Most people are asked “DB or DC?” on their first day in a Korean company, pick one at random, and never open the account again. That single box changes what you walk away with — and the never-opening-it part is the bigger problem.
1. What it's worth. Taking your payout as an annuity instead of a lump sum is worth 10 percentage points — retirement income tax is reduced 30% through year 10 and 40% from year 11. Getting past ten years is where it pays.
2. Where the risk is. The most common DC mistake is leaving it parked in deposits. And the common belief that “an IRP charges the most” is the opposite of what the statistics show — in the Ministry's data IRPs had the highest returns and the lowest total cost.
3. What to do. That one box changes what you walk away with, yet most people never open the account again after choosing. Start by checking whether yours is DB or DC — and if DC, what it is actually invested in.
DB and DC, as the government defines them
The Ministry’s retirement pension page defines the two schemes like this:
Defined Benefit (DB) — “a retirement pension scheme in which the benefit the worker will receive on leaving is fixed in advance.”
Defined Contribution (DC) — “a retirement pension scheme in which the contribution the employer pays is fixed in advance each year at 1/12 of the worker’s annual total wages.”
Read the definitions closely and the difference is which end is nailed down. In a DB plan the payout is fixed; in a DC plan the input is fixed. So DB pays out regardless of investment performance, while in DC the performance simply is your balance.
| Item | DB (defined benefit) | DC (defined contribution) |
|---|---|---|
| What is fixed in advance | The benefit you receive | The employer contribution (1/12 of annual total wages) |
| Who invests | The company | You |
| Who bears gains and losses | The company | You (principal can fall) |
| Better when | Pay is rising fast and promotion is coming | There is a wage-peak scheme, or you will actually manage it |
| Extra contributions | Not possible | Possible |
The rule of thumb is simple. If your final salary will keep climbing, DB. If pay will flatten or fall and you are willing to manage the money, DC. Leave a DB plan untouched at a company with a wage-peak scheme and the reduced final salary becomes the basis for your severance calculation.
The statistic that reverses the folklore
A Ministry release from May 2024 (as at end-2023) publishes returns and total cost ratios side by side for each scheme type.
| Scheme | Annual return | Total cost ratio |
|---|---|---|
| DB | 4.50% | 0.323% |
| DC (incl. corporate IRP) | 5.79% | 0.508% |
| IRP (individual) | 6.59% | 0.318% |
The most expensive type was not the IRP but DC, at 0.508%. The IRP came in at 0.318%, the lowest of the three — and with the highest return. People who take a lump sum because “rolling into an IRP means more fees” have no support for that in this data.
This scheme-by-scheme table is as at end-2023. The most recent release (May 2026) does not break returns down by scheme type, so for a type comparison these remain the newest verifiable figures.
End-2025: reserves passed 500 trillion won
From the latest release (issued 20 May 2026, as at end-2025):
- Reserves of ₩501.4 trillion — up 16.8% from ₩431.7 trillion a year earlier
- Annual return of 6.5%, the highest on record
- DC and IRP together now 54.3% of the total; DB is shrinking
- Default-option reserves of ₩53.3 trillion, returning 3.7%
- Within that same default option: balanced type 10.8%, TDF 13.7%
That last line is the most useful thing in this article. The default option returned 3.7% overall, while the balanced type inside it returned 10.8%. Which type you selected, inside the same scheme, made a large difference. “I set a default option, so I am covered” is not the point — which one you set is.
The most common DC mistake: leaving it in deposits
Enormous numbers of DC holders never open the account and leave everything in principal-guaranteed deposits. Nothing is lost nominally, but if it trails inflation, the real value shrinks. The gap between the 5.79% DC average and the 3.7% default option above is roughly the cost of that neglect.
Piling everything into risk assets is not the answer either — there is a cap. A Ministry release from July 2022 refers to “the existing risk-asset limit (70%) regulation”, and in the same sentence to its exception: “a default-option method can be operated up to 100% of reserves.” Money run through the default option is not held to the 70% wall.
Within the same default-option scheme, the type you designated decides the outcome.
How an IRP differs
An IRP (individual retirement pension) is an account you open yourself. DB and DC come through your employer; an IRP is your own vessel.
