As mentioned earlier, I personally consider the National Pension and Employee Retirement Pension as extra bonuses, and I find it more comfortable to think you only have a personal pension system. First, let’s look at the types of pension accounts in South Korea, as shown in the table below.
Additionally, there is an “ISA (Individual Saving Account)” account, which is designed to provide tax benefits for general investments but can also be used as a means to contribute to personal pensions.
Defined Contribution (DC) retirement pension is an employee / company-provided pension and is not directly related to personal pensions. Pension Fund Accounts are categorized into Pension Saving Fund (run by securities companies), Pension Saving Insurance (by insurance companies), and Pension Saving Trust (by banks), depending on which financial institution you open the account with. Different financial institutions have different investment options available, and since we want to invest based on market returns such as mutual funds and ETFs, we need to create a Pension Saving Fund account. Insurance and trust accounts are known to have limited options for mutual funds and ETF investments and typically focus on deposits and safer assets.
The typical accounts used for personal pensions are referred to as the “IRP Trio,” and I personally invest in the following accounts:
- Pension Saving Fund account (securities company)
- Individual Retirement Plan (IRP)
- ISA (Individual Saving Account)
As mentioned in a previous post, it is generally advisable to take advantage of the means provided by the government, which set limits and offers tax benefits. From now on, let’s refer to the combined “Pension Savings Account” for Pension Saving Fund + IRP accounts. The annual contribution limit to the Pension Savings Account is capped at 18 million KRW. As of ’23, if the annual labour income tax base is 55.5 million KRW or less, you can enjoy a 16.5% tax deduction if you contribute up to 9 million KRW to the Pension Savings Account. If the annual labour income tax base exceeds 55.5 million KRW, a 13.2% tax deduction is provided. By contributing to this account alone, you can secure a return of 16.5% to 13.2% annually. Where else can you find investments with such returns?
One of the most beautiful aspects of investing through the Pension Savings Account is deferred taxation. In other words, regarding the profits made from buying and selling within the Pension Savings Account, as long as you do not withdraw from the account, it will not be subject to taxation. When we receive dividends or generate profits from investing in domestically listed overseas ETFs (buying and selling), we would normally have to pay a dividend income tax (15.4%), but with this account, we don’t have to. When these profits accumulate, over time, the power of compound interest can lead to significant differences in results. Investment experts often say that the biggest factor hindering returns is taxes. How much you can defer taxes and invest consistently is key to pension investments. There are many books on this topic, which I will introduce later.
Pension Saving Fund has a mandatory enrollment period of 5 years, and the IRP account can be withdrawn from the age of 55. Since our goal is “preparing for retirement,” this is completely unrelated to us, so let’s invest steadily.
The ISA account allows contributions of up to 20 million KRW per year, with a maximum of 100 million KRW. The minimum investment period is 3 years. However, the first 2 million KRW of profits are tax-free (for certain below-income level citizens/farmers, it is 4 million KRW), and any excess profits are subject to separate taxation at a rate of 9.9%. As mentioned earlier, we can use the ISA account as a means to contribute to personal pensions indirectly. After the mandatory enrollment period, we can liquidate the account and contribute to the Pension Saving Fund! When liquidating, a 10% tax deduction is applied to the contribution amount (up to 30 million KRW). This results in a total of 3 million KRW, and an additional annual income deduction of 1 million KRW is obtained, significantly increasing the amount contributed to the pension fund.
To summarize, I am managing my personal pension using these three accounts, and I believe it is the best option. In the next post, we will explore how much and what investments I have made in each account.