Severance Pay & Performance Bonuses as Pensions in Korea. I don’t currently have to deal with this, but I’m writing this post to document and prepare for when the time comes.
Severance Pay (DB Plan)
The tax treatment of severance pay depends on how it’s received. This applies only to Defined Benefit (DB) plans and not to Defined Contribution (DC) plans. In Korea, it’s required to receive severance pay through IRP account.
Severance Pay (DB) → Received in an IRP Account → Lump Sum or Pension Withdrawal (Starting at Age 55 for Pension Withdrawal)
If you take a lump sum, you’ll pay income tax based on the severance tax rate. The tax amount depends on years of service and taxable income brackets.
For example, if you worked for 20 years and received 100 million KRW in severance pay, you would owe approximately 11.2 million KRW in taxes—an effective tax rate of 11.2%.
(Case Study provided by National Tax Service Korea)
• You joined A Corp. on January 1, 2004, and retired on December 31, 2023.|
• Years of service: 20 years
• Final severance pay: 100 million KRW
What if you receive severance as a pension?
The biggest advantage of taking severance as a pension is tax deferral. Instead of paying taxes upfront, you can invest the amount and earn additional returns.
Additionally, tax reductions apply based on the number of years you receive pension payments:
• Years 1–10: 30% tax reduction of severance tax
• Years 11+: 40% tax reduction of severance tax
The most efficient strategy would be to leave severance pay in an IRP account until age 55 and start withdrawing at age 65, maximizing the 40% tax reduction.
Investment returns on severance funds are taxed as pension income if annual withdrawals are below 15 million KRW (tax rate: 3.3–5.5% depending on your age). If withdrawals exceed this, they are taxed as general income.
However, if severance pay is needed for living expenses now, taking a lump sum may be better than waiting for tax reductions. Inflation erodes purchasing power, and riskier investments may not be an option for those relying on severance for daily needs.
For those who change jobs frequently, it may be smarter to leave severance funds in IRP accounts rather than cashing out each time.
What happens if you receive severance as a pension?
Let’s assume:
• You joined Company A at age 25, worked 20 years, and changed jobs at age 45.
• Received 100 million KRW in severance, invested in the S&P 500 for 10 years.
• Started pension withdrawals at age 55.
Using Portfolio Visualizer:
• 10-year CAGR (50th percentile performance): 10.92%
• Final value after 10 years: ~280 million KRW (100M severance + 180M investment returns)
If withdrawals are 10M–15M KRW per year, taxes will be significantly lower than a lump sum withdrawal. This underscores the importance of long-term investment and strategic tax planning.
KRW per year, taxes will be significantly lower than a lump sum withdrawal. This underscores the importance of long-term investment and strategic tax planning.
| Type | Withdrawal Amount | Tax | Remark |
| Year 1 (age 55) | 10M KRW | 10M KRW *11.2% * 70% (30% Deduction) | From severance pay resources first |
| Year 2 ~ 7 | 15M KRW | 15M KRW *11.2% * 70% (30% Deduction) | Exhaustion of severance pay |
| Year 8 ~15 | 15M KRW | 15M KRW * 5.5% | From operating profit resources |
| Year 16 ~ 19 | 15M KRW | 15M KRW* 4.4% | |
| Total | 280M KRW | 20M KRW | 7.3% |
Performance Bonuses: Lump Sum vs. Pension
The same tax advantages apply to performance bonuses if they are received as pension rather than earned income.
For employees in high-paying industries, accumulated performance bonuses could exceed severance pay in value over time. For example, this year employees at SK Hynix will receive massive performance bonuses ranging from tens of millions to hundreds of millions of KRW.
https://n.news.naver.com/mnews/article/119/0002916725?sid=101
If received as salary, these bonuses are taxed at an effective earned income tax rate of 20–40%. Instead, investing them as pension could result in huge tax savings and long-term investment growth.
However, this requires company-level policy changes, such as:
1. The company adopting a DC plan.
2. The company allowing performance bonuses to be contributed to DC accounts.
Unfortunately, my company only offers a DB plan, so this isn’t an option for me. But for those working at companies with DC plans, it’s worth serious consideration.
Managing Pension Accounts
I already have an IRP account for personal contributions, but severance pay must be received in a separate IRP account. This raises a question:
Can IRP accounts be merged, or do I need two separate accounts?
Two options:
1. Combine severance and personal savings into one IRP account (choose the “combined account” option at securities firms).
2. Keep two separate IRP accounts—one for severance, one for personal savings.
After some thought, I’d likely keep two accounts, for the following reasons:
• If I ever need to withdraw severance, I can close only the severance IRP account.
• After age 55, I can start pension withdrawals from one account while keeping the other for tax deductions.
After age 55, it may also make sense to open an additional pension savings fund account for maximizing tax deductions. With multiple accounts, I could use larger accounts for pension withdrawals and smaller accounts for tax deductions.
| Account | Type | Status | How to use pension starting point | Remark |
| Pension Saving Fund | Account | Investing | Start receiving pension | |
| Account’ | – | Use for getting tax credit | Open new account | |
| IRP | Individual | Investing | Use for getting tax credit | |
| Severance Pay | – | Start receiving pension | Open when quitting the job |
I prefer simple financial setups, but at this rate, by the time I retire, I might end up having several accounts:
• 2 IRPs
• 2 Pension Saving Funds
• 1 ISA
• 1 Roth IRA
• Possibly a 401(k) account?
That’s at least six different accounts—and I’m not sure if that’s optimal or just overcomplicated.
https://www.chosun.com/economy/money/2024/10/21/57Z6GOXKF5AJ7OJCGTBBYODRGQ
https://n.news.naver.com/mnews/article/037/0000030922?sid=101