If you put 7 million won now, you will get 1 million won back next February… Pension Use Tax Guide

2020, when everyone was struggling with Corona 19, is not far away. If you’re an office worker, you shouldn’t miss the payment of personal pensions, one of the top financial products that you must join before the year changes. This is because the tax refund benefits that can be returned at the year-end settlement early next year are very large.

Maeil Economy’s’Don Tour’ met with Dr. Jang Deok-jin, a pension expert, to learn about tax savings using pension savings funds and personal retirement pension (IRP) accounts. Dr. Chang earned a Ph.D. in Economics from the City University of New York and retired as vice president of Shinhan BNP Paribas Asset Management in 2016, gaining a reputation as a fund and pension product expert in Yeouido’s capital market for over 20 years. He recently published a book in Iran, revealing tips on pension investment that novice office workers must know.

Dr. Chang said that if you pay 7 million won per year as a personal pension, you can get back the tax of 920,000 to 1.15 million won through year-end settlement, as well as reduce the tax burden to at least 5.5% when investing in overseas equity funds. He stressed that we should not miss the opportunity to save money. As for the management method of pension assets, it is advised to diversify 80% in global equity funds and 20% in principal and interest guarantee products from a long-term perspective despite the burden from the recent short-term surge in domestic and overseas stock markets.

The following is the full text of the interview.

A. This is because the national pension and retirement pension alone are insufficient for retirement funds. When talking about the standard of living in old age, the replacement rate is used. The replacement rate is the proportion of post-retirement income, or pension income, to pre-retirement income. The replacement rate should be 70% to be considered appropriate. Those who earn 5 million won per month before retirement can maintain their pre-retirement lifestyle only if their pension income is 3.5 million won per month. Developed countries want to achieve 45% replacement rate with the national pension. In Korea, 40% is the goal.

However, 40% of them have to work 40 years before they turn 60. It is not easy to work 30 years, but if you work for 30 years, it is 30%. Even if you achieve 20% with retirement pension, 20% is insufficient. The government provides various tax incentives so that insufficient funds can be raised as personal pensions.

In the future, pension accounts will be advantageous in terms of taxation, even when raising other amounts of money. From 2023, two years later, the financial investment income tax, which is subject to 22% tax on gains from trading of financial assets, will be implemented. Publicly offered domestic equity funds are tax-free up to KRW 50 million in trading profit, but if you invest in foreign equity funds or other funds, the tax on the trading profit is 22%. The tax rate is 5.5% or less when the investment income generated from the pension account is withdrawn to an annuity, and 16.5% is lower than that of a general account, even when it is withdrawn.

If you or your dependents withdraw medical expenses from illness or injury that require more than 3 months of care from your pension account, you only pay 5.5% tax instead of 16.5%.

A. You can pay up to 18 million won per year from your pension account, and you can receive tax deductions up to 7 million won. Pension savings accounts are limited to KRW 4 million, so you can receive tax benefits up to KRW 7 million by using an IRP account. Subscribers over the age of 50 can receive tax credits of up to 9 million won if their total salary is less than 120 million won. The refund tax rate is 13.2% of the amount paid, but it increases to 16.5% if the total salary is less than KRW 55 million. If the tax credit limit of 7 million won is paid to the pension account, 16.5% of the 7 million won or 1155,000 won will be refunded if the total benefit is less than 55 million won. can.

A. It’s a good idea to subscribe and manage both. It’s important to get your tax refund back on your pension account, but it’s more important to increase your return. Pension savings fund accounts can only invest in funds, and IRP accounts can invest not only in funds, but also in principal and interest guaranteed products. However, except for some large securities companies, IRP accounts have a management fee, and when you join the fund and redeem it, it takes one more day than pension savings. Pension savings funds are more versatile than funds that can be invested in IRP. It is advisable to open both accounts to invest in the pension savings fund account and the principal and interest guaranteed product in the IRP account.

A. Because IRP account fees are different for each financial institution and there is a large difference in the funds that can be invested, you should compare them carefully. As a brief advice, it is recommended to open a pension savings fund account at a fund supermarket, and an IRP account at a large securities company that has many funds and is exempt from management fees. The Fund Supermarket offers the largest number of pension savings funds.

The fund pays the lowest and has the most information to analyze the fund. IRP accounts of large brokerage firms provide a variety of products with principal and interest guarantees for other businesses, including savings bank term deposits. In order to invest in an ETF in your pension account, you must open it with a securities company.

