Voluntary Retirement Preparation Must Be Hastened... Private Pension Tax Support Cannot Be Delayed Any Longer

[Super-Aged Society and Private Pensions - Part 2]
81% of Pension Savings Accounts Below Tax Deduction Limit
Used More for Tax Deduction Than Retirement Preparation

[Asia Economy Reporter Oh Hyung-gil] Even if people subscribe to pension savings products to prepare for old age, the actual amount they pay is far from sufficient.

Since it is urgent to reduce spending immediately and save money for the future, institutional incentives need to be established, but related discussions remain stagnant. Experts point out that tax support for private pensions should be increased so that citizens can voluntarily prepare for their retirement.

Pension Savings Have Become a Means of Tax Credit Rather Than Retirement Preparation

According to the Financial Supervisory Service on the 29th, the total annual payment for pension savings contracts last year was 9.703 trillion won. The annual payment per pension savings contract was 2.5 million won, an increase of 130,000 won from the previous year (2.37 million won). Since the pension amount increases as the payment amount accumulates, the increase in payments is welcome news.

However, it was found that 81.2% of all pension savings accounts maintain payment amounts below the tax credit limit (4 million won). This indicates that pension savings subscriptions are being used primarily to receive tax credits rather than for the original purpose of saving money for retirement. This is why there are calls to increase the tax credit limit for pension savings to better prepare for a more comfortable retirement.

Currently, a bill to increase the tax credit for pension savings accounts to support the formation of retirement income for citizens urgently needing retirement preparation has been proposed in the National Assembly, but discussions have effectively halted due to the presidential election climate.

On August, Go Yong-jin, a member of the National Assembly’s Planning and Finance Committee from the Democratic Party, proposed amendments to the Income Tax Act and Restriction of Special Taxation Act to expand the tax credit limit to 6 million won annually for pension savings accounts regardless of income or age, and to 9 million won annually when combined with retirement pension accounts.

The amendment to the Income Tax Act focuses on providing an additional 2 million won tax credit beyond the pension account tax credit limit to residents aged 50 or older with comprehensive income and whose total withholding tax on interest and dividend income is 20 million won or less. The amendment to the Restriction of Special Taxation Act includes deleting the current provisions related to pension account tax credits.

More Tax Credits Needed for Private Pensions

[Image source=Yonhap News]

Tax-qualified pension savings, introduced in 2001, are private pension products sold by insurance companies and securities firms, offering a tax credit of 13.2% to 16.5% within an annual limit of 4 million won.

A certain percentage of the pension account payment amount is deducted from the comprehensive income tax payable. For pension savings accounts, tax credits can be received up to an annual limit of 4 million won, and when combined with retirement pension accounts, up to 7 million won.

In particular, the Restriction of Special Taxation Act provides an additional 2 million won tax credit on pension account payments for residents aged 50 or older from 2020 to 2022 compared to the current law. The amendment proposes increasing the tax credit limit to 6 million won annually for pension savings accounts and 9 million won when combined with retirement pension accounts, without income or age restrictions.

There are also calls to modernize tax credits for protection insurance premiums to reduce the burden of increasing medical expenses during old age, such as dementia or caregiving costs.

Currently, 12% of protection insurance premiums are tax-deductible from earned income, and the annual deduction limit was raised from 700,000 won to 1 million won in 2003 and has remained unchanged for over 20 years. However, since most of the limit is filled by subscribing to automobile insurance, there is little incentive to purchase additional protection insurance.

An insurance industry official said, "Although the tax credit for protection insurance premiums mostly targets low- and middle-income earners, the deduction limit has not reflected inflation at all," adding, "It is necessary to expand the tax credit limit for protection insurance to 2 million won to prepare for medical expenses in old age."

This content was produced with the assistance of AI translation services.