A retirement pension is a system in which a company entrusts severance pay to a financial company to ensure retirement, operates it under the direction of the company or employee, and receives payment as a lump sum or pension upon retirement. Let’s take a look at retirement pensions, including the DC type and the default option introduced in July.
Severance pay payment standards
The criteria for receiving severance pay are those whose continuous employment period exceeds one year. If the working hours per week are more than 15 hours on average over 4 weeks, the company must pay severance pay to the retiring worker. Here, periods of employment exceeding one year exclude periods of leave due to childcare, childcare, injury, illness, etc. Even if you work at a workplace with less than 5 employees, are not enrolled in the four major insurance policies, or do not have an employment contract, you can receive severance pay if you have worked for more than 1 year and worked more than 15 hours a week.
Severance pay payment deadline
When an employee retires, the employer must pay severance pay within 14 days from the date of resignation.
How to calculate severance pay
Severance pay – average daily wage
Average daily wage = Total salary for 3 months / Total working period for 3 months
Average wage means the total amount of wages paid to the worker during the three months prior to the date on which the reason for calculation occurred divided by the total number of days in that period.
An average wage of at least 30 days must be paid to a retiring worker based on one year of continuous employment.
The average daily wage is the sum of wages earned during the three months prior to the date of resignation divided by the number of days worked during the three months.
Bonuses paid to specific individuals are excluded, and congratulatory money paid to all employees and incentives based on business performance, rather than bonuses, are excluded from the average wage.
Periods of leave due to childcare leave, maternity leave, injury, illness, etc. are not included in the average wage calculation period. If you are on leave but resign from the company due to personal reasons, severance pay is calculated based on the average wage from the three months before the leave to the date of leave.
Severance pay calculation example
Date of joining – October 2, 2020
Retirement date – September 30, 2023
Monthly salary – 2.5 million won
Average daily wage = Assuming the hiring date is October 2, 2020 and the leaving date is September 30, 2023, the total working hours are 1093 days. Also, assuming that the monthly salary is 2.5 million won, 2.5 million won The total number of working days in 3 months is 92 days (June 30 is 1 working day, July is 31 days, August 31 is 29 days, and September is 29 days). When calculating the average daily wage, it is 7.5 million won / 92 = 81,521 won.
Severance pay = 81,521
Differences between severance pay and retirement pension
The biggest difference between severance pay and retirement pension is the payment method. The severance pay system is a system that pays severance pay to workers in a lump sum for the period they worked from the date they joined the company. At this time, the worker is paid 30 days’ average wages for one year of continuous employment. Anyone can be paid regardless of their work type, including regular workers, contract workers, daily workers, and part-time workers. This excludes periods of leave due to childcare, childbirth, injury, illness, etc. while working for more than one year. Additionally, if there is no collective agreement or provision for payment of severance pay even when working for less than 1 year, workers who have worked for less than 1 year cannot receive severance pay. Severance pay is paid in a lump sum, so retirement income is not guaranteed.
Retirement pension systems are largely divided into DC, DB, and IRP. The difference between DC and DB types is whether the company directly operates the retirement pension or the employee manages it. The retirement pension system allows you to receive a pension after the age of 55, reducing your tax burden and allowing you to live a stable life in retirement.
Types of retirement pension
Defined benefit type (DB type)
Defined benefit DB is a benefit in which the retirement benefit a worker will receive is set. Employers can accumulate and manage contributions annually, and workers can receive a pre-determined salary upon retirement. At this time, the fixed salary is paid at least an amount equivalent to 30 days of average wages for one year of continuous employment.
Defined contribution type (DC type)
In a defined contribution DC, the employer pays a contribution of more than 1/12 of the total annual wage, and the worker manages the savings and can receive the savings and management profits as a salary upon retirement.
Individual type (IRP)
In addition to the retirement benefit user contribution, additional contributions can be paid by setting up an IRP account. IRP, an individual retirement pension, is a retirement pension system established to accumulate and manage lump sums or contributions paid by the subscriber according to the subscriber’s choice, and is a system in which the level of benefits and contributions are not fixed.
Individual Retirement Pension (IRP)
To receive severance pay, you must create an IRP account. An IRP account is an individual retirement pension system that allows you to manage your personal retirement pension. This refers to a bank account in which the amount accumulated by an individual or the severance pay received at the time of retirement is transferred to the IRP account if the individual is under the age of 55 and received as a pension after the age of 55. IRP accounts can be opened at securities companies, insurance companies, and banks. Additionally, retirees who are not enrolled in a retirement pension or are over 55 years of age can transfer their IRP retirement benefits if they wish. As the law for the personal retirement pension IRP has changed to require that severance pay be paid only to the IRP account from 2022, workplaces are required to set up one or more retirement benefit systems. At this time, most workplaces are DB type (extended benefit type) or DC type (confirmed). If you choose the contribution type and retire, you must receive severance pay into your IRP account.
