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2022 Jan/13
Retirement Income Tax Reform and Annuitization in Korea
Issue Papers 22-02
PDF
- Research Topic Asset Management/Pension
- Page 20
- Summary
- In the 2010s, the Korean government revised the Income Tax Act to increase the tax burden for retirement income paid in a lump sum. The reform gradually increased the tax from 2015 to 2020. In addition, if a plan member transfers retirement income to the individual retirement pension account to select annuity payment, the applicable tax would be reduced to 70% of that imposed on lump-sum withdrawals.
The reform primarily aimed to promote annuitization of retirement income, by driving up the tax burden for lump-sum withdrawals of retirement benefits (retirement annuity and severance pay). The tax policy for lump-sum payments was considerably generous, thanks to the previous severance pay scheme. The effective tax rate of around 3% was applied to most retirees who withdrew their retirement income in a lump sum. But the reform abandoned fixed-rate deductions that were applied regardless of the amount of retirement benefits and imposed a relatively higher tax rate on the annualized wages.
This article analyzed how the tax amount imposed on retirement income changed by referring to the statistical yearbook published by the National Tax Service. It was found that nearly 50% of the retirement income was transferred to the individual retirement pension account after the revised retirement income tax policy was fully implemented in 2016. The group of retirees being subject to higher effective tax rates held a larger proportion of deferred retirement income. As the years rolled by after the end of 2016, retirees tended to hold a larger proportion of deferred retirement income. Given the above, the first phase of annuitization has achieved some measure of success. However, the contributions accumulated in the retirement pension account, being similar in amount to the retirement income transferred annually to the retirement pension account, were withdrawn in any form other than annuity payments. This implies that once transferred to the retirement pension account, retirement income rarely stays long in the account.
More incentives should be offered to ensure that retirement benefits would be placed in the retirement pension account for a longer period and then be annuitized. One solution is to allow retirees to withdraw part of their retirement assets tax-free for emergency funds.