Sojin Park
Sojin Park

Retirement Pay

Most workers in South Korea retire at age 55 and may have no cash flow for about 10 years until they begin receiving the National Pension at age 65. The retirement pay system generates a stable cash flow during this income gap period, thereby securing a stable retirement.

If retirement pay is received as a lump sum due to a job change or other reasons, a significant income gap can arise between retirement and the start of National Pension payments.

There are largely three types of retirement pay systems in South Korea.

  • Lump sum:
    • Retirement pay is calculated based on the average wage of the last 3 months and the number of years of service, and paid as a lump sum.
    • For example, if the average wage over the last 3 months is 5 million won and the person worked for 20 years, the lump-sum retirement pay would be 5 million won × 20 = approximately 100 million won.
    • After receiving the lump sum, how to invest it is up to the individual.
    • Since it is paid from the company’s funds, if the company goes bankrupt, the retirement pay cannot be received.
    • Since the amount received is determined by the average wage of the last 3 months before retirement, if the wage growth rate is high, it is more advantageous to receive it as a lump sum or through the Defined Benefit (DB) type.
  • Defined Benefit (DB) type:
    • The amount received from the company is the same as the lump sum above, but it is paid in the form of a pension.
    • The payment period can be chosen as a lump sum or a period ranging from 5 to 20 years.
    • If retiring early due to a job change or other reasons, it is received as a lump sum.
    • The company sets aside reserve funds at an external bank or securities firm to pay retirement benefits. Thanks to these accumulated reserves, retirement pay can be received in part or in full even if the company goes bankrupt.
  • Defined Contribution (DC) type:
    • When an individual opens a retirement pension account, the company contributes 1/12 of the annual salary to it. The individual decides how to manage the investment.
    • The payment period can be chosen as a lump sum or a period ranging from 5 to 20 years.
    • Even if retiring early due to a job change or other reasons, the individual pension account can continue to be maintained.
    • As with the DB type, retirement pay can be received stably even if the company goes bankrupt.