The money you receive when leaving a company in Korea is collectively called “retirement benefits”. They are paid through one of several systems set by law, and which system you are in determines how much you get, when you get it and what you need to pay attention to.
Types of retirement benefit
- Severance pay: the employer doesn’t set money aside separately; it pays a lump sum from company funds when you leave. The amount is average daily wage × 30 days × days of service ÷ 365.
- Defined-benefit retirement pension (DB): the amount you receive is set in advance by the same formula as severance pay, and the employer deposits and invests the money with a financial institution.
- Defined-contribution retirement pension (DC): the employer puts a set amount into the employee’s account each year, and the employee invests it. What you receive depends on investment performance.
Severance pay and DB plans calculate the amount the same way. The difference is whether the employer keeps the money with an outside financial institution: under a DB plan, the amount set aside is protected even if the company goes under.
On severance pay or a DB plan, you can estimate the amount right away
Calculate severance payDB vs DC compared
| Item | DB (defined benefit) | DC (defined contribution) |
|---|---|---|
| Amount received | Based on the average wage of the last 3 months before leaving | Annual contributions + investment returns |
| Employer contributions | The employer manages them | At least 1/12 of annual total pay each year |
| Who invests | The employer | The employee |
| Investment gains and losses | Borne by the employer | Borne by the employee |
| On changing jobs | Transferred to an IRP on leaving | Balance transferred to an IRP |
Which system suits you
DB is better when
- You work at a company where pay rises steadily, such as a seniority-based pay system
- You plan to stay long at one company
- You aren’t interested in investing or worry about losing principal
A DB plan calculates benefits for your entire service based on your pay just before leaving, so the more your pay rises, the better it is.
DC is better when
- Your pay is expected to stop rising or to fall, for example under a wage-peak system or a pay freeze
- You change jobs often
- You are confident you can invest to earn more than your pay growth
Just before a wage-peak system cuts your monthly pay, switching to DC is generally better. But once you switch to DC it is hard to go back to DB, so decide carefully.
IRP and retirement income tax
An IRP (individual retirement pension) is a personal account for holding retirement benefits. Since 14 April 2022, retirement benefits must in principle be paid into an IRP account. Exceptions include leaving at age 55 or over and benefits of ₩3 million or less.
- Withdraw right away: you receive it after retirement income tax is deducted.
- Keep it in the IRP: you can defer retirement income tax instead of paying it right away.
- Receive it as a pension after 55: retirement income tax is cut by 30% (40% from the 11th year of pension payments).
If you don’t need the money right away, keeping it in an IRP, investing it and later taking it as a pension is better for tax. Extra money you put into an IRP also qualifies for the year-end tax credit.
When can you take an interim settlement?
Severance pay is in principle paid when you leave, so taking it early while employed (an interim settlement) is possible only for reasons set by law.
- A non-homeowner buying a home in their own name
- A non-homeowner paying a jeonse or rental deposit to live in (once at the same company)
- You, your spouse or a dependent needing six months or more of medical care, with medical costs above 12.5% of annual total pay
- A bankruptcy declaration or a decision to start individual rehabilitation within the last five years
- Pay falling because of a wage-peak system or reduced working hours
Remember that an interim settlement settles your service up to that point, so the severance pay you receive later is reduced accordingly.
References
- Korea Law Information Center Employee Retirement Benefit Security Act
- Ministry of Employment and Labor retirement pension guide
- Financial Supervisory Service integrated pension portal