submitting supporting documents to the financial institution within six months is required to apply the low pension income tax rate (3.3%~5.5%). However, even for unavoidable reasons, if the withdrawal is for medical care expenses, the low tax rate applies only if the withdrawal amount is within the tax law’s withdrawal limit. If the deadline for submitting supporting documents is missed or the unavoidable reason is not recognized, other income tax (16.5%) will be imposed.

Furthermore, the FSS operates an Integrated Pension Portal to support financial consumers’ retirement planning. Through 'My Pension Inquiry,' users can check the accumulated amount of their subscribed pension products and the scheduled pension start date at a glance.