One saver bought a pension savings insurance policy after being told it would pay about 9 million won a year, but the actual dividend came to just 190,000 won. Another saw the interest rate applied to the policy fall to 4.0% from 11.25% at the time of purchase, leaving the retirement payout well short of what had been projected.
Pension savings insurance policies taken out for retirement can pay far less than the amounts initially presented to buyers, warranting caution. Projected pension payments and dividends shown at the time of purchase can change depending on interest rates and an insurer's business performance.
The Financial Supervisory Service released a set of consumer warnings on the 21st under the title "Consumer Precautions for a Stable Retirement." Complaints and disputes continue to arise from misunderstandings about these products, both when policies are bought and when payouts begin.
In one case cited by the FSS, a pension savings insurance policyholder filed a complaint ahead of the start of payouts, saying the scheduled amount was less than the figure written in the policy illustration. The applied interest rate, which stood at 11.25% when the policy was taken out in the late 1990s, had fallen to the minimum guaranteed rate of 4.0%.
Rate-linked pension savings insurance builds up retirement funds by applying the policy's interest rate to the net premium set aside from payments. That rate can move with market interest rates. Policy illustrations, however, mostly calculate pension amounts on the assumption that the rate in effect at purchase holds until the end. If the rate is 5% at purchase, the projection assumes 5% interest will accrue until payouts finish. When the rate later falls, the actual pension inevitably comes in below the projection.
The same applies to policyholder dividends on dividend-paying pension savings insurance. The saver who received 190,000 won instead of 9 million won also bought the policy in the late 1990s. Dividends vary with an insurer's business performance, and projected dividends in illustrations are based on assumptions such as a particular interest rate gap holding until payouts end, so they can differ from what is actually paid. The FSS said the minimum guaranteed rate that applies to the policy's base annuity amount cannot be assumed to apply equally to dividends.
Amounts can also change after payouts begin. Under fixed-term plans, which spread payments over a set period, the pension amount is calculated based on accumulated funds and the remaining payout period. If the applied interest rate on a pension savings insurance policy or the return on a pension savings fund changes, investment income and payout amounts change with it.
Taxes can also shrink the amount that lands in an account. In another case presented by the FSS, a saver who had been receiving about 320,000 won a month since 2015 filed a complaint saying the amount fell to about 300,000 won after taxes began to be levied in 2021.
Pension savings funds are withdrawn in a set order: amounts excluded from taxation, deferred retirement income, and then taxable income such as contributions that received tax deductions along with investment gains. Savers first draw on money that is not taxed, and once withdrawals start eating into taxable funds, withholding reduces the amount actually received.
"If you are considering a pension savings insurance policy, you need to get a full explanation of whether it is a rate-linked product and what the applied interest rate and minimum guaranteed rate are before signing up," the FSS said.