The Herald Business is launching "Yeonbu" (Pension Rich), a practical personal-finance series on building wealth through pension accounts. Everyone knows a pension is the most reliable asset for retirement — but the rules and management options are complex enough to leave many people unsure where to begin. The series lays out a systematic strategy covering goal-setting, growth and withdrawal planning to guide readers toward a pension-rich retirement.
Jang Mi-so (pseudonym), a woman in her 50s, retired last November after 30 years in the workforce. Her severance package came to about 500 million won ($340,000). Having enrolled in a retirement pension plan back in 2009, and having watched most of her former colleagues deposit their severance into an individual retirement pension (IRP) account to grow their assets and enjoy tax benefits, she planned to do the same.
Then a forgotten obligation surfaced. She realized she owed a 200 million won real estate balance payment due the following January. Facing an urgent need for a large sum, she visited her bank unsure whether routing her severance through an IRP still made sense.
The bank's pension specialist said the answer was still the IRP. By receiving the funds through an IRP spread over five years, she could withdraw 111.6 million won after tax in 2025 and another 88.4 million won after tax in January 2026 — collecting the 200 million won she needed while saving 6 million won in taxes.
Following the specialist's advice, Jang settled the balance payment without difficulty. The remaining 300 million won stayed inside the IRP, allowing her to continue building her retirement savings and ultimately reach the full 15 million won tax-reduction ceiling over five years.
Experts warn that withdrawal strategy matters enormously — pointing to "The Dream Life of Mr. Kim," a drama series in which the protagonist pours his entire lifetime severance into an unvetted real estate investment in one go and suffers heavy losses, as a cautionary example of what poor planning can cost.
Q: How is severance paid out through a retirement pension plan?
A: Since April 2022, transferring severance into an IRP account has been mandatory — you must have an IRP account to receive your severance pay. Even so, you can close the IRP and take the full amount as a lump-sum cash withdrawal into a regular deposit account, at which point retirement income tax is deducted.
If you are already 55 or older at retirement, or if your severance is 3 million won or less, you may receive it directly into a regular deposit account without going through an IRP. Retirement income tax is still deducted in that case.
If you do not need a large sum immediately and choose to receive the money as a pension in installments after age 55, the government reduces the retirement income tax you would otherwise owe by 30 to 50 percent.
When there is no urgent cash need, receiving severance through an IRP is theoretically the better way to maximize returns. Inside the IRP, retirement income tax is deferred until you actually make a withdrawal, allowing compound growth to work longer on the full pre-tax balance.
Q: Can you still get the retirement pension tax break if you need emergency cash right after retiring?
A: You first need to understand the concept of the annual pension withdrawal limit. Each year, the maximum you can withdraw under pension tax-relief rules equals the total assessed value of your pension account divided by (11 minus your pension-receipt year number), then multiplied by 120 percent.
The pension-receipt year number simply counts how many years you have been drawing the pension — year one is the first year you start receiving it, year two is the next, and so on. Under current rules, pension accounts opened before March 1, 2013 begin counting from year six.
Because Jang enrolled in her retirement pension before 2013, her pension-receipt year number is six. Dividing her 500 million won severance by five gives 100 million won; multiplying by 120 percent yields a 120 million won annual limit. The following year the year number advances, unlocking additional withdrawals. This means she can manage her retirement pension with tax benefits without taking the severance as a single lump sum.
It is worth noting that this formula sets only the maximum amount eligible for tax relief in a given year. In practice, pension holders can choose to receive a fixed regular amount or withdraw freely as needed.
To qualify for the tax reduction, however, withdrawals must stay within the annual limit. If the limit is 100 million won, for example, amounts up to that threshold receive a 30 percent reduction in retirement income tax. Withdraw 200 million won and the 100 million won above the limit loses the discount entirely — full retirement income tax applies to that excess.
Q: Is it true that starting to draw from an IRP raises your national health insurance premium?
A: This is one of the most common questions from workers approaching retirement. The short answer is no — under the current national health insurance premium assessment system, private pension income from a retirement IRP or personal pension savings account is not subject to health insurance premiums.
The income categories that form the basis of national health insurance premium calculations are interest income, dividend income, business income, earned income, pension income and other income as defined by the income tax law. Not all pension income triggers a premium, however. At present, premiums apply only to public pension income — the national pension, civil servant pension, private-school employee pension, military pension and special postal service pension. Retirement pension income is not included.
Q: If private pension income exceeds 15 million won a year, the tax burden increases — how should that be managed?
A: Under current rules, private pension income above 15 million won a year is subject to either global income tax or separate flat-rate taxation. That said, not every won withdrawn from a pension account counts toward the 15 million won global-taxation threshold.
Within an IRP, the order of withdrawal and the applicable tax treatment differ depending on the source of the funds. An IRP can hold severance pay transferred in at retirement, as well as personal contributions — money an account holder deposits from their own earned income while still employed. The government offers a tax credit on personal contributions: up to 9 million won of the 18 million won annual contribution ceiling qualifies for a year-end tax credit.
When you begin drawing pension payments from an IRP, withdrawals follow this order: personal contributions that did not receive a tax credit → severance pay → personal contributions that did receive a tax credit → investment returns.
Of these, only the tax-credited personal contributions and investment returns count toward the 15 million won annual threshold.
One effective management strategy is to split a personal IRP into two separate accounts by purpose — keeping severance pay in one account and tax-credited personal contributions in another, which makes withdrawal planning considerably easier.
From the account holding tax-credited contributions, you withdraw while keeping annual pension income below 15 million won, then draw from the severance account whenever additional living expenses arise. Once the severance funds are fully withdrawn, you can begin taking investment returns as pension income — again managing the amount to stay under 15 million won a year — which helps reduce the risk of triggering global income taxation.
By Seo Sang-hyeok / Han Yu-jin, deputy manager at Woori Bank
hyuk@heraldcorp.com
