Although it is commonly said that receiving severance pay through an individual retirement pension (IRP) reduces taxes, the time funds remain in the account differs from the actual period over which the pension is received.
If existing tax-deductible IRP contributions and severance pay are combined in one account after retirement, the burden of early termination may also increase.
Severance pay is both a lump sum and a source of cash flow after retirement, so it is necessary to decide when and how much to withdraw before deciding how to manage it.
3-line summary
1. The tax-saving period for severance pay starts from the actual withdrawals
2. The tax burden on amounts received over more than 20 years has been reduced
3. Living expenses and emergency funds should be considered first
Keeping It for 10 Years Does Not Start Pension Payments
According to a report by Seoul Economic Daily, when severance pay is placed in an IRP and received as a pension, withdrawals made within the actual 10-year receipt period are subject to approximately 70% of the retirement income tax that would apply to a lump-sum payment. From the 11th year through the 20th year, the level is approximately 60%, while, starting this year, the level for withdrawals made after the actual pension receipt period exceeds 20 years has been lowered to approximately 50%.
The key point here is the period during which the pension is actually withdrawn, not the period for which the IRP account is held. The explanation is that even if severance pay is kept in the account for 10 years, the receipt period does not accumulate if pension payments have not begun. This is why the timing of living-expense needs and the receipt period should be coordinated, rather than rushing to withdraw solely for tax savings.
It was reported that severance pay cannot be received as a pension before age 55. If there is a possibility that a lump sum will be needed during this period, it may be worth considering separating the IRP used for year-end tax deductions from the account that will receive the severance pay. Experts explain that if the two funds are placed in one account and it is terminated because emergency cash is needed, tax burdens related not only to retirement income tax but also to past tax deductions may arise.
Money for Living Expenses and Money for Investment Serve Different Roles
After retirement, one approach presented was to set aside necessary living expenses and emergency funds first, then determine the receipt period for the remaining severance pay. Another option mentioned was to use retirement pensions to cover the income gap before receiving the National Pension and supplement any shortfall with a personal pension. However, the ratio between lump-sum and pension payments may vary depending on assets held, dependents, and the timing of National Pension receipt.
The investment approach also differs depending on the payment stage. Before retirement, some growth assets may be included, but during the payment period, the advice is to secure immediately usable funds—such as hospital bills or living expenses—in cash-like assets. Keeping severance pay only in deposits can make it difficult to outpace inflation, while concentrating it in high-risk assets may leave insufficient time to recover losses.
85% S&P500 Exposure Is a Product Feature
Mirae Asset Global Investments listed the ‘TIGER US S&P500 US Treasury Bond Balanced 50 ETF’ on September 8, investing 50% each in the US S&P500 and US Treasury bonds with remaining maturities of 1 year or less. The product is structured to adjust its stock and bond weights daily to approximately 50-to-50, and TheGuru reported that it can be invested in at 100% within DC-type and IRP accounts.
For general equity ETFs, the investment limit for risky assets in retirement pensions is 70%, but this product is classified as a bond-mixed type. As in the example cited in the report, combining 70% of an S&P500 ETF with 30% of this product results in 85% overall S&P500 exposure and 15% US short-term Treasury bonds. This is a calculation based on the product composition, not a ratio that guarantees returns. It is also necessary to confirm that the entire portfolio consists of dollar-denominated assets, meaning returns may vary with changes in the won–US dollar exchange rate.
The choice regarding severance pay is less about how long to leave it invested and more about when to start receiving it and through what cash-flow structure. Rather than trying to address taxes, living expenses, and investment risk with one decision, it is better to consider each according to its role.
References
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