Why does the same ₩10K lead to such different results? — the ₩15M pension threshold

Two people each drew exactly ₩15.01M from pension savings this year, ₩10K over the ₩15M separate-taxation threshold. Yet the tax on the pension including local income tax was about ₩1.42M for one and about ₩390K for the other: 3.6× apart. Had the first person stopped at ₩15M and settled by withholding, the tax would have been ₩825,000, so that ₩10K cost about ₩600K more. Had the second stopped at ₩15M but elected to add the pension to comprehensive income, the tax would have been ₩391,600, almost the same. The same ₩10K was a trap for one person and a non-event for the other.

Pensions are taxed too. The money you got back as a tax credit when paying in is settled as pension income tax when it comes out. Four steps: the map of pension taxes, the ₩15M threshold and the election to add it in, what happens when you cross it, and taking retirement pay as a pension. By the end, how you split your pension withdrawals shows up as a tax question.

Step one: pension tax runs on three tracks. First, public pensions such as the National Pension are taxed comprehensively at basic rates like other income and settled through year-end tax adjustment. Only the portion arising from contributions paid on or after 2002-01-01 is taxable, so the longer someone has been enrolled, the smaller the taxed share. Second, private pensions drawn from pension savings and IRP. What is taxed is the contributions that earned a tax credit plus investment returns; principal that never got a credit carries no tax. The rate is set by age: 5% under 70, 4% from 70, 3% from 80, and 3% for a lifetime annuity paid until death. Third, retirement pay moved into a pension account and drawn in installments within the annual pension limit is taxed separately regardless of amount.

Step two: if private pension withdrawals are ₩15M or less a year, the 3 to 5% withholding you just saw can settle the tax. That is separate taxation, with no aggregation with other income and nothing to file. A 65-year-old drawing ₩12M a year from pension savings has 5% plus local income tax withheld, ₩660K a year, or ₩55K a month. At 72 the same amount is 4%, ₩528,000 a year. With a lifetime annuity it drops to 3%, ₩396,000 a year. But ₩15M or less does not mean separate taxation only. Income Tax Act Art. 14(3)9 excludes, in brackets, cases where you choose to add the income in, so you may file it as comprehensive income. Withholding still happens and is settled in the following May's return. Two things are left out when counting toward ₩15M: retirement pay drawn as a pension, and withdrawals for unavoidable reasons such as medical purposes.

Step three: dissecting the hook. Above ₩15M, the whole year's private pension enters comprehensive taxation. That means the full ₩15.01M, not just the ₩10K overshoot. You may elect 15% separate taxation instead, so the worst case is capped at 15%, or 16.5% with local income tax. Assume both people are 65 with only the basic personal deduction. The first has ₩30M of other income such as rent (not wages). Stacking ₩15.01M of pension on top puts it in the 15% bracket, so the tax on the pension portion comes to about ₩1.42M with local income tax. Electing 15% would cost more, so comprehensive taxation wins, and it is about ₩600K more than the ₩825,000 of withholding at exactly ₩15M. For this person the threshold is a trap.

The second person's pension is their only income. Under comprehensive taxation the pension income deduction of ₩6,401,000 and the ₩1.5M personal deduction shrink the tax base to ₩7,109,000; 6% of that is ₩426,540, less the ₩70,000 standard tax credit for people without wage income (Art. 59-4(9)2(b)) is ₩356,540, or about ₩390K with local income tax. The ₩9M deduction cap only bites from ₩41M of total pension, so it is nowhere near here. Had this person stopped at ₩15M, settling by withholding would have cost ₩825,000 but electing to add it in only ₩391,600. So for this person ₩15M is neither a trap nor a door; the election decides ₩430K. What makes the difference is not the threshold but whether you have other income, and whether you elect to add it in. With other income, managing withdrawals near the threshold is worth it; with pension income only, the filing choice matters more than the amount. Gains and losses near the line vary by situation, so the right answer is to run your own numbers.

Step four: retirement pay runs on its own track. Move it into a pension account and draw it as a pension, and you pay only 70% of the retirement income tax a lump sum would have incurred. After 10 years of receipt it falls to 60%, after 20 years to 50%. It has nothing to do with the ₩15M threshold, but there is an annual pension limit (account value ÷ (11 − year of receipt) × 120%, Enforcement Decree Art. 40-2(3)); anything drawn above it is a non-pension withdrawal and pays the full retirement tax with no discount. Someone drawing retirement pay as a pension at ₩20M a year within the limit would have owed about ₩1.2M a year in income tax on that portion as a lump sum at a 6% effective rate (assumed); as a pension it is 70%, ₩840K. Those figures exclude local income tax; with it, ₩1.32M and ₩924,000. That saves ₩360K of income tax (₩396,000 with local income tax) every year, and the discount widens after 10 years. It is an incentive to spread retirement pay over your later years rather than spend it at once.

Three gauges to check in practice. First, identify which track your pension is on. The National Pension settles itself at year-end adjustment; what you manage is the withdrawal plan for pension savings and IRP. Second, the annual withdrawal amount. Your starting age and payout period set the yearly figure, and that decides which side of ₩15M you stand on. A longer period lowers the annual amount and can also move you from the 4% to the 3% age bracket. Third, in a year when you have rental or business income, a pension that also crosses the threshold becomes the trap picture. In such years it is worth asking your provider whether the product lets you reduce or defer withdrawals. Conversely, if you have little income besides the pension, check whether filing it as comprehensive income is cheaper even at ₩15M or less. One premise: calculate before you start drawing.

Two things to do now. If your pension is about to start, work out which side of ₩15M your annual withdrawal falls on, whether it overlaps with other income, and whether adding it in is cheaper. If retirement is approaching, compare the tax on a lump sum versus a pension before deciding how to take your retirement pay. Today's figures are examples resting on specific assumptions. With wage income the standard tax credit becomes ₩130,000, and there are non-tax variables such as health insurance premiums, so if the amounts are large, plan with a professional before withdrawals begin. The biggest tax saving is to ride the pension tax system the way it was designed: get a credit going in, and pay a low rate spread over time coming out.