A. There is no single solution I can recommend to everyone. Each individual has a different investment period, investment experience, and the nature of the amount of money they want to raise. Here, assuming that a novice investor in their 20s to 30s invests on a monthly basis for more than 10 years, I will explain how to invest in the beginning. It is suggested to invest 80% in global equity funds and 20% in bonds or principal and interest guaranteed products for the first 3-4 years of investment.

Since the current interest rate is zero and the interest rate is more likely to rise rather than decline for the time being, it is better to subscribe to the two financial sector principal and interest guarantee products, which give 1.8~2% per year rather than bond-type funds.

You might think it’s risky to ask a novice investor to invest 80% in equity funds, but there are pessimism about the stock market next year, but the consensus seems to be a bull market. However, as most of the world’s stock markets are at all-time highs every day, there is a possibility of a sharp fluctuation in the short term. However, since you will be investing for more than 10 years, regardless of the market conditions, it is a good idea to bring at least 80% to equity funds at the beginning of your investment. Even if the stock price declines, if you continue to invest in the accumulation method, you will buy additionally at a lower price, so when the stock price recovers, the rate of return turns to positive. The worst situation when investing in a long-term accrual method is to repurchase the fund and settle the loss, fearing that the stock price will drop sharply and the loss will fall further when the loss increases by 10% or 20%.

In particular, novice investors with little investment experience are likely to do so, but in this case, even if the stock price recovers, losses cannot be recovered. If investing 80% in equity funds is burdensome, divide 80% to invest in global equity funds by 7:3, and invest 70% in global equity funds, but deposit 30% in money market funds (MMF). We invest at this rate for about 6 months or a year. When the fund loss exceeds 10%, the MMF is withdrawn and the so-called water splashing is performed on the global equity fund. From then on, we invest 80% in global equity funds as originally planned.

A. If you pay 4 million won each year for 25 years from 30 to 55 years old, the principal is 100 million won. If the return on investment is 4%, the combined return on investment can be raised to 280 million won by age 55. It is almost three times the principal amount. Due to the long investment period, the profits expanded like a snowball. Warren Buffett called this magical compounding effect.

It emphasized the importance of long-term investment. Since Korea has an average life expectancy of about 85 years old, if you withdraw for 30 years, you can receive about 9.3 million won per year as a pension. However, after the age of 70, the amount to be withdrawn is about 140 million won, and I will withdraw this little by little from 15 years later, but it is too wasteful to leave it in cash until then. If you invest this money until the age of 65, an additional investment income of 45 million won will be generated at the age of 55, and the pension will increase to about 10.7 million won each year. By investing 4 million won for 25 years, you receive 10.7 million won every year for 30 years after retirement.

A. Naturally, it is the national pension. Re-enrollment in the national pension system, which is called additional payment or future payment. Additional payment is a system in which the subscription period is recognized if all of the previous premiums were paid after joining the National Pension Plan after quitting work. However, as the National Pension Act was revised in early December, the period for additional payments was limited to 119 months, which is less than 10 years.

In the last two months, the Internet or the National Pension Service’s counseling phone has been raging over the past two months to see if it is better for housewives to pay extra before the law goes into effect. The revised law goes into effect as soon as it is promulgated, but I think it could be promulgated at any time. If you are over 10 years old, please contact the National Pension Service as soon as possible.

Full-time housewives who have never enrolled in the national pension can also receive the pension by applying before age 60 and paying the premium for 10 years or more. This is called voluntary subscription, and additional payments or voluntary subscriptions continue to increase. The reason is that the national pension has a better cost-performance than any other product. If a full-time housewife subscribes to the national pension in addition or voluntarily, the premium can be paid between 90,000 and 220,000 won per month as of this year. If you pay 90,000 won per month for 10 years, you will receive 4 times the premium paid for 20 years as a pension. If you pay 220,000 won, you will receive twice as much as the premium paid as a pension. The national pension is received for life, so the longer you live, the better the cost performance.

If you give a tip when signing up for the national pension voluntarily, extend the signup period if possible. This is because the cost performance is better by extending the subscription period rather than increasing the monthly premium. For example, you can get more pensions by signing up for 20 years at 90,000 won per month than signing up for 10 years at 180,000 won per month.

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