Retirement Pension

A system that reserves and manages workers' retirement benefits outside the company and converts them into retirement income, operated in three forms: DB, DC, and IRP.

Retirement Pension

Overview

Retirement pension is a system in which the retirement benefits workers receive upon retirement are accumulated at financial institutions outside the company and, over the working life, augmented with investment returns and converted into retirement income. It was introduced with the enforcement of the 'Employee Retirement Benefit Security Act' in 2005 and aims to shift the existing structure centered on lump-sum severance pay to a pension-centered structure. Korea is at the center of system reform as discussions on mandatory retirement pension (phased) from 2026 have gained momentum.

Key Details

Three Forms of the System

Defined Benefit (DB): The benefit to be received at retirement is fixed in advance. It is usually calculated as 'average wage for at least 30 days × years of service', and management responsibility and risk are borne by the employer (company). Workers do not participate in management.
Defined Contribution (DC): The company contributes at least 1/12 of the total annual wages each year to the worker's account, and the worker directly gives investment instructions. Retirement benefits vary depending on investment performance, and additional contributions (IRP) are also possible.
Individual Retirement Pension (IRP): A personal account to which retirement benefits can be transferred or into which individuals can freely contribute. It serves as a consolidated account for retirement benefits received upon job change or retirement, and contributions eligible for tax credits are also possible.

Accumulation and Management

DC and IRP subscribers can invest in a variety of products, including deposits, bond funds, equity funds, ETFs, TDFs (Target Date Funds), and REITs. However, investment in risk assets (such as equity funds) is limited to 70% of total reserves, and concentration rules apply by individual product. Investment education (pre-education) must be completed to invest in risk assets.

Tax Benefits

A tax credit applies to contributions to pension accounts (pension savings + IRP) up to KRW 9 million (KRW 6 million for pension savings + KRW 3 million for IRP). The credit rate is 16.5% for total salary of KRW 55 million or less and 13.2% above that, and additional IRP contributions are also included in the eligible amount. Investment gains are tax-deferred, and receiving benefits as a pension applies pension income tax (3.3–5.5%), which is more favorable than receiving a lump sum (retirement income tax).

Receipt Methods

Retirement benefits can be received as a lump sum or as a pension (pension receipt). To receive them as a pension, requirements such as being aged 55 or older and having a subscription period of at least 5 years must be met, and the annual pension receipt limit (installment receipt until death) must be observed to maintain tax benefits. Early withdrawal is permitted only for statutory reasons, such as home purchase, jeonse deposit, or medical care for six months or more.

Default Option (Pre-designated Management System)

Introduced in 2022 and fully implemented from July 12, 2023, this system automatically manages contributions in a pre-designated product (ultra-low-risk, low-risk, medium-risk, or high-risk grade) if the worker does not give investment instructions. DC and IRP subscribers must designate at least one default option; if none is designated, the product is managed according to the workplace's rules.

Protection Devices

Retirement pension reserves are accumulated outside the company even if the financial institution goes bankrupt, separately from deposit insurance (KRW 50 million per person; discussions on a separate protection limit continue), and workers are granted preferential payment rights even if the employer goes bankrupt. In addition, supervisory authorities inspect issues such as failure to execute investment instructions, excessive fees, and concentration in principal-and-interest-guaranteed products.

Latest Trends

In the 2024–2025 retirement pension market, the key keywords are reserves surpassing KRW 400 trillion and improved returns. Moving away from a structure in which principal-and-interest-guaranteed products (deposits) accounted for more than 80%, allocations to performance-linked products, TDFs, and ETFs are increasing rapidly. In 2024, financial authorities revised the retirement pension supervisory regulations and pursued mandatory disclosure of the total expense ratio (TER), expanded disclosure of performance and risk indicators for default option products, and simplification of custodian institution change procedures for workplaces with reserves of KRW 30 billion or more. In 2025, along with a roadmap for mandatory retirement pension, policy tasks under discussion include expansion of the IRP tax credit limit (up to KRW 12 million under discussion), rationalization of taxation at the pension receipt stage, and transfers between pension accounts (ISA and pension savings linkage). In addition, AI-based robo-advisor advisory services, ETF-centered low-cost management, and the spread of digital IRP platforms (mobile apps) have become major market trends. Strengthening the three-tier system of retirement pension–national pension–personal pension to fill the retirement income gap caused by aging and ultra-low fertility is the broad direction of policy.