South Korea's Financial Supervisory Service warned consumers that the pension payouts they are quoted when signing up for retirement savings plans may differ from what they eventually receive. For pension savings insurance, annuity and dividend amounts change with an insurer's business performance, and early withdrawals from a pension savings account can carry a heavier tax burden, the regulator said, urging savers to check the terms at each stage from enrollment through payout.
The FSS released the guidance, titled "Consumer Points to Note for a Stable Retirement," on the 21st, drawing on major dispute cases. Pension savings balances stood at 224.8 trillion won ($157 billion) at the end of the second quarter, up 13.4% from the end of last year. Disputes continue to arise as the market grows because savers do not fully understand how the products are structured and taxed, the FSS said.
Savers should first note that the annuity figure shown in the enrollment proposal before signing a pension savings insurance contract may be an estimate rather than a guaranteed amount. For interest-linked pension savings insurance, the annuity amount in the proposal is in most cases calculated on the assumption that the interest rate applied at the time of enrollment will be maintained. If that rate later falls, the actual payout can decline as well. In one case, a saver was told to expect annual dividends of about 9 million won but received only about 190,000 won. The minimum guaranteed rate applied to premiums does not extend to dividends.
On early withdrawal, contributions that received tax deductions and investment gains are in principle subject to a 16.5% other-income tax. A pension income tax of 3.3% to 5.5% can apply if an unavoidable reason is recognized, such as the saver's death, emigration, or medical care lasting three months or longer due to illness or injury. Supporting documents must be submitted to the financial company within six months of the date the reason is confirmed. For some grounds, including medical care, there is a cap on the withdrawal amount eligible for the lower rate, and the other-income tax can apply to anything above it.
Payments can also change after the annuity starts. Even for products designed to pay the same amount for a set period, the annuity can be adjusted if the applied interest rate or the investment return changes. Tax-exempt amounts within the balance are paid out first, and once taxable amounts are withdrawn, withholding tax arises and can reduce the amount actually received.
Savers moving from pension savings insurance to a pension savings fund should check whether an account transfer is possible. The transfer system allows savers to carry over their enrollment period without being taxed as an early withdrawal, but transfers can be restricted for accounts with policy loans or those subject to seizure, provisional seizure, or a pledge. Moving only part of the balance in an account is also restricted, so savers need to confirm the conditions with their financial company in advance.
