In the realm of retirement benefits, comprehending the difference between a lump-sum retirement payment (퇴직금) and a retirement pension (퇴직연금) is crucial for employees in South Korea. The traditional lump-sum retirement payment system involved companies providing a fixed amount based on years of service and salary when employees quit. With people's lifespans elongating and societal dynamics changing, improvements in the retirement payment system became necessary.
1. Challenges with Lump-Sum Payment: Longer lifespans have extended post-retirement life to around 20-30 years. Managing retirement expenses for such durations with a lump-sum payment becomes difficult, often leading to these funds being depleted within a few years.
2. Risk of Company Bankruptcy: If a company goes bankrupt before an employee's retirement, their lump-sum payment might disappear. To mitigate this, the retirement pension (퇴직연금) system was introduced in 2005. It involves entrusting the pension to financial institutions, ensuring it remains accessible even if the company faces financial trouble.
Types of Retirement Pensions:
Retirement pensions are categorized into two main types based on how they are provided by companies:
1. Defined Benefit Pension (DB): Under this system, a predetermined retirement amount is provided based on an employee's years of service and recent average salary. This mirrors the old lump-sum payment system but is delivered in pension form.
2. Defined Contribution Pension (DC): Here, a fixed amount is deposited into an individual account named after the employee every month. The employee can invest these funds, but the exact retirement amount isn't known until retirement.
Choosing Between DB and DC:
1. Stability: In terms of stability, the DB pension system is preferable, particularly during economic downturns. The DB system ensures a secure retirement income with consideration for salary increases.
2. Investment Opportunities: During prosperous times, the DC pension system might be more advantageous. Investing the pension funds can lead to larger retirement amounts. However, investment comes with risks, so regulations limit the total amount that can be invested.
3. Employer Perspective: Companies tend to favor the DC system, as the DB system's reliance on salary increases can strain their finances.
Individual Retirement Pension (IRP):
IRP is akin to an individual's retirement account managed by the company. Instead of depositing retirement funds into a regular bank account, companies deposit them into an IRP account.
1. Tax Benefits: With IRP, the immediate tax burden of retirement income is reduced, and later, a 30% tax discount is applied to received pension income. Additional payments into IRP also qualify for tax deductions during annual tax adjustments.
2. Consolidating Retirement Benefits: Starting from April 2022, depositing retirement funds into an IRP account has become mandatory. This allows individuals to manage accumulated retirement benefits from various jobs more effectively.
3. Accessible to Self-Employed: IRP is open not just to employed individuals but also to self-employed and freelancers, providing them a way to accumulate retirement savings and benefit from tax incentives.
Understanding the differences between these retirement options is essential for individuals to make informed choices and secure their financial futures effectively.