- It is where severance money lands when you change jobs or retire.
- You can add to it while still employed, and combined with a pension savings account it qualifies for a tax credit on up to ₩9 million a year.
- Taken as a pension after 55, it is taxed at the low pension income rate.
The tax-credit figures — and the trap that an IRP and a pension savings account have different early-withdrawal tests — are set out with source quotations in the pension savings and IRP tax credit.
On leaving: lump sum versus pension is 10 percentage points
Take severance as a lump sum and you pay retirement income tax in full. Take it as a pension and a reduction applies. The FSS retirement planning guide (February 2025) states:
“Where retirement benefits are received within the annual pension withdrawal limit, 30% of the retirement income tax is reduced through year 10.”
“From year 11 the reduction becomes 40%, giving roughly a further 10 percentage points of saving.”
Here is the part people miss: it gets better after ten years, not at ten years. Because the reduction steps up from 30% to 40%, designing a plan that ends exactly at year 10 finishes just before the best band starts. Check whether you can stretch the payout period past eleven years.
| How you take it | Retirement income tax |
|---|---|
| Lump sum | No reduction |
| Pension — years 1 to 10 | 30% reduction |
| Pension — year 11 onward | 40% reduction |
Get a rough figure first with the severance calculator, then set it against what retirement actually costs each month to see how many months it buys.
Plot the relief against the number of years and there is a step between year 10 and 11.
Before you leave
- Open an IRP in advance — severance is paid into one as a matter of course.
- If you are on DC, check the holdings once — make sure it has not been sitting in deposits.
- Work out whether the payout can run past eleven years — that is worth 10 percentage points.
- Budget for health insurance — the fixed cost that moves most right after you stop working. See health insurance after you retire.
- Plan the gap before your public pension starts — up to five years for people born from 1969.
Questions people ask
Can I switch from DB to DC?
Sometimes, depending on company rules. But switching back from DC to DB is generally difficult. Think through your pay trajectory first.
What if the company goes under?
Retirement pension reserves are held at an external financial institution, separate from the company’s finances. That separation is the whole point of the scheme.
Can I withdraw early?
In principle no; early withdrawal is allowed only for statutory reasons. For the tax that applies, see tax on pension withdrawals.
I am on DC and have no idea what to pick.
The default option exists for exactly that. But results varied widely within it — as at end-2025, 3.7% overall, 10.8% for the balanced type, 13.7% for TDFs. Setting it and never checking which type you set defeats half the purpose.
I do not know where my retirement pension is.
Ask the financial institution holding it, or your HR team — that is the most reliable route. Online aggregation services have changed address before, so this article does not link to one.
Sources and where to check
- Ministry of Employment and Labor — retirement pension scheme guide. Source of the DB “benefit fixed in advance” and DC “1/12 of annual total wages” definitions.
- Ministry of Employment and Labor — retirement pension statistics release (16 May 2024, as at end-2023). Source of returns DB 4.50 / DC 5.79 / IRP 6.59% and total cost ratios DB 0.323 / DC 0.508 / IRP 0.318%.
- Ministry of Employment and Labor — reserves pass 500 trillion won (20 May 2026, as at end-2025). Source of ₩501.4tn (from ₩431.7tn, +16.8%), the 6.5% return, 54.3% DC/IRP share, ₩53.3tn default-option reserves at 3.7%, balanced type 10.8% and TDF 13.7%.
- Ministry of Employment and Labor — introduction of the default option (5 July 2022). Source of “the existing risk-asset limit (70%) regulation” and the 100% exception.
- Financial Supervisory Service, FINE portal — retirement planning tips (21 February 2025). Source of the 30% reduction through year 10 and 40% from year 11.
Written as of July 2026. The DB and DC definitions, the returns and cost ratios by scheme, the end-2025 reserve and default-option figures, the 70% limit and its exception, and the retirement income tax reductions all come from the sources above. One caveat: the scheme-by-scheme return and cost table is as at end-2023, and the latest release (May 2026) does not publish returns by scheme type, so no more recent comparison could be verified. Whether you may switch between DB and DC, and which early-withdrawal reasons apply, depend on company rules and personal circumstances — confirm with your HR team and your provider. This is not investment or financial advice.
