Retirement Pension in Korea (Toejik Yeongeum)

In the old days, many companies only wrote severance pay down in their books and never set the money aside. Then, when the company suddenly went bankrupt, employees who had worked hard for years left with nothing. Losing your workplace was bad enough, and losing your retirement money too happened all the time.

The retirement pension was created to stop this kind of unfair tragedy by law. A company that adopts it must deposit each employee's share every year with an outside financial institution, such as a bank or a brokerage. Many companies still use the old severance system, so people are discussing, step by step, making the pension mandatory for every company. Thanks to this, even if the company runs into financial trouble or closes, your hard-earned severance pay stays safe in a vault outside the company.

There's also a safeguard so you don't take a big lump sum when you quit and lose it on a risky business or an impulse purchase. The system recommends taking the money as a pension, paid out in monthly installments like a paycheck after retirement, so your living expenses are covered for life.

If you want, you don't have to cash out your severance pay when you switch jobs. It acts as a sturdy bridge, letting you gather the money you build up across several employers into one account and keep it growing until you retire.

When you join a retirement pension plan, you choose one of two main paths, depending on who invests the money. They are the defined benefit plan (DB), where the company invests for you, and the defined contribution plan (DC), where you invest it yourself.

With a DB plan, the amount you get at retirement is fixed in advance, based on your average pay over the last three months before you leave and your years of service. The company holds and invests the money, but whether its investments boom or bust, the severance pay you receive doesn't change at all. That's why it's much better for workers whose pay rises quickly.

With a DC plan, the company puts one year's worth of severance pay into your account each year, and that's it. After that, you have to pick and manage products yourself, such as funds or deposits. If you invest well and earn a lot, your severance pay grows fast. But if you lose money, you take the whole loss yourself.

So it's commonly explained this way: if your pay keeps rising a lot and you stay a long time, a DB plan ends up paying more. If your pay rises only a little and your investment returns beat your pay raises, a DC plan ends up paying more.

As a rule, the severance pay you get when you change jobs or retire is deposited into a dedicated account called an Individual Retirement Pension account (IRP). There are exceptions, such as retiring after age 55. This account is your lifelong retirement piggy bank, collecting the severance pay you receive as you move from job to job.

Besides the severance pay your company puts in, you can add your own spare money to an IRP each year. When you do, the government gives you a tax credit within a set limit at year-end tax settlement. That's why it's often introduced as a product that helps you save on taxes and prepare for retirement at the same time.

To be more precise, the real tax benefit shows up when you take the money as a pension after age 55, paid out in installments within a yearly limit. The retirement income tax you'd owe on a lump-sum withdrawal is cut by 30%, and the longer you collect the pension, the bigger the reduction gets. It's like the government giving you a big bonus for spreading the money out as a pension instead of blowing it all at once.

There's a catch, though. If you cancel the account early, you have to pay back the tax benefits you received on the money you put into the IRP. So unless it's a real emergency, it's best to manage it with the mindset of leaving it untouched until retirement.