[PB Notebook] It's Time to Prepare Your Year-End Tax Settlement Documents Now

As December begins without fail, it marks the time to wrap up the year. With the year-end approaching, office workers must prepare for the year-end tax settlement conducted early next year based on this year’s income. Tax-saving strategies are always important. However, in times like these when asset prices, including stocks and real estate, have fallen significantly, they feel more crucial than ever.

Contributions to pension savings and Individual Retirement Pensions (IRP) are tax-saving methods that can maximize tax deduction effects. In particular, the IRP is a product that all employed and self-employed individuals with income can freely contribute to, allowing for year-end tax credit before retirement and pension income after retirement.

Combining pension savings and IRP allows for a tax credit of up to 7 million KRW. Until the end of 2022, there is a temporary provision allowing those aged 50 and over to receive tax credits up to 9 million KRW, so it is advisable to check the detailed conditions and not miss this opportunity.

While taking advantage of tax credit benefits, interest in how to manage the money deposited into pension accounts is also increasing, but due to the stock market decline, investors’ fear of investing in risky assets is growing. In fact, since these accounts cannot be canceled immediately, many individuals either invest solely in fixed deposits or neglect their accounts even after maturity. Fortunately, in July 2022, the Worker Retirement Benefit Security Act was amended and implemented, introducing the ‘Default Option’ system.

The ‘Default Option’ (Pre-Designated Management System) is a system where, if a retirement pension subscriber does not provide management instructions, the pension is managed according to a default option product pre-designated by the subscriber. This system, already adopted by pension-advanced countries such as the United States, the United Kingdom, and Australia, aims to improve returns and guarantee subscriber benefits for those who neglect their retirement pensions. The Default Option applies to Defined Contribution (DC) retirement pensions (managed directly by the customer) and IRP.

The Default Option is applied after a maximum waiting period of six weeks if the worker does not provide management instructions even after the maturity of the existing product they subscribed to. Of course, if the subscriber wishes, they can instruct immediate management under the Default Option without the six-week waiting period.

Each provider offers Default Option portfolios classified by risk levels, typically ultra-low risk, low risk, medium risk, and high risk. The main products of the Default Option include Target Date Funds (TDF), asset allocation funds, and fixed deposits. These products are combined into portfolios according to risk levels for selection.

TDF is a fund that automatically adjusts the portfolio ratio between investment assets and stable assets based on the investor’s retirement timing. When young, the fund holds a higher proportion of stocks, and as retirement approaches, it increases the proportion of stable assets. Since TDFs also invest in global assets, investors must choose whether to eliminate or reflect currency fluctuation risks that affect returns. The management types include ‘active funds’ that operate aggressively, ‘passive funds’ that follow benchmark indices and operate defensively, and ‘hybrid funds’ that utilize both strategies. Since TDF funds have been introduced in Korea for over five years, they are subdivided by currency strategy and management type by each asset manager, and actual performance can be verified.

Asset allocation funds invest diversely across various assets and manage risk through periodic rebalancing; EMP funds fall into this category. EMP invests in ETFs (Exchange-Traded Funds) that diversify across domestic stocks and bonds as well as overseas stocks, regions, and sectors, enabling ultra-diversified investment by further subdividing ETFs.

Whether someone dislikes losses so much that they want 100% fixed deposits, wants continuous and stable management regardless of retirement timing, or is a client expecting high returns including currency gains, the most important thing is to keep the investment running without interruption. Pension investment should be viewed from a long-term perspective, so steady returns are more important than anything else.

KB WM Star Advisory Group GOLD&WISE THE FIRST Center

Im Eun-sun, Deputy Center Head

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