※ An IRP account is required to receive severance pay, but a general account can also be used for the following cases.
When a worker retires after the age of 55 and receives benefits
If a worker dies
If the salary is less than the amount determined and announced by the Minister of Employment and Labor
When other laws require all or part of salary to be deducted
If the worker is a foreigner and leaves the country after retirement
※ IRP subscriber benefits
Tax deduction possible up to 7 million won per year
30-40% savings on retirement income tax
Later, if you receive salt money of 12 million won or less, a tax rate of 3.3% to 5.5% will be applied.
If the amount received exceeds 12 million won, you can choose between comprehensive taxation and separate taxation.
Click here to calculate severance pay
Difference between DC and DB
There are two types of retirement pension: IRP, which anyone with income can subscribe to, DC (defined contribution), and DB (defined benefit) set by the company. Let’s look at the differences between DC and DB.
※ DB type (‘company responsibility type’ where the company is responsible for operating losses and performance)
The defined benefit type (DB type) is a system in which the retirement benefits that workers will receive are set.
In the DB type, the company is responsible for operating losses and performance, so the severance pay that employees receive is the same regardless of the financial institution’s operating performance.
The severance pay an employee will receive upon retirement is determined by the length of service and average wage.
It is advantageous when there are many opportunities for promotion and the wage increase rate is high. Also, if long-term service is possible or stability is considered, the DB type is good. For the DB type, savings are calculated based on salary for 3 months before retirement.
Conversion from DB type to DC type is possible, but conversion from DC type to DB type is not possible.
DB type does not allow early withdrawal.
※ DC type (‘employee responsibility type’ where workers directly manage their savings)
The defined contribution type (DC type) is a benefit system in which the company pays 1/12 of the annual salary (more than the average monthly salary) into a retirement benefit account and allows workers to directly manage their savings.
From the worker’s perspective, there is a disadvantage of having to bear losses, but if it is managed well, it is a structure that can generate a lot of profit.
Recommended for those who are confident in investing. Contrary to the DB type, it is advantageous for people who have few opportunities for promotion, low wage growth, and frequent job changes.
※ DC-type reasons for early withdrawal
When a worker who does not own a home purchases a house in his or her own name
When a worker who does not own a home pays jeonse or monthly rent for housing purposes
If you, your spouse, or your dependents require medical care for more than 6 months (if medical expenses exceed 12.5%)
If you are declared bankrupt within 5 years from the date of application
If you suffer damage from a disaster
Retirement pension default options
Retirement pension default options
The retirement pension default option took effect on July 12, 2023, and has already been in effect in the United States since 2006.
The retirement pension default option is only available to workers with DC or IRP.
When a worker with a pension does not manage a separate retirement pension reserve, he/she decides on products such as funds or deposits in advance, and when any retirement pension investment product expires, the financial company automatically invests in the pre-determined product. It has been specifically designated.
If you are a DC type subscriber, it is recommended that you select one of the default option methods presented by the financial company.
If you do not issue management instructions within 6 weeks of signing up for a retirement pension, the default option set at the time of signing up will be implemented immediately.
Default options may have high or low returns depending on the management method you choose.
Only 7 to 10 default option products approved by the Ministry of Labor can be subscribed to.
The default option can be changed at any time in the future, and after investing only a portion, the remainder can be invested elsewhere.
The Financial Supervisory Service website announces default option comparison disclosures on a quarterly basis. Please check using the button below.
Source – Financial Supervisory Service
Comparison disclosure of default options (high risk, low risk)
How to check retirement pension
There are two ways to check retirement pension. Let’s take a look at how to check retirement pension.
How to check with Korea Workers’ Compensation and Welfare Service
1. After accessing the Korea Workers’ Compensation and Welfare Service website, click the retirement pension button.
2. Click the Retirement Pension System (DC/IRP) button.
3. Click the Introduction to Retirement Pension > Savings Management Status button.
4. Log in.
5. You can check the reserve management status in Asset Status.
Financial Supervisory Service website
1. Financial Supervisory Service site > Integrated Pension Portal > Check my pension > Sign up > Check national pension, retirement pension, personal pension, additional pension, etc.
How to receive retirement pension