The Three-Pillar Pension — National, Retirement, and Personal

Relying on a single source for retirement income is risky. That's why experts explain retirement preparation divided into three tiers. The lower you go the more it's a foundation, and the higher you go the more you take charge yourself.

Tier 1 is the state-run National Pension (public pension), Tier 2 is the retirement pension your company sets aside, and Tier 3 is the personal pension you contribute additionally. If Tier 1 is the minimum floor, Tiers 2 and 3 are layers stacked on top to protect your standard of living.

The key point is that "one tier is not enough." Because it's hard for the National Pension alone to fully replace pre-retirement income, you must stack Tiers 2 and 3 together to reduce the retirement-income gap.

The National Pension is a public system in which citizens with income are mandatorily enrolled, pay monthly contributions, and, once they grow old, receive a monthly pension until they die. Because the state runs it and pays it linked to inflation, its big advantages are that it doesn't cut off even if you live long and reflects price increases to some degree.

Still, the National Pension does not fully replace pre-retirement income. So it's accurate to understand the National Pension as the "minimum floor of retirement" and think of stacking Tiers 2 and 3 on top of it.

Pillar 2 is the retirement pension in which the company sets aside the worker's severance benefits. Under the Act on the Guarantee of Workers' Retirement Benefits, there are broadly three forms.

DB (defined benefit): The amount you'll receive is predetermined, and the company bears the management responsibility and risk. It's usually calculated based on the average wage just before retirement.

DC (defined contribution): The company puts a set amount into the worker's account each year, and the worker decides directly how to manage that money. Because the final amount varies with investment performance, both gains and losses are your own.

IRP (Individual Retirement Pension): An account into which you can roll the severance pay received when changing jobs or retiring, or into which an individual can make additional contributions. It also connects to the Tier 3 tax deduction.

Pillar 3 is the personal pension you prepare voluntarily. Representative examples are pension savings (funds, insurance, trusts) and the IRP. Money put here is premised on being received as a pension in installments in retirement, and in return it gives tax benefits.

As of 2025, the tax-deduction limit is 6 million KRW per year for pension savings alone, and up to 9 million KRW per year when combining pension savings and IRP. The deduction rate is 16.5% for total salary of 55 million KRW or less, and 13.2% above that.

For example, if someone with total salary of 55 million KRW or less fills up 9 million KRW, they can get back up to 1,485,000 KRW (9 million × 16.5%) at year-end tax settlement. That's why it's called "the 13th-month salary."