Pension Savings Fund vs. IRP — How to Claim Your '13th-Month Paycheck' Through Tax Credits
When year-end tax settlement season arrives, some people end up paying more while others get a refund. One of the surest cards that decides which side you land on is the pension savings fund and the IRP. Both involve putting money aside for your 'future self,' but because the government cuts your taxes immediately when you do, they're called the '13th-month paycheck.' That said, the names are similar and the limits are intertwined, so it's easy to get confused. Today we'll walk through the differences between the two products and the credit calculations in numbers. (This is reference information only and not investment advice.)
For both, the key is a 'tax credit' — which is different from an income deduction
Let's start with the concepts. Pension savings and IRP give you a 'tax credit,' not an 'income deduction.' An income deduction reduces the income base on which your tax is assessed, while a tax credit subtracts directly from the tax that has already been calculated. The latter feels far more powerful. In other words, it's a structure where you get back 'the money you contributed × the credit rate' straight off your tax bill.
Credit rate: 13.2% or 16.5%, depending on your salary
The credit rate is split into two tiers. Those with total salary of 55 million KRW or less (comprehensive income of 45 million KRW) get 16.5%, while those above that get 13.2% (including local income tax). For example, if you maxed out the limit and contributed 9 million KRW per year, someone with a salary of 50 million KRW gets back 9 million × 16.5% = 1,485,000 KRW, while someone earning 70 million KRW gets back 9 million × 13.2% = 1,188,000 KRW. Even putting in the same amount, the refund differs by nearly 300,000 KRW depending on income.
Contribution limit: the combined 9 million KRW is the magic number
This is the point that confuses people the most. The tax-credit limit is 9 million KRW per year for the pension savings fund and IRP 'combined.' But within that, the pension savings fund alone is capped at 6 million KRW per year. So to fill the full 9 million KRW, you must necessarily include the IRP — for example, 6 million KRW in the pension savings fund + 3 million KRW in the IRP. Conversely, the IRP on its own can be filled to the full 9 million KRW.
So what's the difference? — Investment freedom vs. limits
The biggest practical difference is 'what you can invest in.' The pension savings fund has almost no restriction on the proportion of risk assets (equity funds and ETFs), so you can manage it aggressively. The IRP, on the other hand, as a safety mechanism can only hold up to 70% in risk assets, with the remaining 30% kept in safe assets like deposits or bond-type products. Also, the IRP sometimes carries an account management fee, so check before signing up.
- Pension savings fund: standalone credit limit of 6 million KRW, up to 100% in risk assets possible, generally no fees, anyone aged 18 or older can open one
- IRP: standalone credit limit of 9 million KRW, up to 70% in risk assets, may have management fees, open to those with income such as employees and the self-employed
- Common: tax credit rate of 13.2–16.5%, received as a pension after age 55, separately taxed pension income tax of 3.3–5.5%
- Common: on early termination, you may have to pay back the tax benefits received so far at a 16.5% other-income tax rate
Strategies to fill the 9 million KRW per year (examples)
- If you prioritize investment freedom: manage ETFs and the like with 6 million KRW in the pension savings fund + fill the rest with 3 million KRW in the IRP
- To keep it simple with one account: 9 million KRW all in the IRP (but you'll accept the 70% risk-asset cap)
- If you only have room for 6 million KRW: put 6 million KRW into the pension savings fund only (assuming 16.5%, that's a 990,000 KRW refund)
- Amounts contributed beyond the limit (9 million KRW) don't qualify for the tax credit, but the tax-deferral effect on investment gains still remains
'Deferring taxes' is also a benefit — tax deferral and low-rate taxation
The credit isn't the only benefit. In a regular account, a 15.4% dividend income tax is taken every year on gains from funds and ETFs, but inside a pension account taxation is deferred until withdrawal (tax deferral). Since even the tax that would be taken keeps compounding, the compounding effect grows larger. And when you receive it as a pension after age 55, it's taxed separately at a low pension income tax of 3.3–5.5%. It's a three-stage structure: a discount when you put money in, deferral while it grows, and a low cut when you receive it.
There's also a detour that goes through an ISA
With an ISA (Individual Savings Account), if you move the funds into a pension account at maturity (the mandatory 3-year holding period), you can get an additional tax credit. A separate credit applies to 10% of the converted amount (up to 3 million KRW), so there's room to claim more of a refund beyond the 9 million KRW limit we saw above. The ISA itself is also tax-free up to 2 million KRW of investment gains (4 million KRW for the low-income type), with the excess taxed separately at 9.9%, making it a great tax-saving pairing.
A discount when you put it in, deferral while it grows, and a low cut when you receive it — a pension account is a tool that saves you taxes three times.
To sum up, if your salary is 55 million KRW or less, the 16.5% credit is very attractive, so it's advantageous to fill the limit as much as you can. If you want free management, use the pension savings fund; if you want to use up the entire limit in one account, use the IRP; and usually people combine the two to fill the 9 million KRW. Just be sure to consider that it's money tied up for a long time and that there's an early-termination penalty. Make your judgment based on your own income, cash flow, and investment temperament, and please decide on specific product choices under your own responsibility. (This article is for reference only and does not recommend the purchase or sale of any specific product.)